Children’s Place Stock: Mithaq’s Buying Will Lead To Buyout Offer Or Short Squeeze (PLCE)

A stock is worth exactly how much someone with money is willing to pay for it. That edict certainly rings true on The Children’s Place, Inc. (NASDAQ:PLCE). A slowly dying and heavily indebted retail outlet is generally not in my interest until it declines to a small fraction of its book value. As BV per share is less than $10 and headed lower as long as it reports net losses, PLCE certainly doesn’t meet this criteria. However, my opinion as an individual retail investor doesn’t hold a lot of weight next to a fund owned and operated by a Saudi family that runs the country’s largest bank.

Mithaq Capital went on an absolute rampage earlier this month. In a filing released by PLCE, the firm has spent $97.8 million to purchase just over 7 million PLCE shares as of February 16. All but 344,000 of those shares were purchased in a week long spending spree starting February 9. That caused the stock to move from a low of $8.50 after posting weak guidance for Q4 to as high as $38 on a likely short squeeze. As the stock has pulled back to the $20 range, I believe that this is an ideal area to load up for round two. Mithaq Capital’s aggressive buying and recent activity on the market tells me it’s not done. This is either going to result in a takeout offer or a short squeeze that will bring back the good old days of 2021 where other dying or dead well known retail stocks such as GameStop Corp. (GME), AMC Entertainment Holdings, Inc. (AMC) and Bed Bath & Beyond Inc. (OTCPK:BBBYQ) temporarily reigned supreme.

Mithaq Capital’s attempted purchase of Aimia is foreshadowing of what is to come on PLCE

Mithaq Capital recently let a tender offer on Aimia Inc. (AIM:CA)(OTCPK:AIMFF) expire. Coincidentally, that was right around the time that the fund took a larger interest in PLCE. During the attempted takeover, Aimia claimed that Mithaq and other shareholders unlawfully conspired to take control of the Company and engaged in various breaches of Ontario’s securities laws. The legal documents associated with the case show that these shareholders include Milkwood Capital and Christopher Mittleman. Mittleman was the Chief Investment Officer of Mittleman Investment Management, a subsidiary of Aimia, until his termination in March 2023. Within the legal documents, Aimia claims that Mithaq and Milkwood were buying shares concurrently in their attempted roles as activist investors.

When reviewing the eleven people who Mithaq plans to elect to PLCE’s Board, a few interesting names pop up. Along with Mithaq’s own leadership team, Rhys Drennan Summerton and Andre Charles Tonkin from Milkwood Capital and Evan Richard Newman, former President & Director of Business Development at Mittleman Investment Management are listed.

Given that the exact same players behind the Aimia takeover offer are involved in PLCE, one can assume that it’s very likely a similar action will take place. Mithaq has disclosed that further open market purchases of shares along with a tender offer or another form of a take-private transaction are among the options that it may pursue. In the near-term, Mithaq is focused on solutions to refinance PLCE’s debt, which is now in default thanks to the company’s change in control. With having laid down nearly $100 million to buy equity, Mithaq likely has a plan for refinancing the debt that will take insolvency risk off the board for the foreseeable future. Assuming that financing is on more favorable terms, that will improve net income. Both of these events will improve the risk profile of PLCE.

If not a buyout, a short squeeze on PLCE may be the end result

Mithaq Capital prides itself on being a value investor. Within that context, it would be difficult to see how this aggressive investment in PLCE fits into that goal. The $97.8 million spent to purchase 7 million shares leads to a $14 per share average cost. PLCE’s valuation metrics compared to the retail sector show that at $20, its price to book is just over 2x, about the sector average. Due to its inability to consistently produce profits, its P/E ratios are meaningless and I wouldn’t trust its forward P/E multiple of 9 until the dust settles on the recently announced guidance for the quarter. Where the company stands out as cheap is its 0.15x price to sales multiple, six times lower than the sector median. If Mithaq finds a way to increase margins and lower the debt burden, PLCE does have legitimate fundamental upside.

However, there might be a much easier path for Mithaq to see investment gains. One that will help put it on the map with meme stock traders. As Mithaq owns 7 million shares, that leaves only 5.5 million shares outstanding that aren’t owned by the firm, and 4 million in the float. As of January 31, there is 2 million in short interest, while ORTEX data suggests that PLCE short interest could be closer to 3 million now.

Recall that with Aimia, Milkwood also bought shares along with Mithaq. Given that members of Milkwood’s management are among the slate of 11 directors to be added to PLCE’s board, there is a strong chance that it also bought up some shares. Potentially up to 600,000 before it would be required to disclose a greater than 5% stake.

Assuming Mithaq holds onto all of its shares, at a minimum, the short interest is over 50% of the float. It could be closing in on 100% if the ORTEX data is correct and Milkwood is also buying shares and taking them out of the float. The volatile price action since February 9th shows the potential of PLCE to undergo a short squeeze, as the spike to $38 looks like one. Some investors may think that the squeeze has already occurred. I believe there is another larger one to come.

One can’t discount that idea that Mithaq has seen the price action on GME, AMC and BBBYQ back in 2021. While fleeting, these trades were immensely lucrative to those who were smart enough to take profits at or near the top. Some investors such as Ryan Cohen managed to drastically increase their profile during this time. Cohen parlayed his involvement in meme stock investing into a CEO position at GME.

Mithaq is in a unique situation as an activist investor to add shareholder value to PLCE by positively impacting its financial performance AND leading it down a short squeeze or meme stock path. Mithaq could do what other meme investors failed to do. Add shareholder value AND keep it. That must be a tempting proposition, especially with the frustrating turn of events for the firm on Aimia.

Conclusion

I have purchased some shares and call options on PLCE in expectation of either a tender offer or a short squeeze. I consider this to be a “special situation” as opposed to a value play or a speculative bet on a growing industry of which I am bullish. I recommend that other investors view PLCE in the same light I do and invest according to their risk tolerance for this type of opportunity.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.