Gravity Co. NYSE:GRVY and Activision-Blizzard NYSE:ATVI – Thinking about relative value

Provided to subscribers July 19, 2023. Disclosure: We own both GRVY and ATVI at time of posting.  

What is Gravity Co? It was founded in April 2000 and is known for its popular online role-playing game (RPG) called "Ragnarok Online." Ragnarok Online was one of the first successful Korean MMORPGs (Massively Multiplayer Online Role-Playing Games) and gained significant popularity both in South Korea and internationally. However, is a bit of an orphan, being controlled by its ~60% shareholder GungHo Online Entertainment, Inc. (also publicly listed and in Japan). The world thought GRVY had a tired franchise, Ragnarok Online, and was in decline. However, over the last few years they have launched several sequels to the original, as well as other unrelated games, and have ramped up annual revenues to the US$400MM range from ~$40MM in the 2010s. Now they are sitting on a few hundred million dollars while their market cap is only a few hundred million more.

When you see a company with a market cap of $555MM (at $79), $287MM of cash, ~$75MM of annual FCF, and a growing twenty-year-old franchise, we take a look.

We only came across this company very recently (we don’t spend much time on Korean ADRs), and find the timing a bit prophetic. One of our largest holds, Activision-Blizzard, looks to finally be crossing over and will become part of Microsoft shortly. Here is a comparison of where they are today; is GRVY trading at the right relative price? We do not think so.

First - Quick update on ATVI

-The FTC tried to block the merger and lost - https://www.bloomberg.com/news/articles/2023-07-12/ftc-to-appeal-judge-s-go-ahead-for-microsoft-activision-deal

-The FTC tried to appeal, and was blocked https://www.bloomberg.com/news/articles/2023-07-14/ftc-loses-appeals-court-bid-to-pause-microsoft-activision-deal  “Court ruling is a blow to the US agency and Chair Lina Khan” – We agree. It is probably better that the FTC focuses on more important things than many gaming consoles kids can play Call of Duty on.

-Last stop is the UK Competition and Markets Authority CMA. This is a very awkward stop, given they initially tried to block the deal (assuming FTC would have some success), but are now the last regulator standing in the world. https://www.eurogamer.net/microsoft-and-uks-cma-get-two-more-months-to-reach-agreement-in-activision-blizzard-deal 

-The deadline for the deal was July 18th and was extended by both parties. In consideration, MSFT is letting $0.99 out the door as a dividend in August. “On July 18, 2023, the Company’s Board of Directors declared a cash dividend of $0.99 per share of the Company’s outstanding common stock, payable on August 17, 2023, to shareholders of record at the close of business on August 2, 2023.” The termination fee also increased – “the Company waived any right to the Parent Termination Fee during the Waiver Period, after which the Parent Termination Fee, if payable under the Merger Agreement after (x) August 29, 2023, shall be increased from $3,000,000,000 to $3,500,000,000 and (y) September 15, 2023, shall be increased from $3,500,000,000 to $4,500,000,000;” https://www.sec.gov/ix?doc=/Archives/edgar/data/0000718877/000162828023025102/atvi-20230719.htm  Amended agreement - https://www.sec.gov/ix?doc=/Archives/edgar/data/0000718877/000110465923082205/tm2321522d1_8k.htm

ATVI is trading at ~$92 vs the offer of $95 plus $0.99 dividend. With an expected timeline of three months or less your IRR is ~17% if you buy today.

Ragnarok

Gravity Co is most famous for Ragnarok online and it is long-lived. My goodness. Originally released in 2002 (and continually updated), the game is still played.

But they are also working on sequels that have been successful (see chart below). They have moved from being a one trick pony in 2018 to having several revenue generating games on the go. Is this revenue diversification? We acknowledge it is still driven by their one key franchise. But, they are also working on new games and franchises. Our favorite is their just released Whale in the High (WITH). We downloaded the game and can confirm it is extremely cute. https://apps.apple.com/us/app/with-whale-in-the-high/id6446757241 To be clear, their products are an Asia phenomenon, originally Korea/Japan/Taiwan, but now also Thailand is material (see sales breakdown by sales by country at end).

On to the actual numbers. Ragnarok is now a franchise with multiple offshoots. Revenue is growing, revenue is coming from more games, and the margins are holding. An important thing to keep in mind is net income is not bad at approximating free cash flow as R&D development is expensed and not capitalized. In fact, net income can arguably be understated as some of that R&D is for the future growth, but we won’t get into this. The nice thing is you do not have to worry about these details if something is cheap.

ATVI merger failing? Maybe not so bad... and picking up an odd lot

Provided to subscribers June 11th.

Here is the latest from Canadian Value Investors!

• An odd lot trade - DND

• What is an odd lot trade?

• ATVI merger failing? Maybe not so bad…

DND Odd Lot trade

Thank you for subscribing! Here’s $150 - Dye & Durham TSX:DND Odd Lot Trade - $15.36 vs $17-$20, return of ~$150 or 10% for a few minutes of work.

FYI this gets complex for non-Canadian investors and there is always uncertainty of completion; do your own due diligence (as always).

DND is doing a share repurchase and they have an odd lot provision (if you’re not familiar see next). Details below from their proxy; you have until June 16th to purchase, settle, and submit your shares and make sure your trade has settled before then.

The Offer will commence on the date set forth above and expires at 5:00 p.m. (Eastern time) on June 16, 2023 or at such later time and date to which the Offer may be extended by Dye & Durham (the “Expiration Date”). Per their disclosures:

Holders of Common Shares (“Shareholders”) who wish to accept the Offer may do so in one of two ways: (a) by making an auction tender (“Auction Tender”) pursuant to which they agree to sell to the Company at a specified price per Common Share (not less than $17.00 and not more than $20.00 and in increments of $0.10 within that range) a specified number of Common Shares owned by them; or (b) by making a purchase price tender in which the tendering Shareholders do not specify a price per Common Share, but rather agree to have a specified number of Common Shares purchased at the Purchase Price (as defined below), to be determined pursuant to the Offer (“Purchase Price Tender”), understanding that if they make a Purchase Price Tender, for the purpose of determining the Purchase Price, such Common Shares will be deemed to have been tendered at the minimum price of $17.00 per Common Share.

…

Shareholders validly depositing Common Shares pursuant to Auction Tenders at $17.00 per Common Share (the minimum purchase price under the Offer) and Shareholders validly depositing Common Shares pursuant to Purchase Price Tenders can reasonably expect to have all or a portion of such Common Shares purchased at the Purchase Price if any Common Shares are purchased under the Offer (subject to provisions relating to proration and the preferential acceptance of Odd Lot Holders described below).

…

For the purposes of the foregoing, an odd lot deposit is a deposit by a Shareholder owning in the aggregate fewer than 100 Common Shares as of the close of business on the Expiration Date

WHAT DOES A SHAREHOLDER DO IF THAT SHAREHOLDER OWNS AN “ODD LOT” OF COMMON SHARES?

If a Shareholder owns in the aggregate fewer than 100 Common Shares as of the close of business on the Expiration Date and that Shareholder validly deposits all such Common Shares pursuant to an Auction Tender at a price equal to or less than the Purchase Price or pursuant to a Purchase Price Tender, the Company will purchase all of those Common Shares without proration (but otherwise subject to the terms and conditions of the Offer) if the Company purchases any Common Shares pursuant to the Offer. This proration preference is not available to holders of 100 or more Common Shares even if holders have separate share certificates, ownership statements or DRS positions for fewer than 100 Common Shares or hold fewer than 100 Shares in different accounts. Odd Lot Holders making an Auction Tender or a Purchase Price Tender will be required to tender all Common Shares owned by the Shareholder. Partial tenders will not be accepted from Odd Lot Holders.

What is an Odd Lot Trade?

When companies repurchase shares they use various repurchase strategies. They set a target dollar amount of shares to repurchase. The strategies companies use for repurchasing is for another day (and probably another blog), but the important thing for value investors is that they sometimes offer a small but extremely high return on capital at very low risk.

Companies sometimes incorporate odd lot provisions in their repurchases, which means (typically) that if an investor has 99 shares or less (i.e. not holding a lot of shares) they will get repurchased first. Companies do this for a few reasons, primarily to simplify shareholder communication and stockholder structure.

How does this benefit you? Well, if a firm repurchase comes up and the stock is trading below the repurchase price or range, you can buy 99 shares and know you will be bought out by the company first so long as the repurchase goes through.

To submit your shares you just have to reach out to your broker. Sophisticated brokers that are used to this kind of thing (hi Interactive Brokers) let you do this online easily. Others might require you to email them and (George Carlin voice) the worst… make you call!

Here’s how it works with Interactive Brokers – After your trade settles (or if you already owned the company) you can head to your notifications and let them know what you want to do. As shown below, you indicate that you want to tender your full position. If you use Qtrade this can be done with a secure email through their online account. If you use a brokerage account at a chartered Canadian bank, you should switch to something better immediately.

It’s not big money, but we still take the time to pick up $100 bills we see on the sidewalk.

ATVI merger failing? Maybe not so bad

Disclosure: We still own ATVI

We have been following (and posting about) Microsoft’s acquisition of Activision-Blizzard for the past year. Unbeknownst to us until 13-F day, we bought ATVI alongside Warren Buffet last year, only to have the odds of the trade blow out the wrong way near the end of this April. But… maybe the merger failing would not be so terrible for a cash flow positive company with a couple great franchises. Especially if you have $12-14 billion saved up by the time it fails. We argue that there might be a golden egg regardless of what happens. “Heads you win, tails you don’t lose (much?)”

Merger Update

As noted in several posts (see archives), the Microsoft-ATVI merger has been dealing with antitrust reviews around the world. Our main concern was the U.S. Federal Trade Commission (FTC) and Linda over there blazing a trail https://www.bloomberg.com/news/articles/2023-06-06/lina-khan-is-upending-wall-street-s-merger-arbitrage-playbook , but out of left field came the CMA. Per their Q1/23 release:

“On April 26, 2023, the United Kingdom Competition and Markets Authority ("CMA") announced a decision to block the merger, stating that competition concerns arose in relation to cloud gaming and that Microsoft’s remedies addressing any concerns in cloud gaming were not sufficient. Activision Blizzard considers that the CMA’s decision is disproportionate, irrational and inconsistent with the evidence. Microsoft has announced its decision to appeal the CMA’s ruling, and Activision Blizzard intends to fully support Microsoft’s efforts on this appeal. Activision Blizzard continues to believe that the deal is pro-competitive, will bring Activision Blizzard content to more gamers, and will result in substantial benefits to consumers and developers in the UK and globally. The parties continue to fully engage with other regulators reviewing the transaction to obtain any required regulatory approvals.”

How often have companies been able to successfully challenge the CMA? “Essentially, there has never been a successful appeal in the UK on an antitrust decision,” said Aaron Glick, a merger arbitrage strategist at TD Cowen. “There does not appear to be a path forward for Microsoft.” https://www.bloomberg.com/news/articles/2023-04-26/microsoft-s-69-billion-activision-deal-blocked-by-uk-watchdog

Oof.

The merger is not off, but the odds have changed. But, this brings two interesting things into play if it fails: 1) Underlying business performance of the company since the announcement (how much is it worth), and 2) the Microsoft break fee.

First, let’s deal with the easier question. If the merger fails due to a regulatory hiccup, The Termination Fee Microsoft would owe to Activision is straightforward and quite material. Microsoft’s deal team and lawyers seemed confident in anti-trust rulings going their way and did not give themselves an out we can find. Per the deal disclosures:

Reverse Termination Fee If the merger agreement is terminated in specified circumstances, Microsoft has agreed to pay Activision Blizzard a reverse termination fee of (i) $2,000,000,000, if the termination notice is provided prior to January 18, 2023, (ii) $2,500,000,000, if the termination notice is provided after January 18, 2023 and prior to April 18, 2023 or (iii) $3,000,000,000, if the termination notice is provided after April 18, 2023. [CVI editor: the merger deal being $68.7 billion]

Activision Blizzard will be entitled to receive the reverse termination fee from Microsoft if the merger agreement is terminated: by either Microsoft or Activision Blizzard due to (1) a permanent injunction or other judgment or order arising from antitrust laws having been issued by a court or other legal or regulatory restraint or prohibition arising from antitrust laws preventing the consummation of the merger being in effect, or any action having been taken by a governmental authority arising from antitrust laws that, in each case, prohibits, makes illegal…

The Board of ATVI also stopped allocating surplus capital as their hands have understandably been tied by the merger agreement. Cash and short-term investments at the end of the first quarter stood at $12.6 billion, and Activision Blizzard ended the quarter with a net cash position of approximately $8.9 billion. This, plus expected free cash flow throughout the year results in about $12-14 billion of surplus cash by the end of the year (our timeline for final failure and assuming they keep $3-4 billion back) to use for repurchases (more likely) or dividends (less). This cash is only available to shareholders if the merger fails. With a market cap of ~$60 billion, that’s material.

How’s the business?

At the same time, they had a blow out quarter and the latest flagship game (the sequel to one of our childhood favorites) is selling like gangbusters.

Diablo® IV Launches, Immediately Sets New Record as Blizzard Entertainment’s Fastest-Selling Game of All Time

From: Business Wire
Jun-06-2023 9:06 AM

In just four days of early access, players have already enjoyed the latest installment of the iconic game for over 93 million hours, or over 10,000 years

IRVINE, Calif.--(BUSINESS WIRE)--
Diablo® IV, the highly anticipated new installment of the iconic Diablo series, is now live. Already, it is Blizzard Entertainment’s fastest-selling game of all time, with Blizzard’s highest pre-launch unit sales ever on both console and PC*. In the four days since early access started on June 1, Diablo IV has been played for 93 million hours, or over 10,000 years --- the equivalent playing 24 hours a day since the beginning of human civilization.

View the full release here: https://www.businesswire.com/news/home/20230606005812/en/

The Company has a few key franchises broken up between Activision, Blizzard, and King. We find it pretty amazing how resilient these franchises are. They can get tired and be broken; just look at what EA has done with numerous franchises like Sim City.

Key figures and charts below. Various reports we have read (before Diablo launching) put free cash flow in the range of $3-4 billion annually over the next few years. It currently trades at ~$80 or a market cap of about $63 billion. Netting out the surplus cash gets you a mid to high teens P/E multiple.

We want to point out that the merger is not quite dead. It is still quite possible (experts betting a bit less than 50/50 it seems based on recent reports we have read) that you get bought out at $95 sometime over the next year or so. Heads you win, tails you might not lose?

2023 Mid-year Portfolio Update

Here’s is the latest from Canadian Value Investors!

• Portfolio Update – Current Holds

• The problem with the S&P

• Astrotech special situation recap with links to filings

• Want an oil royalty? Check out North European Royalty Trust

• Interesting reads from around the web – Brazilian laser hair removal, Lebanese robbing their own banks, and more

We have had a few emails asking about what our portfolio looks like today, and here it is. We note that we find ourselves in a bit of an odd spot and asking ourselves existential questions like what are long-term holds anyway?

The majority of our positions are true special situations (CKI, GAN; waiting for buyouts) or a bit of both, like Taiga Building Products, which could in theory stay in the portfolio awhile. Even Suncor is something that we are very price sensitive about and could be quick to sell if the right price came along.

Some ideas – like ATVI and PHG – were meant to be short-term plays. ATVI’s accumulation of cash and strong underlying business performance since the Microsoft offer (and subsequent potential failure) has made this interesting. PHG is up 40%, but is now too early to sell while the recalls and operations stabilize? Hmm.

So, this means that our portfolio could turn over in a short period of time, or very little. This, in turn, has made allocating capital among ideas at this moment particularly difficult.

We also have one company we working on taking a position in and will disclose later due to its low trading volume.

Here’s a high-level summary of the more active special situations.

The problem with the S&P

The S&P had a fantastic start to the year, up approximately 15% YTD. However, only a few companies at (or now at) high multiples are driving the run.

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/just-7-companies-are-carrying-the-s-p-500-in-2023-75823741

Big Tech is largely fueling the S&P 500's positive performance in 2023, with investors buying just seven stocks and selling pretty much everything else.

Those seven stocks — Apple Inc., Alphabet Inc., Meta Platforms Inc. Microsoft Corp., NVIDIA Corp., Amazon.com Inc. and Tesla Inc. — have seen significant gains after a bleak 2022, and the collective gains have kept the S&P 500 in positive territory in 2023, with the overall index rising about 7% since the start of the year. Without these seven stocks, which make up nearly 26% of the large-cap index's total weight, the S&P 500 would be down 0.8% on the year, through May 16.

The S&P index is market cap weighted, causing these companies to have an outsized impact on returns, more so going forward if they keep running up. In fact, if you take an equal-weighted approach, like the Invesco S&P 500 equal-weighted ETF, your return would be closer to 5%. We do wonder if it is time for the approach to “best practice” low cost index investing to be reviewed, but this is a problem we will leave for others to solve.

Astrotech special situation recap with links to filings

Disclosure: We do not currently own this but are watching.

And here is an example of the problem with intrenched management. This might still come to something; we are not sure what BML’s play is here, and the company’s stock offering really was cancelled. We will wait on the sidelines.

Company prospectus https://www.sec.gov/Archives/edgar/data/1001907/000143774923017741/astc20230614_424b5.htm

BML Offer - https://www.sec.gov/Archives/edgar/data/1001907/000156761923006436/doc1.htm

Company rejection https://www.sec.gov/ix?doc=/Archives/edgar/data/1001907/000143774923019047/astc20230629_8k.htm

Want an oil royalty? Check out North European Royalty Trust

We have been looking at purchasing oil and gas royalties on the side, but have not been able to close on a deal. We continue to find better opportunities in the market and you also benefit from liquidity. North European Royalty is a fun comparable we have been using. We wrote about this back in September of 2022 (see archives), but did not and have never purchased. We continue to look. Since then, Douglas McKenny posted about this. A bit light on oil and gas details (like reserve life), but a helpful overview.

Summary

The North European Oil Royalty Trust offers a simple business model with low risk and potential for high returns.

The Trust has grown distributions at over 20% a year in the last five years and has a free cash flow yield of 22.95%.

The Trust's business model allows it to avoid the boom and bust cycle typical of the oil and gas sector, providing investors with stability and certainty.

https://seekingalpha.com/article/4613977-north-european-oil-royalty-trust-more-certainty

Fun read: Espaco Laser - Did you know 79% of Brazilian women (and 9% of men) use some type of laser hair removal?

The Company is “the largest laser hair removal company in Latin America. They have 764 stores in Brazil and are also present in Colombia, Argentina, Chile, and Paraguay.

The company has expanded extremely quickly, growing its store count organically and via acquisition from only 49 stores in 2014. This culminated in an IPO in 2021. But this growth is not without its growing pains, which now manifest as significant risk for equity holders.

Espaço Laser stock is one of the risker companies I have covered in this newsletter. The company is in a perilous financial situation. They have a huge debt cliff in 2024 and 2025 and I believe they will not be able to repay this debt from existing cash flows. Meaning dilution and/or bankruptcy are real possibilities.

That being said, there is a real turnaround effort underway. If management can resolve the company’s debt problem, Espaco Laser’s equity investors would be left with a solid operating business that is well positioned as the clear market leader in Latam’s cosmetic hair removal market.

https://latamstocks.substack.com/p/espaco-laser-latam-stocks-investment

Desperate Lebanese Are Robbing Their Own Banks to Get Savings

https://www.bloomberg.com/news/articles/2022-09-16/desperate-lebanese-are-robbing-their-own-banks-to-get-savings

Wielding real or toy guns, angry Lebanese have forced their way into as many as seven banks this week to access trapped savings, as the country’s crippling financial crisis pushes people to take the law into their own hands.

Informal capital controls are in place across Lebanon -- blocking bank customers from withdrawing foreign currencies and savings in full -- as an economic implosion that began three years ago shows no sign of easing.

Unable to pay for basic necessities, account holders are taking desperate measures to get hold of their money.

…

The spate of incidents began two days ago when a woman brandishing a toy gun and accompanied by social activists stormed a bank in Beirut. She briefly held employees hostage while taking $13,000 from her account to pay for a sister’s cancer treatment.

That’s all for now. Thank you for subscribing!

Special Situations, Bye Bye Alibaba, and More

Provided to subscribers March 30th.

Here is the latest from Canadian Value Investors!

• Special Situations – 111, Inc. (YI) and Activision Blizzard (ATVI) chug along; new Chembio Diagnostics, Inc. (Nasdaq: CEMI)

• Coal Update

• Bye Bye Alibaba

• The Demise of Credit Suisse

• Silicon Valley Bank (Canada) Wind Up

But first, our poetry reading (CVI copywrite pending)

Alibaba, Alibaba, you've served us well

But as a Canadian investor, it's time to sell

The risks and regulations, are just too high

It's time to say "bye bye" and wave our goodbyes

Investors, investors, it's time to say goodbye

To the Alibaba shares, we once held so high

It's time to move on, it's time to break free

We'll never say "bye bye" to investing, just this company

We'll take our profits, and invest them anew

Our portfolios will thrive, and continue to accrue

So here's to you, Alibaba, we raise a glass

To a future of success, as we let go of the past

Special Situations - Yi and Activision Blizzard chugs along, new Chembio Diagnostics, Inc. (Nasdaq: CEMI)

Coal Update

For those keeping track, the Australian election adds more noise (see previous posts for companies covered). Canada and Australia are just like Brazil and Mexico, just more expensive. Shenanigans is underpriced in the former, and overpriced in the latter.

https://www.bnnbloomberg.ca/australian-energy-minister-rules-out-ban-on-new-coal-mines-1.1888246

Australian Energy Minister Rules Out Ban On New Coal Mines

(Bloomberg) -- Australia’s energy minister has ruled out a ban on new coal mines as part of the country’s overhaul of climate policy.

“That’s not part of our agenda,” Chris Bowen said when asked directly about the prospects for a ban on the ABC’s Insiders TV program on Sunday. “It won’t be part of those negotiations.”

The government was elected on a pledge to end the country’s climate wars and last year passed landmark legislation mandating emissions cuts of 43% off 2005 levels by 2030. However, the bill left the detail on how the cuts will actually be achieved to future debate.

Bye Bye Alibaba (NYSE:BABA)

Disclosure: We are long Alibaba but are exiting shortly.

We hoped you enjoyed our poetry reading. Alibaba has announced its division into six separate businesses: domestic e-commerce, international e-commerce, cloud computing, local services, logistics, and media and entertainment. The domestic e-commerce group will include Taobao and generates the majority of the company's revenue. The latest gossip can be found here - https://www.bloomberg.com/news/live-blog/2023-03-29/alibaba-briefs-on-breakup-plan

This is to “unleash productivity”, but really – we think - it is to address the Chinese government’s concerns of having giant powerful corporations that can push against the Chinese government around. The Chinese government is worried about avoiding the American outcome of having megacap corps, due to their potential economic dominance and political influence, never mind their access to sensitive information. We would be worried too. Over the long-term, we think their approach might work out better for their situation and society. This is also a practical approach for the company. They are significantly undervalued compared to their Western peers and, frankly, in absolute terms, and a spinoff is the textbook way to fix this.

More importantly, we are exiting because there is a real risk that Canadians lose access to the Chinese market, or face some sort of serious friction or expropriation by either the Canadian or Chinese government (we hope that Canada and China can be friends one day). Alibaba having a New York Stock Exchange ticker was a symbol for the Chinese government to protect from a reputational standpoint; six smaller names are not.

Our bet was on the combined entity. There are easier problems to solve in the world, than to figure out how to value these entities and which ones we should stay in or swap into/out of given the political risk. However, if we were Chinese nationals we would work on this problem.

We are thinking about potentially selling a series of long calls (high volatility, high premiums) or buying puts (significant jump in the stock; potentially a lot further to run before the split but protect downside). But there will be no long position.

The Demise of Credit Suisse

Great article on the collapse of CR.

https://www.netinterest.co/p/the-demise-of-credit-suisse

“So why the urgency to shut Credit Suisse down over the weekend? “Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks,” declared its regulator just four days earlier. (“We welcome this statement of support,” tweeted back Credit Suisse, rather sweetly.)

In its dying throes, the group had a regulatory capital ratio of 14.1%, ahead of its 13% target, and a liquidity coverage ratio of 144%. Once central bank support was factored in, that liquidity coverage ratio jumped to 190%, signalling that the bank had sufficient liquidity to meet almost 60 days of stressed deposit outflows.”

Silicon Valley Bank (Canada) Wind Up

Silicon Valley Bank had a Canadian Branch, similar to other foreign banks operating in Canada. PWC was appointed as the liquidator and the full filings can be found here - https://www.pwc.com/ca/en/services/insolvency-assignments/siliconvalleybankcanada.html The endorsement provides a good summary - https://www.pwc.com/ca/en/car/silicon-valley-bank/assets/svb-004_170323.pdf

[2] SVB is a U.S. bank based in California. It offers commercial and private banking products primarily to clients in the technology and life science/healthcare industries and global private equity and venture capitalists. SVB is jointly regulated by the U.S. Federal Reserve Board and the Department of Finance Protection and Innovation (“DFPI”).

[3] In Canada, SVB is an authorized foreign bank pursuant to the Bank Act. In 2019, the Minister of Finanace authorized SVB to establish a branch in Canada (the “Canadian branch”) and the Superintendent authorized it to carry on business in Canada. SVB is regulated by the Superintendent with respect to its Canadian operations. The Canadian branch has been primarily focused on lending to early and mid-stage start-up businesses in Canada in the technology and life sciences sectors, as well as to venture capital and global private equity firms that assist Canadian start-up businesses in those industries. The Canadian branch is not authorized to accept deposits from Canadian sources.

[4] On March 8, 2023, SVB announced significant losses. The following day, investors and depositors reacted by initiating withdrawals which caused SVB to be incapable of paying its obligations as they became due. It is insolvent. On March 10, 2023, the DFPI appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver of SVB. On March 13, 2023, FDIC announced that it had transferred all SVB deposits and substantially all of SVB’s assets to a newly created FDIC operated bridge bank (“Bridge Bank”) to protect the depositors of SVB.

[5] In Canada, on March 10, 2023, the Office of the Superintendent of Financial Institutions (“OSFI”) advised SVB and the Canadian branch that it was taking control measures to ensure that sufficient assets were maintained in Canada. On March 11, 2023, the Superintendent appointed PwC as its representative to assist in the supervision of the Canadian branch.