On Tuesday May 28, 2024 Riot Platforms (RIOT), having acquired a 9.25% stake to become Bitfarms’ largest shareholder, made a strategic proposal to acquire all remaining outstanding shares at a price of US$2.30 per share. The offer represents a 24% premium over the Bitfarms one-month volume-weighted average share price. The Board of Riot Platforms have unanimously approved the proposal to acquire Bitfarms, subject to customary conditions, without requiring a shareholder vote or financing.  

Later in the day, Riot Platforms acquired a further 3,002,350 common shares of Bitfarms, representing 0.75% of its outstanding shares, for an average price of $2.19 per share, increasing ownership to 10%. The company now intends to requisition a special shareholder meeting to nominate new directors.

The proposed acquisition carries significant implications for both companies and the broader Bitcoin mining industry. This analysis delves into the strategic rationale behind Riot’s proposal, its potential impact on shareholders, and the challenges that lie ahead.

Bitfarms have issued a statement today to acknowledge that on April 22, 2024, the company  received a proposal from Riot Platforms to acquire 100% of its shares at $2.30 per share in cash and Riot Platforms stock. A Special Committee of independent directors deemed the offer undervalued Bitfarms. Riot did not respond to requests for confidentiality and non-solicitation agreements. The Special Committee is now reviewing strategic alternatives, including potential business combinations or a sale, to maximize shareholder value, while continuing its expansion and efficiency improvements.  As previously announced, the Company’s CEO search remains on track.

Creating the World’s Largest Publicly Listed Bitcoin Miner

Riot Platforms’ proposed acquisition of Bitfarms aims to establish the world’s largest Bitcoin mining company, featuring a combined power capacity of up to 1.5 GW and 52 EH/s of self-mining capacity by year-end. This merger offers significant geographic diversification with a combined 15 facilities across the U.S., Canada, Paraguay, and Argentina, facilitating continued expansion in favorable energy environments.

Additionally, Riot Platforms strong financial profile, including over $700 million in cash and minimal debt, with 8,872 unencumbered Bitcoin as of April 30, 2024, positions the combined entity to finance Bitfarms’ growth plans and enhances access to public equity markets. The strategic alignment and financial strength of the combined company promise substantial benefits for shareholders of both organizations.

Premium Offer and Immediate Value?

Compared with the share price at the time of issue, the offer of US$2.30 per share represents a premium for Bitfarms’ shareholders  and provides them with immediate cash value; initial sentiment suggests it would need a significantly higher premium to achieve any support for this acquisition.

If the process were to receive approval from its shareholders, they could benefit from the potential upside through their participation in the newly formed, more robust company, which is expected to deliver enhanced financial performance and shareholder returns.

In terms of the cost to effectively procure 21 EH of hash rate, located near low cost renewable energy, recent analysis suggests the following:

However, although Riot Platforms have sufficient cash balances to meet this cost, the time and effort acquiring sites and placing orders with suppliers would prove significant and effectively more costly.  By paying a premium for Bitfarms, a company with a hash rate growth target by the end of 2024 of 21 EH/s, Riot Platforms can fast track its own total growth strategy this year to 52 EH/s.

Performance and Valuation

In terms of operational performance, Bitfarms, with the exception of Hive Digital (HIVE), is effectively unparalleled, in terms of production metrics.  For the last 3 years, Bitfarms has remained in the top 2 miners in terms of production by EH/s, guided by Ben Gagnon, Chief Mining Officer,one of the most respected operators in the industry.  If there is one concern with regards to Bitfarms, when compared to its peer miners, is that it has an aging fleet with an average efficiency of 31.0 j/TH significantly lower than peer miners, CleanSpark (CLSK), IREN (IREN) and Marathon Digital (MARA) who can boast average fleet efficiency closer to 24 j/TH.

The table below compares the Market Capitalisation (MCAP) and the Enterprise Value (EV).  The EV calculation takes the MCAP, adds any debt held on the balance sheet and removes cash and cash equivalents (including Bitcoin held), which provides a fairer comparison, with companies in the same industry.  

If you review the total current hash rate, for each miner, it highlights that Bitfarms energized hash rate is currently valued at $88 million per EH/s in comparison to Riot Platforms $141 million per EH/s.  It should also be noted that on the Bitfarms balance sheet is $88.3 million of prepaid deposits for future miner deliveries, with a further $156 million in payments due this year to get the company to their target of 21 EH/s.  Taking into account  this payment, the potential cost value each EH would then reduce to $37 million if the target is achieved.

Financial Synergies and Growth Opportunities

The merger would unlock significant financial synergies, enabling the combined company to invest in growth initiatives more effectively. These initiatives include expanding mining operations, adopting new technologies, and improving overall operational efficiency. A financially stronger entity would be better equipped to navigate the inherent volatility of the cryptocurrency market and capitalize on emerging opportunities. The enhanced financial resources would also facilitate strategic investments in infrastructure and innovation, driving long-term growth.

Challenges and Considerations

Despite the strategic benefits outlined by Riot Platforms, the Bitfarms Board has rejected the initial proposal without engaging in substantive dialogue. In response, Riot Platforms has expressed its intention to requisition a Special Meeting of Bitfarms’ shareholders. This move aims to introduce new independent directors who are committed to transparency and aligning with shareholder interests. Riot's approach underscores its determination to pursue the acquisition while emphasizing governance improvements and shareholder engagement.

Allegations and Director Accountability

The acquisition proposal has also brought to light governance issues within Bitfarms. New allegations from Bitfarms’ recently terminated CEO have raised questions regarding the commitment of certain directors to shareholder welfare. These allegations suggest potential lapses in governance and accountability, adding a layer of complexity to the acquisition process. Riot Platform's proposal indirectly addresses these concerns by advocating for changes in the board structure, aiming to enhance transparency and accountability.

Market Response and Investor Sentiment

The market response to Riot’s proposal has been one of cautious observation. Investors are closely monitoring the unfolding situation, with the potential acquisition stirring significant interest and speculation. Shareholders of both Riot and Bitfarms are awaiting further developments, including regulatory approvals and additional communications from the respective companies. The outcome of this proposal could set a precedent in the Bitcoin mining industry, influencing investor sentiment and market dynamics.

Conclusion: A Transformative Move

Riot Platforms’ proposal to acquire Bitfarms represents a bold and strategic maneuver with the potential to reshape the Bitcoin mining landscape. If successful, the merger would create a dominant player capable of driving innovation, expanding operations, and navigating the challenges of the volatile cryptocurrency market. However, the path to completion is fraught with hurdles, including securing shareholder approval, addressing governance issues, and obtaining regulatory clearances.

As the Bitcoin mining market continues to evolve, the implications of this proposed acquisition will extend beyond the immediate stakeholders. It will impact investors, miners, and the broader crypto community, potentially setting new benchmarks for corporate governance and strategic consolidation in the industry. The outcome of Riot’s proposal will be closely watched, as it could herald a new era of growth and consolidation in the Bitcoin mining sector.