Thursday, H.C. Wainwright changed its stance on shares of Stronghold Digital Mining Inc (NASDAQ:SDIG), downgrading the stock from Buy to Neutral following the company's acquisition announcement. Stronghold Digital Mining revealed it has entered a binding all-stock agreement to be acquired by Canadian-based Bitfarms for approximately $175 million.
This deal includes taking on approximately $50 million of Stronghold's debt and values Stronghold shares at $6.02 each. This price is a significant 71% premium over Stronghold's 90-day average share price as of August 16, and also surpasses H.C. Wainwright's previous $4 price target.
The agreement stipulates that upon closure, Stronghold will hold a 10% ownership stake in Bitfarms, which equates to an estimated issuance of 42 million shares. This share exchange does not necessitate a vote from Bitfarms' shareholders. Nevertheless, a favorable vote from a majority of Stronghold's shareholders is expected, given the outlined benefits of the merger discussed in a recent call. The transaction is anticipated to be finalized early next year.
H.C. Wainwright noted the value of Stronghold's electrical infrastructure assets in an August 15 report, which highlighted the company's access to up to 955MW of power. However, the firm now believes its initial valuation may have been too optimistic. The active 165MW is estimated to be worth around $500,000 per MW, while the potential value for the development of additional megawatts is considerably lower.
The analyst also pointed out that the approval process for the 647.5MW studied by PJM for development remains uncertain. The electrical assets and infrastructure may require up to two years to become fully operational. Due to these considerations and the acquisition, H.C. Wainwright has decided to withdraw its price target for Stronghold Digital Mining and maintain a Neutral rating on the stock.
In addition to the merger, Stronghold Digital Mining has been exploring strategic alternatives, including potential sales, mergers, and expansions. Despite reporting a GAAP net loss of $21.3 million and an adjusted EBITDA of negative $0.3 million during its second-quarter earnings call, the company highlighted potential future revenue boosts from increased waste coal tax credits and capacity market auction results.
The company is also considering data center opportunities and has engaged Appleby Strategy Group to explore this possibility. These recent developments could add significant value to Stronghold's cash flow starting in 2025. Both companies are expected to share further details on these recent developments in future announcements.
InvestingPro Insights
The acquisition of Stronghold Digital Mining by Bitfarms has caught the attention of investors, with the transaction offering a significant premium over Stronghold's recent average share price. In light of this, InvestingPro data reveals a market capitalization of approximately $90.19 million for Stronghold, underscoring the scale of the deal in relation to the company's size. Moreover, the company's revenue for the last twelve months as of Q2 2024 stands at $86.09 million, with a gross profit margin of 29.14%, indicating a solid profit on its revenue despite overall operational challenges.
InvestingPro Tips for Stronghold highlight the significant debt burden and the fact that short-term obligations exceed liquid assets, which could be contributing factors to the company's decision to merge. The stock's high price volatility is reflected in the recent return metrics, showing a dramatic 94.54% return over the last week. Investors should note that while the company has seen strong returns in the short term, analysts do not anticipate Stronghold will be profitable this year, and the stock has not been profitable over the last twelve months.
For those looking for a deeper dive into Stronghold Digital Mining's financial health and future prospects, additional tips and insights are available on InvestingPro. As of now, there are 13 more InvestingPro Tips that could provide valuable context and guidance for investors considering the implications of this acquisition.
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