Nanoco Group Plc - Settlement Update
Closing out idea given revised risk / reward
Friday’s RNS - Litigation Outcome – Settlement Agreed
This was a very brief announcement stating that the term sheet for a no fault settlement with Samsung had been agreed, staying the trial while they agree the detailed binding agreement over the next 30 days. Oddly (ominously?) there was no comment from the CEO, as often accompanies Nanoco news.
A global settlement provides confidence of payment (instead of multi year legal battle, with appeals etc), past and future royalties (in a single payment), and crucially is for worldwide sales. From the information regarding damages approaches previously communicated by the company, as well as potential royalty rates from Edison and TPI “research” (paid for by Nanoco), the obvious conclusion would be this was a very positive outcome.
Alas, with the shares trading at 43p pre-announcement, only 16% above the 37p oversubscribed fundraising in June 2022, why would the company settle unless it would provide substantial upside.
On Friday the shares popped to c72p, however LOAM sold 12.5m shares, and they closed at 55.8p.
Monday’s RNS - Litigation Settlement Update
A much longer announcement, but with very little helpful information. Some further information was then provided through / by Edison. Key takeaways:
1. I think the announcement was at least partially in response to the trading on Friday, and thus can be taken to indicate the settlement value is significantly below 72p / share. This is a substantial negative, as it essentially removes the possible balloon upside scenarios from the range of legal / settlement outcomes.
2. Settlement at lower end of guidance, while they have never previously given $m guidance as to what the settlement / jury trial outcome would be (bold added):
“The gross settlement value should be expected to be towards the lower end of the range of expectations for a successful jury trial outcome as previously guided by the Company.”
Referencing the jury trial outcome brings confusion, given this was a US only trial, and the settlement is global in nature. One figure in the market is the $200 - 250m previously referenced by Edison (for US historical only). Alternatively I have seen email text purportedly from the CEO indicating expectations / guidance is simply that it would be "transformative for the Company's prospects and for shareholder value." and that this would be measured against the company’s market capitalisation (c$75m when they filed suit, and over $150m when announcing the settlement).
3. The company communicate to some extent through Edison, and it is apparent they are talking down the implications of the prior mentioned $200 - 250m figure. They do recognise non-US and future will increase the amount, but then attempt to rebase by saying should use “lost earnings” rather than revenues (I would have expected this to be v. high margin revenue), and recognise a discount to avoid uncertainty of trial.
Interpretation & Conclusion
We are dealing with very limited information, disclosed to the market poorly. There is inherently a risk of mis-interpretation, and arriving at the wrong conclusion.
Upside is very hard to assess. Using previously described damages approaches (enabling the entire device, enabling additional sales price above non-QD TV, or component value of QD film), and applying to a global settlement covering past and future, produces very large figures. However, as explained above with the sequencing & content announced, I view this major upside case as basically ruled out.
The legal funding structure means that the proportion of the award that goes to the funder increases for smaller awards (max. 50%), with the indication this settlement is at the lower end of guidance, that pushes us towards a large portion going to the funder.
Putting it all together, my sense is it is unlikely the gross settlement value exceeds $250m, however if the funder takes 40%, the post tax & loan note figure left for shareholders is perhaps c£100m or 30p / share.
There is some further value from the organic QD sensing business, however I am not willing to ascribe significant value until they win commercial orders. It is also possible they are able to monetise the display IP a little further, however given Samsung have c90% of the market, I do not ascribe significant value to this either.
Therefore, I am closing out this idea for the site. The shares have been volatile since posting but currently trade at c40.5p or c5% below the price when idea posted originally.
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Pretty horrible deal ultimately. Very disappointing that they raised money so recently at 37p/share and then agreed to a deal offering significantly less value. Well, on to the next one!
Thinking the settlement is a one time $50-75M USD payment. Anything more and Samsung would likely roll the dice in court and then at the CAFC. Winning the IPRs was very helpful for Nanoco and they have world class legal representation with Mintz, Caldwell Cassady & Curry and Johnny Ward.