Summary Hut 8 Mining is merging with the private mining firm US Bitcoin Corp with finalization expected in Q2. As part of the deal there will be a 5-1 reverse split of HUT shares with current shareholders retaining 50% equity in the post-merger "New Hut" entity. Going forward HUT will use mined BTC and the BTC in treasury to finance operations. Meaning the "HODL" days seem over for the time being. It has been a little over one month since my initial public coverage of Hut 8 Mining ( HUT ). Since that time, we've learned of a very large fundamental catalyst after the recently announced merger deal with US Bitcoin Corp. I'm not convinced this is actually a good deal for HUT shareholders. There are a variety of reasons for that opinion and I'll highlight my key issues shortly. Merger Details However, assuming merger completion, this deal would boost Hut's mining EH/s to 5.6. That would more than double the 2.7 EH/s the company disclosed at the end of January - and this is apparently not including the currently offline North Bay facility in that capacity estimate: Hut 8 According to the announcement deck , US Bitcoin Corp brings in 4 new mining sites, hosting revenue, equipment revenue, and "managed infrastructure." Hut 8 On paper, it is an interesting combination but there is quite a bit of key information that we simply do not know. And when things this big happen and we don't know key information, I tend to become cautious rather than euphoric. What We Know The Treasury HODL days are over for the time being as the company has stated it will be using Bitcoin (BTC-USD) to fund operations before this merger closes: During the interim period, we plan to cover our operating costs through a combination of selling the Bitcoin we mine, selling from our stack and/or exploring various debt options , as agreed under the terms of the Business Combination Agreement. Upon a successful close of the Transaction, we will take the opportunity to carefully review and determine our go-forward treasury strategy Following merger finalization, "New Hut" shareholders will split the equity 50/50 between current HUT shareholders and US Bitcoin Corp equity owners. Hut 8's leadership projected a post-merger market cap of $990 million, but I think that makes a lot of assumptions that are potentially difficult to justify from that outside looking in. As part of the deal there will be a reverse split of the current HUT shares on a 5 to 1 basis. From where I sit, this means unless US Bitcoin Corp can genuinely be valued the same as HUT 8 is today, current HUT shareholders appear to be getting diluted in a roundabout way. I take that view because I don't think we can assume the market will value new HUT shares at the individual unit price needed to keep current HUT investors whole post-merger and post-split. That brings us to what we don't know. What We Don't Know We frankly have no idea what the right valuation for "New Hut" should be post-merger because we don't have any idea what US Bitcoin Corp's balance sheet looks like. Answers weren't really provided by Hut 8 CEO Jamie Leverton to post-merger balance sheet questions during the company's merger announcement webinar. But I think we can reasonably infer US Bitcoin Corp is financially distressed just by looking at the important details in the announcement press release. For instance, US Bitcoin Corp has essentially forfeited a facility in Texas to a lender per a notation in the announcement: Hut 8's North Bay facility is not accounted for in the calculations provided as legal proceedings are underway with the site's third party energy provider. In addition, USBTC's former facility in Pecos, Texas is not accounted for in the above calculations as it has been transferred to one of USBTC's former lenders as part of a debt extinguishment transaction . And later in the release: Pursuant to the Business Combination Agreement, Hut 8 has also agreed to provide USBTC with secured bridge financing during the interim period, with the expected amount of such financing ranging from US$6.0 – $6.5 million, subject to the completion of definitive loan documentation. In addition to US Bitcoin Corp giving up property to satisfy debt obligations, the deal isn't even done yet and US Bitcoin Corp is getting cash from Hut 8 up front through a bridge loan. I think we can safely assume US Bitcoin Corp is bringing some financial baggage with that EH/s capacity and probably not a lot of BTC. More Questions Now It was obvious Hut 8 had to do some sort of cash raise to fund operations going forward. Financing terms in this credit environment are likely not all that great, especially for crypto-related businesses. And selling the stack probably did make the most sense. But to stomach selling BTC to fund operations, it is pretty imperative that Hut 8 can replenish that treasury HODL before the halving. From the outside looking in, it seems this is the deal Hut 8 is making because it's likely the best deal the company can get at the moment. US Bitcoin Corp apparently needs cash and Hut 8 needs machines if it is going to meaningfully scale a Bitcoin mining operation before the halving. What is a bit unsettling from where I sit is just a month ago it appeared as though Hut 8 was transitioning to an HPC business. Now we're seeing a doubling of EH/s capacity that will only produce block rewards on par with current levels for an additional year or so following the merger - possibly less. Investor Takeaway It does feel like leadership isn't sure of the company's long term vision, and that's unsettling. Leverton balked at providing a picture of what the business could look like 3 years from now: we continue to try to make sure we skate where the puck’s going. And so, I can’t foresee how things are going to look in three years. But what I can say is we’re going to continue to do exactly what we’ve done for the last two years but now with even more strength and scale as a combined company under New Hut. If you had asked me to explain where Hut 8 would be in 3 years just a few weeks ago I'd have told you Hut will probably be a cloud computing and HPC services business that also mines a little Bitcoin. Yet here we are a little over a month later scaling up EH/s at the expense of the HODL approach. Without knowing how much debt New Hut is about to carry, I've sold off about half of my "HUT HODL." I could certainly become more excited about HUT again if US Bitcoin Corp's balance sheet isn't actually as bad as I anticipate it probably is. Until then, HUT is still a great trade when BTC is going up and probably a big sell when BTC is going down. For now, we don't have enough information to make a great fundamental case for Hut either way.
