RMGN - RMG Networks

[Guest notorious546]

The smallest investment we made in the fourth quarter was in a company called RMG Networks, which I have been studying for almost a year. I went to visit the Dallas headquarters over the summer, but did not invest at the time. RMG is a business in transition. They historically sold the screens that digital advertising is shown on. This is a bad business with little differentiation, low margins, and little recurring revenue. Couple a bad business with the bad strategy of the last CEO who tried to build a media company, and the result is bad financial performance. The stock chart of RMG Networks is a black diamond ski slope with the price declining from more than $10 to less than $1 in less than three years. So far, nothing outlined above would have piqued my interest. Why travel to Dallas in July? The primary reason was that Eric Gomberg from Dane Capital had prodded me to meet with the CEO in the spring. Eric described the CEO, Bob Michaelson, as an incredibly high quality leader for a sub-$50M market cap company. Per usual, Eric’s assessment was spot on. The trip to Dallas was to understand if Bob had been able to build a team – or if he was “all hat and no cattle.”

 

One method I use when evaluating management is imperfect, but it is the “What Would Scott Miller Do” (WWSMD) test. In the case of Bob Michaelson, the only move he has made to date that fails the WWSMD test is accepting the job as CEO, stepping into the top role at a money-losing company pursuing a moneylosing strategy with a constrained balance sheet. I would have never taken the job in the first place, but once in the CEO role, he has done everything I would have done and then some. He (and his team) sold the money-losing media business, radically restructured the digital screen business by taking out 30% of the operating costs and lowering the breakeven points, invested in new products, and improved distribution. Bob and his team are de-emphasizing the low-margin hardware and emphasizing the highermargin recurring revenue software and services. Bob is focusing on what goes on the screens that are sold. Bob has added distribution in specific verticals, giving up some economics in order to leverage their sales forces. Specifically, he partnered with Manhattan Associates, a public company 100X their size, Ragan Associates, a leader in internal communications, and DS-COMM, a unit of Boeing. This is a lowcost, potentially high-reward strategy (nice work, Bob). None of these changes “screen well,” but they matter – the fundamentals matter.

 

Almost all of Bob’s progress outlined above (except the partnerships) was evident in our July visit when the shares were trading at just over $1, but I still decided to wait and watch as I am not a fan of the hardware business. This waiting and watching ended in December, when two other factors drove the investment decision. First, there appeared to be an indiscriminate seller – the portfolio manager at the second largest stockholder had turned over, and whoever inherited the position wanted out of what effectively amounted to a rounding error in their overall portfolio. An indiscriminate "seller “of size” in an illiquid stock creates an opportunity. The second and final piece to the puzzle was RMG’s fully backstopped rights offering. In plainer English, in order to strengthen the balance sheet, the company raised $4M in additional capital by offering every existing shareholder the right to buy shares at $0.62 (for every five shares an investor owned, s/he could buy an additional share). The largest shareholder, who has a board seat and is presumably quite informed, indicated that he would participate on his pro rata basis and would backstop the offering by taking additional shares, if necessary, to sell the full $4M. A fully backstopped rights offering can be a way for existing investors to buy more shares on favorable terms. As a point of reference, our IDW Media shares, which we bought in their fully backstopped rights offering, are up more than 100% in less than a year. While RMG Networks shares will likely not perform as well, the stock is trading at a depressed valuation and is at an inflection point where the product investments and partnerships will begin showing up in the financials. I was thus happy to participate in the rights offering alongside the largest shareholder who was committing additional capital as the long-term opportunity had improved while the stock had gotten cheaper. Over time, improved profitability should come from the distribution partnerships and reduced cost base. We may also benefit from multiple expansion as the company emphasizes software with recurring revenue and services over hardware.

- Via Scott Miller at Greenhaven Road Capital

 

https://reminiscencesofastockblogger.com/2016/06/22/week-258-in-search-of-the-next-big-thing/

 

http://wsw.com/webcast/ldmicro11/rmgn/index.aspx

 

https://static1.squarespace.com/static/5498841ce4b0311b8ddc012b/t/588bb3d39f74561d0b69fbb7/1485550548279/Q4+2016+FINAL_.pdf

 

https://www.valueinvestorsclub.com/idea/RMG_NETWORKS_HOLDING_CORP/139379#description

 

[writser]

I typed the post below not knowing there was a topic for RMGN already. I'll just paste it here instead.

 

Just throwing this out there. RMG is a 'digital signage' company, selling screens, software (airport lounges, stock tickets, etc). Company was taken public in a SPAC deal by Gregory H Sachs in 2013 (old article about it). The stock has cratered the past few years and now the Sachs wants to take it private again at a bargain price. Sachs owns ~25% of the company. Donald R. Wilson (from DRW) owns another 40%. According to the article linked above they've known each other for a long time.

 

This looks like a typical SPAC: disaster for public shareholders. Now for the interesting thing: trading in the stock has been very erratic, RMGN is currently trading at $1.14 or a ~11% discount to the deal price of $1.27 which implies there are some problems. Among other things, the company has until tomorrow to file a proxy statement. Also, recently some legal proceedings against the company have started (from the 10K):

 

Class Action and Stockholder Derivative Lawsuit

 

On March 23, 2018, a class action and a verified stockholder derivative complaint on behalf of the Company entitled Eric Weinstein et al. v. Gregory H. Sachs et al., Case No. 2018-0210-AGB was filed in the Court of Chancery in the State of Delaware against the Company, as nominal defendant, and certain individual shareholders, directors and former employee of the Company, as defendants (the “Weinstein Proceeding”).  The lawsuit alleges that certain members of the Company’s Board breached their fiduciary duties of good faith and loyalty by agreeing to enter into a purchase agreement (the “Purchase Agreement”) with certain investors on March 25, 2015 to sell such investors shares of preferred stock of the Company, (i) on terms that allowed a small group of investors to acquire common stock of the Company at a significant discount, in a quantity that entrenched their power within the Company, favoring their interests to the detriment of the Company’s minority stockholders, and (ii) by knowingly making false and misleading disclosures, and failing to disclose all material information, to the Company’s stockholders.  The complaint further alleges that Mr. Sachs and Mr. Donald Wilson, as the Company’s controlling stockholders, breached their fiduciary duties of good faith and loyalty by agreeing to issue preferred stock of the Company on terms that allowed a small group of investors to acquire common stock of the Company at a significant discount, in a quantity that entrenched their power within the Company, favoring their interests to the detriment of the Company.  The complaint also alleges that certain of the Company’s insiders, including four directors and a former employee, were unjustly enriched by the opportunity to acquire common stock of the Company at a discount to its trading price at the time.  The lawsuit seeks to cause the defendants to disgorge to the Company the stock that they received at a discount to the market price, and also seeks an award of appropriate damages, plus pre- and post-judgment interest for the plaintiff, the class and the Company. The Company believes that the allegations set forth in the complaint are without merit and intends to defend itself vigorously in the proceedings. Due to the inherent uncertainties of litigation and the early stage of the proceedings, the Company cannot predict the ultimate outcome of this matter.

 

Patent Litigation

 

On March 27, 2018, Ultravision Technologies, LLC (“Ultravision”), filed patent infringement complaints against us in the International Trade Commission (“ITC”) and the United States District Court for the Eastern District of Texas, Marshall Division (“District Court”), alleging infringement of claims in two United States patents based on modular LED display panels sold by the Company. The ITC matter is entitled In the Matter of Certain Modular LED Display Panels (No. 337-3302). The ITC complaint seeks exclusion and cease and desist orders.  Pursuant to the complaint filed in the District Court, Case No. 2:18-cv-00109-JRG, Ultravision is seeking to enjoin the Company from further acts of direct and/or indirect infringement of such United States patents, including the manufacture, sale, offer for sale, importation and use of the infringing products, unspecified monetary relief, injunctive relief for the payment of royalties and reimbursement for costs and attorneys’ fees. The Company intends to defend itself vigorously in the proceedings. Due to the inherent uncertainties of litigation and the early stage of the proceedings, the Company cannot predict the ultimate outcome of this matter.

 

I'll keep this short - I have no unique insights. The chairman owning 25% of this trainwreck wants to take it private at a bargain price with (or so I assume) the consent of another 40% owner. He announced the deal _after_ both lawsuits were disclosed in the annual report. Market is maybe a bit scared because of the lawsuits / lack of a proxy / and this stock being a complete trainwreck the past few years. It's a relatively small deal. The company is not on the verge of bankruptcy. Unless I am missing something this seems attractive.

 

You are at the mercy of a 'shrewd' businessman, not sure I'd want to partner with him for the long run but if he wants to take this thing private, what's going to stop him? And given that his friend / partner owns 40% I'm assuming he has an incentive not to do something stupid (unless they are in this deal together, but nothing in the merger agreement is mentioned about DRW).

 

I own a few shares. If anyone can tell me what I am missing and/or why a huge discount is warranted then that would be greatly appreciated.

 

Interesting tidbit: some salty guy opened multiple accounts on twitter / yahoo finance / etc. to throw salt on the company because he apparently lost a lot of money owning the stock.

[doc75]

Thanks for posting.  I've been watching this for a while and was also going to mention it here, but was a bit embarrassed to admit I was involved in this disaster.

 

My only concern RE the lawsuit is if the offer could be held up because that the plaintiff is asking for a disgorgement of shares/ownership.

 

This is my luckiest investment/speculation ever. 

 

- bought around $0.65 and sold at $1.10 a couple weeks later (pre-split)

- bought at $0.75-$0.80 and sold at $2.20 a couple weeks later

- bought at $0.85 and sold at $1.30 a week or two later

 

Pure luck.  The sale at $2.20 was very strange.  I noticed it skyrocketed to $2.50 one day, looked for news, saw none, and entered a sell order as fast as I could.  It finished the day much lower.  Still have no idea why it went up so much, though it might have been a short squeeze triggered by takeover rumours.

 

I recently bought another (much smaller) position at $1.14.  Given that the offer was made after the disclosures, I  think it very likely will end up going through.

 

 

[SnarkyPuppy]

Thanks for posting.  I've been watching this for a while and was also going to mention it here, but was a bit embarrassed to admit I was involved in this disaster.

 

My only concern RE the lawsuit is if the offer could be held up because that the plaintiff is asking for a disgorgement of shares/ownership.

 

This is my luckiest investment/speculation ever. 

 

- bought around $0.65 and sold at $1.10 a couple weeks later (pre-split)

- bought at $0.75-$0.80 and sold at $2.20 a couple weeks later

- bought at $0.85 and sold at $1.30 a week or two later

 

Pure luck.  The sale at $2.20 was very strange.  I noticed it skyrocketed to $2.50 one day, looked for news, saw none, and entered a sell order as fast as I could.  It finished the day much lower.  Still have no idea why it went up so much, though it might have been a short squeeze triggered by takeover rumours.

 

I recently bought another (much smaller) position at $1.14.  Given that the offer was made after the disclosures, I  think it very likely will end up going through.

 

I owned this too and sold out around ~2.30 that day.  It was randomly up 100% with share volume > all of the common shares.  Bizarre stuff but I think it was just a pump/dump.  Once I saw no news I sold out.  Small corners of the market continue to provide weird opportunities.

 

The merger arb is likely fine writser - I just have a bad taste from the CEO so I haven't looked closely enough.  I'm sure anyone else who has been in this name feels the same way, which in combination w/ the legal uncertainty you describe, is likely contributing to the discount

[writser]

Proxy is finally filed. Haven't done a deep dive yet but at first glance it looks more or less like what I hoped:

 

- DRW is not on board with the merger and did not want to provide bridge financing

- Vote required is a majority of shares outstanding and a majority of independent shares.

 

Seems super unlikely to me that Sachs would try to do this without running this by his buddy so the vote should pass easily and Sachs has an incentive not to piss off independent shareholders. There are no financing conditions and it should be a relatively small deal for Sachs ($12.5m). Current spread is ~8.5% and I think that that is too much. Close is expected in Q3 but IRR is decent even if it takes a little bit longer. I bought a few extra shares.

 

Again, not going all in on this - don't like the lack of a reverse termination fee and Sachs doesn't seem like the nicest guy to partner with .. Also, my research is probably way too superficial and I probably missed some important details. If so, it would be appreciated if you could give me a heads up.

[hillfronter83]

Proxy is finally filed. Haven't done a deep dive yet but at first glance it looks more or less like what I hoped:

 

- DRW is not on board with the merger and did not want to provide bridge financing

- Vote required is a majority of shares outstanding and a majority of independent shares.

 

Seems super unlikely to me that Sachs would try to do this without running this by his buddy so the vote should pass easily and Sachs has an incentive not to piss off independent shareholders. There are no financing conditions and it should be a relatively small deal for Sachs ($12.5m). Current spread is ~8.5% and I think that that is too much. Close is expected in Q3 but IRR is decent even if it takes a little bit longer. I bought a few extra shares.

 

Again, not going all in on this - don't like the lack of a reverse termination fee and Sachs doesn't seem like the nicest guy to partner with .. Also, my research is probably way too superficial and I probably missed some important details. If so, it would be appreciated if you could give me a heads up.

 

What is the chance of DRW becoming rollover investor? It could make passing majority of independent a little complicated.

[fishwithwings]

Proxy is finally filed. Haven't done a deep dive yet but at first glance it looks more or less like what I hoped:

 

- DRW is not on board with the merger and did not want to provide bridge financing

- Vote required is a majority of shares outstanding and a majority of independent shares.

 

Seems super unlikely to me that Sachs would try to do this without running this by his buddy so the vote should pass easily and Sachs has an incentive not to piss off independent shareholders. There are no financing conditions and it should be a relatively small deal for Sachs ($12.5m). Current spread is ~8.5% and I think that that is too much. Close is expected in Q3 but IRR is decent even if it takes a little bit longer. I bought a few extra shares.

 

Again, not going all in on this - don't like the lack of a reverse termination fee and Sachs doesn't seem like the nicest guy to partner with .. Also, my research is probably way too superficial and I probably missed some important details. If so, it would be appreciated if you could give me a heads up.

 

I have my doubts on the votes.  DRW collectively holds 38.1% of the shares whereas only 18% of the shares have entered into a voting agreement.

[hillfronter83]

Proxy is finally filed. Haven't done a deep dive yet but at first glance it looks more or less like what I hoped:

 

- DRW is not on board with the merger and did not want to provide bridge financing

- Vote required is a majority of shares outstanding and a majority of independent shares.

 

Seems super unlikely to me that Sachs would try to do this without running this by his buddy so the vote should pass easily and Sachs has an incentive not to piss off independent shareholders. There are no financing conditions and it should be a relatively small deal for Sachs ($12.5m). Current spread is ~8.5% and I think that that is too much. Close is expected in Q3 but IRR is decent even if it takes a little bit longer. I bought a few extra shares.

 

Again, not going all in on this - don't like the lack of a reverse termination fee and Sachs doesn't seem like the nicest guy to partner with .. Also, my research is probably way too superficial and I probably missed some important details. If so, it would be appreciated if you could give me a heads up.

 

I have my doubts on the votes.  DRW collectively holds 38.1% of the shares whereas only 18% of the shares have entered into a voting agreement.

 

Currently DRW is not part of the rollover investor. 18% belongs to Sachs, who is taking the company private.

[fishwithwings]

Proxy is finally filed. Haven't done a deep dive yet but at first glance it looks more or less like what I hoped:

 

- DRW is not on board with the merger and did not want to provide bridge financing

- Vote required is a majority of shares outstanding and a majority of independent shares.

 

Seems super unlikely to me that Sachs would try to do this without running this by his buddy so the vote should pass easily and Sachs has an incentive not to piss off independent shareholders. There are no financing conditions and it should be a relatively small deal for Sachs ($12.5m). Current spread is ~8.5% and I think that that is too much. Close is expected in Q3 but IRR is decent even if it takes a little bit longer. I bought a few extra shares.

 

Again, not going all in on this - don't like the lack of a reverse termination fee and Sachs doesn't seem like the nicest guy to partner with .. Also, my research is probably way too superficial and I probably missed some important details. If so, it would be appreciated if you could give me a heads up.

 

I have my doubts on the votes.  DRW collectively holds 38.1% of the shares whereas only 18% of the shares have entered into a voting agreement.

 

Currently DRW is not part of the rollover investor. 18% belongs to Sachs, who is taking the company private.

 

Yes.  Since DRW did not enter into the voting agreement, why would they vote for the transaction?

[doc75]

FWIW I sold at $1.19 yesterday after seeing the proxy and the horrid Q1 earnings.  The murkiness of DRW's position in all this made me rethink the risk-reward.

 

[writser]

Yes.  Since DRW did not enter into the voting agreement, why would they vote for the transaction

 

This is just my reasoning: take it with a grain of salt.

 

First of all, according to the proxy, when the Sachs bit was on the table the board contacted DRW. DRW indicated they weren't interested in 'further investing in the company OR proposing an alternative transaction'. I read this as: we are fine with the Sachs bid. What's the alternative explanation? They are super insulted but don't have any spare cash? Or: they don't want to buy the company, they don't want to sell the company, they just want to sit on their 40% stake and run the company into the ground?

 

Second, why would DRW voluntarily enter into a voting agreement? It would limit their options, it might appear as a conflict of interest and it could even make it more difficult to pass the vote! AS Hillfronter pointed out, with DRW being an independent shareholder Sachs and DRW can basically pass any vote together. If DRW would be considered part of the rollover group they'd actually have to find enough independent shareholders to vote for the deal. Not sure about the legal specifics but you could argue the safest (and easiest) thing to do is not signing the voting agreement.

 

Finally, take a step back and think about the incentives of the parties involved: you own 18% of a company and a guy you've known for decades, who you've partnered with multiple times, who participated with you in a rights offering at $0.62 in 2016, owns ~40% of shares outstanding. What are the chances you haven't even discussed the deal with him? What are the chances you would even bother to try to take the company private if you think your buddy is going to vote against it? What are the chances you will try to fuck him over?

 

Maybe I'm too naive but I think the simplest explanation is often the best one: DRW is fine with the deal - I see nothing to contradict that in the proxy. They didn't sign a voting agreement because a) what would be the upside of that and b) it's a hassle and it could actually make things more complicated. If DRW doesn't like the deal: why haven't they made a counterbid? Why don't they want to provide financing even though they did so in 2016? Why haven't they issued any press releases or shareholder letters? Why wouldn't they have told Sachs?

 

If you have an alternative interpretation of the facts that makes more sense I'd be happy to hear it.

[Foreign Tuffett]

Yes.  Since DRW did not enter into the voting agreement, why would they vote for the transaction

 

This is just my reasoning: take it with a grain of salt.

 

First of all, according to the proxy, when the Sachs bit was on the table the board contacted DRW. DRW indicated they weren't interested in 'further investing in the company OR proposing an alternative transaction'. I read this as: we are fine with the Sachs bid. What's the alternative explanation? They are super insulted but don't have any spare cash? Or: they don't want to buy the company, they don't want to sell the company, they just want to sit on their 40% stake and run the company into the ground?

 

Second, why would DRW voluntarily enter into a voting agreement? It would limit their options, it might appear as a conflict of interest and it could even make it more difficult to pass the vote! AS Hillfronter pointed out, with DRW being an independent shareholder Sachs and DRW can basically pass any vote together. If DRW would be considered part of the rollover group they'd actually have to find enough independent shareholders to vote for the deal. Not sure about the legal specifics but you could argue the safest (and easiest) thing to do is not signing the voting agreement.

 

Finally, take a step back and think about the incentives of the parties involved: you own 18% of a company and a guy you've known for decades, who you've partnered with multiple times, who participated with you in a rights offering at $0.62 in 2016, owns ~40% of shares outstanding. What are the chances you haven't even discussed the deal with him? What are the chances you would even bother to try to take the company private if you think your buddy is going to vote against it? What are the chances you will try to fuck him over?

 

Maybe I'm too naive but I think the simplest explanation is often the best one: DRW is fine with the deal - I see nothing to contradict that in the proxy. They didn't sign a voting agreement because a) what would be the upside of that and b) it's a hassle and it could actually make things more complicated. If DRW doesn't like the deal: why haven't they made a counterbid? Why don't they want to provide financing even though they did so in 2016? Why haven't they issued any press releases or shareholder letters? Why wouldn't they have told Sachs?

 

If you have an alternative interpretation of the facts that makes more sense I'd be happy to hear it.

 

I agree 100% with basically all of this.

 

[writser]

Go-shop period extended for two weeks.

[Foreign Tuffett]

Go-shop period extended for two weeks.

 

Maybe another party has shown some interest in the company? We can hope....

[writser]

We'll see. I have my doubts about the relevance of this news (could very well be a delay on technical grounds) but yeah, maybe we get lucky. I'm not adding, still happy with my current position sizing.

[writser]

https://finance.yahoo.com/news/rmg-special-committee-concludes-shop-200500534.html

 

the “go-shop” period [..] has ended and has elicited an alternative acquisition proposal from a third party to engage in a recapitalization transaction with the company (the “Acquisition Proposal”).

 

Under the terms of the Acquisition Proposal, the company, or a successor to the company, would remain a public company.  The company’s existing stockholders would not receive any cash consideration and would continue to own their shares of the company’s stock (or receive shares in a successor entity).

 

[..]

 

The Special Committee has not determined that the Acquisition Proposal in fact constitutes a Superior Proposal under the Merger Agreement and the Acquisition Proposal is not at this stage sufficiently detailed or definitive for such a determination to be appropriate. The Acquisition Proposal is subject to several conditions, including satisfactory completion of due diligence, mutual agreement as to transaction structure and the negotiation of a mutually acceptable definitive agreement. There can be no assurance that the Acquisition Proposal will ultimately lead to a Superior Proposal. At this time, the Special Committee has not changed its recommendation with respect to, and continues to support, the company’s pending sale to an entity controlled by Mr. Gregory Sachs.

[fishwithwings]

Great news!

https://finance.yahoo.com/news/rmg-special-committee-concludes-shop-200500534.html

 

the “go-shop” period [..] has ended and has elicited an alternative acquisition proposal from a third party to engage in a recapitalization transaction with the company (the “Acquisition Proposal”).

 

Under the terms of the Acquisition Proposal, the company, or a successor to the company, would remain a public company.  The company’s existing stockholders would not receive any cash consideration and would continue to own their shares of the company’s stock (or receive shares in a successor entity).

 

[..]

 

The Special Committee has not determined that the Acquisition Proposal in fact constitutes a Superior Proposal under the Merger Agreement and the Acquisition Proposal is not at this stage sufficiently detailed or definitive for such a determination to be appropriate. The Acquisition Proposal is subject to several conditions, including satisfactory completion of due diligence, mutual agreement as to transaction structure and the negotiation of a mutually acceptable definitive agreement. There can be no assurance that the Acquisition Proposal will ultimately lead to a Superior Proposal. At this time, the Special Committee has not changed its recommendation with respect to, and continues to support, the company’s pending sale to an entity controlled by Mr. Gregory Sachs.

[Hielko]

Great news!

https://finance.yahoo.com/news/rmg-special-committee-concludes-shop-200500534.html

 

the “go-shop” period [..] has ended and has elicited an alternative acquisition proposal from a third party to engage in a recapitalization transaction with the company (the “Acquisition Proposal”).

 

Under the terms of the Acquisition Proposal, the company, or a successor to the company, would remain a public company.  The company’s existing stockholders would not receive any cash consideration and would continue to own their shares of the company’s stock (or receive shares in a successor entity).

 

[..]

 

The Special Committee has not determined that the Acquisition Proposal in fact constitutes a Superior Proposal under the Merger Agreement and the Acquisition Proposal is not at this stage sufficiently detailed or definitive for such a determination to be appropriate. The Acquisition Proposal is subject to several conditions, including satisfactory completion of due diligence, mutual agreement as to transaction structure and the negotiation of a mutually acceptable definitive agreement. There can be no assurance that the Acquisition Proposal will ultimately lead to a Superior Proposal. At this time, the Special Committee has not changed its recommendation with respect to, and continues to support, the company’s pending sale to an entity controlled by Mr. Gregory Sachs.

Is it?

[writser]

Too early to judge, I think.

 

Obviously I'd much rather have a firm $1.50 bid then an unknown recapitalization. However, at this point the board still supports the Sachs bid and, with insiders owning 50%+ of shares outstanding I'd say it is unlikely that some sort of rip deal will be forced upon shareholders. I doubt that something like a private placement of a few million shares to an outsider at $1.30 would be considered a superior proposal and that Sachs would rather accept that than buy the company itself. My best guess is that this will be a significant private placement at a premium to the Sachs deal price but it could also be some sort of reverse merger, debt / convertibles / something I didn't even think of. Not super good news but not terrible either. We'll see.

[Foreign Tuffett]

New proxy is out. Some unsettling stuff in the "Subsequent Events" section.

[writser]

This continues to be a nice popcorn story. Three board members just resigned: the special committee decided that the proposed recapitalization from Hale Capital Partners was a superior proposal and then this happened:

 

At the Board meeting, legal counsel to the Special Committee stated that, in the view of the Special Committee, it was inappropriate for Mr. Sachs to attend the Board meeting and participate in the Board’s discussion of the Hale Transaction; Mr. Sachs stated that it was his understanding that Delaware law permitted him to do so as a director and executive chairman of the Company and that the support of either of the two other non-committee directors in attendance would result in approval of the Hale Transaction.  Following the vote on the matter, members of the Special Committee also expressed concern over the outcome of the vote.  Although their letters of resignation did not express a reason for the resignations of the members of the Special Committee, the Company believes that their disagreement with Mr. Sachs’ attendance and participation in the discussion of the Hale Transaction and the outcome of the Board vote on the Hale Transaction were the reasons for their resignations.

 

From the latest Sachs 13D/A:

In response to continued lack of communication as the Committee proceeded with its Hale discussions – but consistent with our efforts to work hard and in good faith towards a closing of the Merger – we presented a proposal to you on July 27 that provides the Committee and the Company’s shareholders “the best of all worlds”. You have inexplicably rejected this proposal. One key purpose of this letter is to document that proposal, which we stand behind and remain willing to implement immediately. Again, the proposal would replace the $1 million penalty loan (the remedy in the event that Parent determines not to close the Merger and all conditions to its obligations to close have been satisfied) with a financing on the precise terms of the Hale financing. Parent will even fund into escrow the precise amount of net cash that would remain with the Company if such financing were effected by Hale under the terms of its proposal. Accordingly, should the Merger – which is a superior transaction for stockholders because it delivers $1.27 in cash at closing vs. no cash and massive dilution in a minority financing – not close, the Company would have the backstop of the exact same financing from Parent. Parent’s approach even has significant improvements relative to the Hale transaction. For example, as we noted previously, the Hale financing is subject to financial conditions (e.g., net working capital and debt levels at closing) that would not apply to Parent’s financing on the exact same terms; if Parent’s few conditions for the Merger were satisfied but Parent didn’t close, the financing would close without such additional conditions applying. In addition, Parent and the Company are nearly ready to hold a stockholder meeting and could look to seek approvals for both transactions at the same time within one month of the date of this letter. On the other hand, the Hale transaction on the same terms (as to the financing alternative) would require the Company to start over with the SEC and delay a closing for months. The bottom line is that – with Parent’s proposal – stockholders preserve an ability to obtain a cash out transaction at $1.27 and will be better off (but certainly no worse off) than the financing on the same terms being offered by Hale, and in all cases one of those transactions (implemented by Parent) will close sooner and with greater certainty than Hale’s financing.

 

In refusing to consider Parent’s proposal – a “best of all worlds” proposal in our view – the Committee appears prepared to conclude that the Hale financing is simply on its face a better deal for stockholders than our cash-out going private transaction and that it wants to affirmatively deny the latter possibility for stockholders on that basis. Such a conclusion makes a total mockery of the process and runs counter to the Committee’s own public statements regarding the Hale proposal: from the outset, the Committee and its counsel have stated that the Hale proposal (which hasn’t changed in any material way) is not superior and that continued conversations with Hale were an attempt to negotiate to improve such proposal. Moreover, while the Committee cited for months “certainty of closing” (and some unsubstantiated fear that Parent would not close the Merger and the Company would be left with no deal) as a basis for why the noncompliant Hale proposal was subject to continuing discussions with Hale, now the Committee ignores “certainty of closing” when the “shoe is on the other foot” – Parent’s proposal in fact provides substantially greater certainty of closing of a transaction than the proposed Hale deal.

 

A few thoughts:

 

- I'm no expert on Delaware law but I assume that mr. Sachs was allowed to visit the board meeting? Even if it would be considered inappropriate? I don't know if this could be cause for a lawsuit from Hale / the SEC / some vultures? Insights would be appreciated.

 

- Regardless of what you think of Sachs' antics, I personally wasn't that thrilled about the 'superior proposal'. An injected of preferred capital with a conversion price of $1.45. Less downside than the common and almost the same upside. As a holder of the common stock I'd rather have the $1.27 buyout. I'm wondering why the special committee liked this alternative so much. Apparently they were worried about the 'certainty of closing' of the Sachs proposal - not sure if that is mostly a theoretical issue or if they are actually worried that Sachs is going to pull a trick / bail out.

 

- Sachs offered to replace the penalty loan with exactly the same funding structure as the Hale offer but this offer was not taken up. The letter attached to the 13D/A actually sounds quite reasonable.

 

- Risks i see currently: lawsuits from Hale (or other parties) regarding the antics of Sachs could delay or endanger the deal. Also, the company was technically in breach of its bridge loan agreement according to the proxy - and while Sachs is reservering 'rights and remedies' for now, he could try to outsmart shareholders via that route if things don't work out the nice way. The worries of the special committee could be well-founded and Sachs either doesn't want to do the deal or doesn't have the resources to pull it off (but then why is he doing all this stuff?). And finally there is no penalty fee if Sachs cancels the deal.

 

I'm a sucker for a simple explanation so I bought a few extra shares. So far everything Sachs has done indicates to me he wants to bulldoze the competition with this $1.27 deal. He bullied the independent directors away and in the latest 13D/A says a stockholder meeting within a month should be possible. Donald Wilson still holds a large stake. He's not interested in a deal himself but it will make it difficult for Sachs to pull off something crazy - I still assume he backs the deal because otherwise trying to pass a vote would be pointless.

 

On the other hand this has train wreck potential as well: the company needs cash badly - it would probably be bad news if the deal fails or is delayed because of lawsuits. And Sachs doesn't exactly seem like mr. nice guy so I'm not 100% sure he's not going to try to pull something off. One of the directors who resigned (Trutter) has worked with Sachs since at least 2004. Maybe their relationship has cooled down but it seems pretty bad if guys like that are resigning from the board.

 

Bit of a non-structured post. Any insights would be appreciated.

[writser]

Bunch of new filings overnight. Some points I thought were interesting:

 

- Record date of the special meeting has been set at August, 3.

- An amended merger agreement was agreed upon: increase of per share consideration to $1.29, small increase to penalty loan, company ceased all discussions with Hale (no longer an excluded party), drop dead date is extended, and the company received a waiver for all breaches of the loan agreement.

- The board (or at least what's left of it) "unanimously" recommends the amendment and recommends that shareholders vote for the merger.

- Hale tried to give shareholders a cashout option at $1.27 in the end as a last-ditch effort.

 

Seems like good news. Seems to me that the path has now been cleared for Sachs to take the company private and, as I mentioned in my previous post, I think it's the easiest and fastest path for him going forward to cash out shareholders as soon as possible. Shares are up ~7%.

[Foreign Tuffett]

Bunch of new filings overnight. Some points I thought were interesting:

 

- Record date of the special meeting has been set at August, 3.

- An amended merger agreement was agreed upon: increase of per share consideration to $1.29, small increase to penalty loan, company ceased all discussions with Hale (no longer an excluded party), drop dead date is extended, and the company received a waiver for all breaches of the loan agreement.

- The board (or at least what's left of it) "unanimously" recommends the amendment and recommends that shareholders vote for the merger.

- Hale tried to give shareholders a cashout option at $1.27 in the end as a last-ditch effort.

 

Seems like good news. Seems to me that the path has now been cleared for Sachs to take the company private and, as I mentioned in my previous post, I think it's the easiest and fastest path for him going forward to cash out shareholders as soon as possible. Shares are up ~7%.

 

Definitely good news for the merger arbitrage case here.

[writser]

Yep. Definitive proxy was filed today. Meeting date: 27 September. Looks like this story will have a happy ending after all. It was an exciting ride.

 

Interesting that the whole story played out without any (visible) involvement from DRW owning ~40% of shares outstanding. Still inclined to think that my initial assessment was correct: e.g. Wilson was ok with this deal from the start.

[writser]

Merger closed. Interesting ride.