Alexander's Inc V.ALX

Scotia's View

[Mully99]

Good Paper, Underwhelming Price; What Are the Options?

OUR TAKE: In the past when we have thought about potential takeout scenarios
for SPE, a corporate purchase by Vermilion Energy Inc. (VET-T; SO; Patrick Bryden covered) ranked high among desirable possibilities. Nevertheless, we did not expect such a deal to come so soon or at this low of a valuation (the headline price implies ~4.7x SPE's '18E DACF on strip; below our target and at no premium to the current multiples for the peer group). We have spent more time thinking through the deal and talking to investors and are still at a loss.

Since SPE's share price began to falter in early 2017, we have been steadfast in our view that SPE offered investors significant upside through exposure to both improving oil prices and valuation multiple reversion. Neither of these have materialized and investors are left looking at a takeout price well below our previous expectation. This leaves us somewhere in between the views that our expectation for a rally in the oil- weighted subset of the SMID-Cap space has been too optimistic or that the price of this transaction is too low. But ultimately, we believe that SPE's management is left to answer (1) why sell now? and (2) why sell at this price?

After considering potential outcomes (discussed below), we are moving our rating to Tender and our target price to $9.00 per share (0.1476x Patrick Bryden's VET target price). While we are underwhelmed by the headline valuation for SPE, we believe that participating in the upside through the VET shares is the better option versus forcing a management team that is evidently motivated to sell to push forward.