Support.com (NASDAQ:SPRT) announced on March 22 that it will do a reverse merger with Greenidge Generation, a next-gen Bitcoin (CCC:BTC-USD). Once the deal closes in Q3, SPRT stock will be a full-fledged mining stock.
Greenidge stockholders will control 92% and Support.com owners will own 8% of the merged company.
As a result, I believe that SPRT stock is deeply undervalued as a mining stock, assuming the deal is approved. (There is a high likelihood of this since Support management and others who together control 30% of the deal have said they will vote for it). I estimate SPRT stock is worth at least 53% more than its present price.
Details of the Deal
The main reason this deal is unique is that Greenidge (note the company is not called “Greenridge,” but “Greenidge”), is a Bitcoin miner based in update New York that controls its own power plant. This means that Greenidge will be able to control its own mining costs.
Greenidge is actually controlled by a Greenwich, Connecticut private equity firm started by Andrew Bursky and Tim Fazio that specializes in power generation assets. Atlas will end up owning 68.8% of the combined company.
As a result of Greenidge’s low cost of energy, the miner will generate significant amounts of revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization). This can be seen on Page 21 of the very well-done slide presentation discussing the reverse merger on Support.com’s website.
This shows that Greenidge, post-merger, will produce up to $281 million in EBITDA by the end of 2022. This is important since we can use this to gauge the valuation of SPRT stock right now.
Pro Forma Market Cap and EV Calculations
As a result of the transaction, there will be 24.203 shares of Support.com outstanding. This is based on the footnote at the bottom of Page 3 of the announcement. Based on a 0.12388 exchange ratio, Page 23 of the slide deck reveals that the new pro forma cap table. It shows that Support.com shareholders will receive 2.998 million shares. This represents 7.694% of the new 38.963 million shares outstanding.
Therefore, the stock price today of $4.98 is actually equivalent to $40.20 after the merger closes (i.e., $4.98 divided by the exchange ratio of 0.12388 – see the Plan of Merger document). As a result, the pro forma market cap will be $40.20x 38.863 million shares, or $1.566 billion.
In addition, the company will have $70 million in cash (see Page 24 of the deck), including the $33 million provided by Support.com). This means that the enterprise value today is $1.566 billion minus 70 million, or $1.496 billion.
Now we can determine its value. For example, I mentioned above that the company expects, on a best-case scenario, to make $281 million in EBITDA by the end of 2022. This means the pro forma EV-to-EBITDA ratio is just 5.32x. That is very cheap.
I suggest that the stock is worth at least 50.3% more, or 8x EV-to-EBITDA ($2.318 billion). After adding back the $70 million in cash and dividing this by 38.863 million shares, SPRT stock will be worth $61.45 per share. This is 52.86% above today’s implied equivalent post-merger price of $40.20.
Another way to say this is that SPRT stock is now worth 53% more, or $7.61 per share. After the merger closes (and the 0.124 exchange ratio kicks in), the new stock price will be $7.61/0.12388, or $61.43.
What To Do With SPRT Stock
I must say, despite the really well-put-together slide deck on the deal, the company could have done a better job with the merger mechanics. It took me a while to figure out that today’s price has to be divided by the exchange ratio to determine the new pro forma stock price and market cap.
I understand why management did this. They wanted to keep the shares outstanding at a low level of 38.863 million. But they could have merged the two companies’ shares (by increasing the Greenidge share count beforehand) and then implemented a reverse stock split. That would have been easier to understand.
Nevertheless, I suspect that after a while the market will realize that the new stock price will be in the $40 to $50 range after converting the exchange ratio. Moreover, right now the stock is way too cheap at just 5x EBITDA.
Look for SPRT stock to soar at least 53% to $7.61 ($61.45 post-merger) as the deal gets closer to the final merger date in Q3.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.