Iceberg Research

Insiders Ditch BigBear ($BBAI) after Selling the AI Hype

March 22, 2024

The Bear in deep hibernation

We tweeted last year that BigBear.ai had little AI expertise, notwithstanding its AI label and ticker ($BBAI). Still, many retail investors remain convinced that BigBear is an AI-play, similar to Nvidia. In reality, BigBear was formed after private equity firm AE Industrial Partners (“AEIP”) merged two underperforming IT consulting companies in its investment portfolio, then disguised them as an AI-play right before its SPAC merger.

We expected financial performance to remain poor. True to form, revenue has stagnated at $155m in 2023, underwhelming for a firm that supposedly operates in the high-growth AI sector.

The company continued its streak of losses at $21.2m with operating cash flow also negative at $18.3m. Unlike many other SPACs, total debt is extremely high at $195.5m – comprising unsecured convertible notes.

 

Another bad asset, Pangiam, dropped by private equity on retail

BigBear announced the acquisition of Pangiam on March 1. The new subsidiary was valued at $70m in an all-stock deal and described as a “leader in vision AI for national security, supply chain management, and digital identity”. Facial recognition is already a crowded space. Less publicized, is the fact that AEIP controls both the seller Pangiam Ultimate Holdings LLC (“PUHL”) and BigBear, as shown in merger-related proxy filings.

Source: Proxy filings for merger

Pangiam represents yet another bad asset dumped by AEIP on the market, after BigBear. Over the last 12 months, Pangiam’s financial performance has been dismal, incurring losses of $9m against $38.2m of revenue. Its cash balance was $1.1m.

The company’s future with Pangiam looks worse than before. BigBear has guided for $195m-$215m of revenue for this year. This relies heavily if not entirely on Pangiam (see table below), meaning zero organic growth for BigBear itself. Combined, both entities would generate losses of ~$50m, and operating cash flow of negative $32m. 

 

The main shareholder, AEIP, is ditching BBAI’s shares

While some retail investors hold to the belief that the company is an AI-play, BigBear insiders have been selling their shares, starting with its main shareholder AEIP.

Notably, AEIP vehicle BBAI Ultimate Holdings LLC sold ~22.8 million shares for $58.4m from 8-15 March.

We expect this selling pressure to continue. The BigBear parentco still holds 79.6 million shares with none under lock-up constraints. 

AE Industrial Partners Fund II, which holds the BigBear investment, is approaching its end-of-life in 2028. It only makes sense that the fund would shed underperforming assets well in advance. 

AEIP controls another 61.8 million BigBear shares through PUHL. These shares are under a one-year lock-up but loopholes could allow for an earlier sale. One, PUHL can sell its shares with BigBear’s written consent. Getting this approval is likely to be easy since AEIP controls both PUHL and BigBear. And two, as shown below, the merger agreement outlines seven exceptions that allow PUHL to ‘transfer’ shares without any approval. 

 
Conclusion

BigBear is not an AI-play but a vehicle for PE to drop under-performing legacy assets on retail investors. This is now made worse with Pangiam in the fold. Insiders are now actively selling their shares, putting pressure on the stock price. We remain short. 




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