EBIX - Ebix Inc

[Guest wellmont]

correct me if I'm wrong but did this $19m note cost ebix $2.3m and 276,000 shares (around $6m) for a little over 1 year of borrowing? why would a company that is Gushing fcf need to do that?

 

On August 26, 2009, we entered into an unsecured Convertible Note Purchase Agreement (the “Whitebox Agreement”) with Whitebox VSC, Ltd (“Whitebox” or the “Holder”). As a result of the transactions consummated by the Whitebox Agreement the Company issued a Convertible Promissory Note (the “Whitebox Note”) with a date of August 26, 2011 (the “Maturity Date”) in the original principal amount of $19.0 million, which was convertible into shares of Ebix common stock at a price of $16.00 per share, subject to certain adjustments as set forth in the Whitebox Note. The Whitebox Note had a 0.0% stated interest rate. In accordance with the terms of the Whitebox Note, as had been understood between the Company and the Holder, upon a conversion election by the Holder the Company had to satisfy the related original principal balance in cash and could satisfy the conversion spread (that being the excess of the conversion value over the related original principal component) in either cash or stock at option of the Company. In November 2010 Whitebox VSC, Ltd elected to fully convert all of the then remaining August 26, 2009 Convertible Promissory Note. The Company settled this conversion election by paying $19.0 million in cash with respect to the principal component, paying $2.3 million in cash for a portion of the conversion spread, and issuing 275,900 shares of Ebix common stock for the remainder of the conversion spread.

[stahleyp]

Here is his facebook page

 

https://www.facebook.com/RobinRaina1

 

 

His cover photo is a little creepy.  :P

[no_free_lunch]

No position on this one but I have been following the discussion closely.

 

Wellmont,

 

They issued the note in August 2009 when their stock price was at an all-time high, it was redeemed in November 2010, after the price jumped a further 30-50% (depending on when in the month it was redeemed).  It might have been a bad call on management's part issuing stock over paying cash, but how did they know the stock market would rebound so strongly?  Perhaps at the time they thought the stock was fairly valued.

[Guest wellmont]

No position on this one but I have been following the discussion closely.

 

Wellmont,

 

They issued the note in August 2009 when their stock price was at an all-time high, it was redeemed in November 2010, after the price jumped a further 30-50% (depending on when in the month it was redeemed).  It might have been a bad call on management's part issuing stock over paying cash, but how did they know the stock market would rebound so strongly?  Perhaps at the time they thought the stock was fairly valued.

 

again why does a company that supposedly gushes fcf need to borrow $19m that ended up costing shareholders $8m for less than 2 years of borrowing? the answer is they are cash starved, and need money to keep their chain letter business "growing".

[no_free_lunch]

It's a weak argument.  Companies issue shares for acquisitions all the time.  Again, the stock was at an all-time high and the US was deep in recession.  Also this isn't a new strategy, Malone made a fortune while issuing shares whenever the price was high.  Plenty of things to hate about the company, this isn't one of them.

[Guest wellmont]

It's a weak argument.  Companies issue shares for acquisitions all the time.  Again, the stock was at an all-time high and the US was deep in recession.  Also this isn't a new strategy, Malone made a fortune while issuing shares whenever the price was high.  Plenty of things to hate about the company, this isn't one of them.

 

you're not getting it. ebix  borrowed cash. they didn't issue shares for an acquisition. they borrowed $19m and paid back $19 + $8m. that's expensive capital. At this time in the cycle malone was a Lender not a borrower. Whitebox is a predatory lender ala buffett. he provides capital to those that need it, at a substantial cost.

[ItsAValueTrap]

they borrowed $19m and paid back $19 + $8m. that's expensive capital

Sometimes companies will do "bad" convertible debt deals when their stock is overpriced.  It's a way to sell shares without paying underwriting fees and the dilution from selling shares at a discount to market price.  Of course they didn't really sell shares... they sold a call option which happened to pan out for the buyer of it.

 

The buyer of the debt can make easy arbitrage money if they short the stock as a hedge.  The people who lose money are the ones who overpay for shares.

 

2- Maybe there is an argument that Ebix has been raising more capital than it has been returning, or that its books were inflated (and/or are currently inflated).

[Guest wellmont]

they borrowed $19m and paid back $19 + $8m. that's expensive capital

Sometimes companies will do "bad" convertible debt deals when their stock is overpriced.  It's a way to sell shares without paying underwriting fees and the dilution from selling shares at a discount to market price.

 

The buyer of the debt can make easy arbitrage money if they short the stock as a hedge.  The people who lose money are the ones who overpay for shares.

 

2- Maybe there is an argument that Ebix has been raising more capital than it has been returning, or that its books were inflated (and/or are currently inflated).

 

but they didn't end up selling a lot of stock. so they didn't do it for that reason. they did it because it was the only way they could get some money. they settled the note with a small amount of stock. nevertheless that's not the question. the question is why did this company need to borrow $19m at a massive cost to shareholders of $8m. the answer to me is that this company was starved for capital and needed to get capital at usurious rates to keep the story intact and the company "growing". most companies hunkered down at that time. Ebix like a lot of under-capitalized financials, needed money. and shareholders paid a huge price for it. the result of capital allocation decisions like that is that the stock today is barely trading above 2008/2009 lows.

[ItsAValueTrap]

We may be talking apples and oranges.  There appears to be nothing in the record about their receiving a Wells notice or something similar from the SEC last November.  However, recent public filings have established that they did receive a letter from the US Attorney about their investigation of EBIX on or about November30, 2013.  Earlier that month they had issued a strong statement that they had not received any notice about being the object of a formal investigation by the US government.

 

In view of the strong public denial of knowledge of an investigation they had issued earlier that month, it seems to me that receipt of a letter from the US Attorney about their investigation of EBIX later that month was quite material to the trading of EBIX shares as soon as received, especially in view of their earlier denial of knowledge of a formal investigation.  If that is correct, that highly material information should have been disclosed to the market immediately.

 

I agree that they should have disclosed right away.  It's safer legally for them to disclose since they wouldn't be in possession of material information (at least that's the opinion of Richard Sauer in his book Selling America Short).  However, and I could be wrong here, they don't have to disclose because it's debatable whether or not it was significant enough at the time to disclose.  I could be wrong.

 

Here's some information about SEC investigations for everyone's reference:

http://www.sec.gov/news/newsroom/howinvestigationswork.html

"All SEC investigations are conducted privately."

[ItsAValueTrap]

they borrowed $19m and paid back $19 + $8m. that's expensive capital

Sometimes companies will do "bad" convertible debt deals when their stock is overpriced.  It's a way to sell shares without paying underwriting fees and the dilution from selling shares at a discount to market price.

 

The buyer of the debt can make easy arbitrage money if they short the stock as a hedge.  The people who lose money are the ones who overpay for shares.

 

2- Maybe there is an argument that Ebix has been raising more capital than it has been returning, or that its books were inflated (and/or are currently inflated).

 

but they didn't end up selling a lot of stock. so they didn't do it for that reason. they did it because it was the only way they could get some money. they settled the note with a small amount of stock. nevertheless that's not the question. the question is why did this company need to borrow $19m at a massive cost to shareholders of $8m. the answer to me is that this company was starved for capital and needed to get capital at usurious rates to keep the story intact and the company "growing". most companies hunkered down at that time. Ebix like a lot of under-capitalized financials, needed money. and shareholders paid a huge price for it. the result is that the stock is barely trading above 2008/2009 lows.

 

Maybe there was some sort of fraud going on.  I don't know.

 

There might also be a legitimate argument for them to do what they did.  The expected cost of the debt on $19M probably wasn't $8M.  If I wasn't lazy, I would go calculate the Black-Scholes valuation on the call option.

 

Ebix took that cash and used it to buy other companies.  Ebix could be a legitimate roll-up, much like what Malone did in the cable business.  (The dynamics of cable are a little different as economies of scale push companies towards mergers and consolidation.)  Raina might be very good at operating software businesses. 

 

Maybe he is very good at outsourcing programming work to India.  Personally I think that it's hard to do because finding good programmers is hard.  I've done freelance programming work for a French company and I live in Canada (they found me)... I'm sure that there are some brilliant Indian programmers but how do you find them???  It's hard.

Being able to find good, cheap programmers would be a huge business advantage.  see http://www.joelonsoftware.com/articles/FindingGreatDevelopers.html for more information on the topic.

 

Anyways, back on topic.  If you're better at managing assets than your competitors, then your stock will often trade at a premium*.  If you use your stock to buy other assets, then you are effectively arbitraging the difference between your stock price and their "stock price" (or private market price).  And it makes sense for this arbitrage to exist because it puts assets into the hands of truly talented managers. 

*Mr. Market is crazy.  Stocks with good management teams don't always trade at a premium to their peers.  There are times when Berkshire Hathaway traded at a discount to its private market value and Buffett was going to buy back shares.  And there are times when Buffett used stock to buy other companies... roll-up style.

**There are roll ups that don't make sense.

[ItsAValueTrap]

why didn't ebix give directly to the Alabama disaster relief fund?

 

Consistent with Ebix’s corporate mission of giving back to the communities in which we operate our business, during the year ended December 31, 2011 Ebix donated $5 thousand to the Robin Raina Foundation, a non-profit 501© charity in support of the Alabama Disaster fund.

Because the Robin Raina Foundation is a self-promotion vehicle?  Have you read the charity's website?

[Guest wellmont]

why didn't ebix give directly to the Alabama disaster relief fund?

 

Consistent with Ebix’s corporate mission of giving back to the communities in which we operate our business, during the year ended December 31, 2011 Ebix donated $5 thousand to the Robin Raina Foundation, a non-profit 501© charity in support of the Alabama Disaster fund.

Because the Robin Raina Foundation is a self-promotion vehicle?  Have you read the charity's website?

 

like everything else about this company, it's a shell game.

[no_free_lunch]

you're not getting it. ebix  borrowed cash. they didn't issue shares for an acquisition. they borrowed $19m and paid back $19 + $8m. that's expensive capital. At this time in the cycle malone was a Lender not a borrower. Whitebox is a predatory lender ala buffett. he provides capital to those that need it, at a substantial cost.

 

I'll have to give this one to you.  Cash taken, not enough acquisitions to even use up the cash over the next few quarters, I am not sure what the money was for.  It is very strange.

[Guest wellmont]

you're not getting it. ebix  borrowed cash. they didn't issue shares for an acquisition. they borrowed $19m and paid back $19 + $8m. that's expensive capital. At this time in the cycle malone was a Lender not a borrower. Whitebox is a predatory lender ala buffett. he provides capital to those that need it, at a substantial cost.

 

I'll have to give this one to you.  Cash taken, not enough acquisitions to even use up the cash over the next few quarters, I am not sure what the money was for.  It is very strange.

 

I think it's a shell game. they need to move this cash around as it comes due....

[prunes]

Some great discussion in this thread guys. For me the big flag that made me lose interest was the choice of auditor and the string of auditor changes.

[Liberty]

I think it's a shell game. they need to move this cash around as it comes due....

 

Isn't it weird to begin paying dividends, then raise those dividends repeatedly, right after buying back about 10% of the float in a year, if cash is so tight and such a problem?

[Guest wellmont]

I think it's a shell game. they need to move this cash around as it comes due....

 

Isn't it weird to begin paying dividends, then raise those dividends repeatedly, right after buying back about 10% of the float in a year, if cash is so tight and such a problem?

 

they have net borrowings of  $47m since 12/31/09. they have also issued new shares for comp and to buy other companies, bringing in cash.  they have more shares outstanding now than they did three years ago, even after spending around $90m on buybacks. it seems like they are repurchasing their stock to directly offset issuances of stock. but hard as they try, they still have 3m more shares out than they did 3 years ago. a cannibal this is not.

[mankap]

Wellmont

Regardiing the convertible note from Whitebox, i do not find any red flag in this deal.

This was good use of capital to buy a company.They returned all the money+275k shares within 2 years.

Note was convertible at $16.00.When whitebox decided to convert it the share was trading at $21.

Ebix has to pay the difference as per the contract.The note carried 0% interest.

Why would Whitebox lend money at 0%.They did it for the upside in the stock price and they got it.

Whitebox believed in Ebix story and lent the money at 0%.This is a positive thing.

If Ebix was trading at less than 16, Whitbox would have lost money.

Ebix borrowed the money to fund the acquisition.What is unusual about that.

Ebix paid $19.0m in cash to Whitebox instead of diluting the shareholders.

They could have chosen to pay whitebox all in shares and diluting the shareholders.They chose not to do it.

 

Why did they had borrow from Whitebox?

Ebix was much smaller company in 2009 with 30m in FCF.They did not had access capital from banks like thy do now.

If I remember it correctly, this was the last convertible note they issued.After 2009 they have not issued convertible notes.

 

Here is the cutting from 2011 10K

On August 26, 2009, we entered into an unsecured Convertible Note Purchase Agreement (the “Whitebox Agreement”)

with Whitebox VSC, Ltd (“Whitebox” or the “Holder”). As a result of the transactions consummated by the Whitebox Agreement the Company issued a Convertible Promissory Note (the “Whitebox Note”) with a date of August 26, 2011 (the “Maturity Date”) in the original principal amount of $19.0 million, which was convertible into shares of Ebix common stock at a price of $16.00 per share, subject to certain adjustments as set forth in the Whitebox Note. The Whitebox Note had a 0.0% stated interest rate. In accordance with the terms of the Whitebox Note, as had been understood between the Company and the Holder, upon a conversion election by the Holder the Company had to satisfy the related original principal balance in cash and could satisfy the conversion spread (that being the excess of the conversion value over the related original principal component) in either cash or stock at option of the Company. In November 2010 Whitebox VSC, Ltd elected to fully convert all of the then remaining August 26, 2009 Convertible Promissory Note. The Company settled this conversion election by paying $19.0 million in cash with respect to the principal component, paying $2.3 million in cash for a portion of the conversion spread, and issuing 275,900 shares of Ebix common stock for the remainder of the conversion spread.

On August 26, 2009, we entered into an unsecured Convertible Note Purchase Agreement (the “IAM Agreement”)

 

 

[Guest wellmont]

whitebox had ZERO risk. they were short the stock. that's not "believing" in ebix. that's extortion. whitebox made $8m for loaning ebix $19m for less than 2 years. that's a High Cost for ebix shareholders. how do you know this was a good use of capital? how do you judge this? the stock is lower today when the deal was made. that deal destroyed value.

[ItsAValueTrap]

whitebox had ZERO risk.

If they did hedge, it would not have been a risk-free trade for them.

 

The Company settled this conversion election by paying $19.0 million in cash with respect to the principal component, paying $2.3 million in cash for a portion of the conversion spread, and issuing 275,900 shares of Ebix common stock for the remainder of the conversion spread.

If this was a total fraud, they could/would have paid shares instead of the $2.3M.

[mankap]

How would have Whitebox made money if the stock was 16.00 or close to 16 in 2 years.

There is a cost to short the shares for 2 years.

 

Loan was used to partly fund E-Z Data acquisition.

E-Z data had revenue of 40-50m range.At Ebix margin, it is producing FCF in the range of 10-15m/year.

[matjone]

Don't take offense here wellmont, but what are you arguing?  That EBIX is a fraud, or just that they made a mistake issuing this note?  Also, do you know that whitebox were short the stock when they made that agreement, or are you just guessing that was the case?  Like I said, please don't take offense, these are sincere questions.

[Guest wellmont]

 

If Ebix was trading at less than 16, Whitbox would have lost money.

Ebix borrowed the money to fund the acquisition.What is unusual about that.

Ebix paid $19.0m in cash to Whitebox instead of diluting the shareholders.

They could have chosen to pay whitebox all in shares and diluting the shareholders.They chose not to do it.

 

In accordance with the terms of the Whitebox Note, as had been understood between the Company and the Holder, upon a conversion election by the Holder the Company had to satisfy the related original principal balance in cash and could satisfy the conversion spread (that being the excess of the conversion value over the related original principal component) in either cash or stock at option of the Company. In November 2010 Whitebox VSC, Ltd elected to fully convert all of the then remaining August 26, 2009 Convertible Promissory Note. The Company settled this conversion election by paying $19.0 million in cash with respect to the principal component, paying $2.3 million in cash for a portion of the conversion spread, and issuing 275,900 shares of Ebix common stock for the remainder of the conversion spread.

 

you said whitebox could have lost money. wrong. if ebix stock went down they were short the stock and owned a security with a claim on the assets of ebix (such as they were) that was ahead of the common. that equals marginal profit. Second, ebix had to settle the principal amount in cash. So Whitebox, did not waste any time (less than 2 years) in collecting their bounty from ebix. ebix could not have diluted shareholders for the $19m even if they had wanted to. whitebox did not want to take the risk that after two years the stock would be lower. it sounds to me like whitebox thought that was a real possibility and mitigated it.

[Guest wellmont]

Don't take offense here wellmont, but what are you arguing?  That EBIX is a fraud, or just that they made a mistake issuing this note?  Also, do you know that whitebox were short the stock when they made that agreement, or are you just guessing that was the case?  Like I said, please don't take offense, these are sincere questions.

 

just asking questions.

[Guest wellmont]

How would have Whitebox made money if the stock was 16.00 or close to 16 in 2 years.

There is a cost to short the shares for 2 years.

 

Loan was used to partly fund E-Z Data acquisition.

E-Z data had revenue of 40-50m range.At Ebix margin, it is producing FCF in the range of 10-15m/year.

 

because they had conversion rights. they could demand payment at any time they had the profit they desired. they made a bet that the stock would rise at some point before the loan term expired, as it did. they could convert at any time, not ONE Point in time. it would be impossible to lose money and almost impossible not to make a lot.