Tangoe (TNGO) – Forced Selling + Merger Arbitrage – 25% upside

Current Price – $5.13

Expected Buyout – $6.5

Upside – 25%

Expiration Date – TBD

This is a fairly straightforward situation. Tangoe received non-binding proposals to be acquired by Marlin Equity Partners (10% shareholder) at $7.5/share and by Clearlake Capital Group and Vector Capital Management (jointly 25% shareholders) at $7/share. Following further discussions Marlin later reduced their proposal to $6.5/share. Clearlake/Vector have not issued any further updates with regards to their offer so it is not clear whether their proposal still stands.

All of the indicated shareholders accumulated their stakes during 2016 at $7+ per share.

Despite these acquisition proposals, the shares of the company continued to trade down as business is facing a number of issues:

- Financials are not current. The latest published accounts are from Q3 2015;

- Previously filed financials for 2013-2015 will be restated;

- Previously profitable operations appeared to be actually loss making after restatements. Growth slowed down significantly in 2015 (2016 still unknown);

- Class action lawsuit has been filed against the company;

- And apparently SEC is investigating Tangoe.

However, in the latest correspondence (1st of March 2017) Marlin indicated that they are fully aware of all these issues and seem to be ok with them:

We have completed a significant amount of due diligence to-date, including (i) on-site discussions with management; (ii) work with Stifel and management to fulfill diligence requests and numerous conference calls; (iii) reviewed and held a follow-up call on Alvarez & Marsal’s quality of earnings report; and (iv) commissioned a third-party market study on the telecom expense management (“TEM”) industry to better understand Tangoe’s current and future market positioning and opportunity. Based on this extensive due diligence we’ve conducted, our deep experience in the software industry and our public-to-private expertise, we are excited about the Business and interested in working with the board of directors to ensure an expeditious and seamless Transaction.”

This indication of interest contemplates the liabilities associated with the pending class action lawsuit as described herein, as well as the ongoing SEC investigation, resulting fines and other litigation based on the information provided to Marlin by Tangoe. In addition, we confirm that neither the potential delisting of Tangoe’s shares from the NASDAQ exchange nor the availability of audited financials for Tangoe will affect the terms outlined in this indication of interest.”

In addition it seems that Marlin also had access to the latest financials as updated financials are not among their further due-diligence requests. Following this latest communication by Marlin, stock was trading around $6/share.

However, last week company got delisted from NASDAQ (this was expected to happen) causing the shares to fall down to $4.5 – potentially due to forced selling by investors who are not allowed to hold OTC stocks or due to over-reaction by the market to this non-event. Shares have rebounded from the lows over the last two days, but I believe that current levels still provide good entry point – besides technical factor behind delisting there seems to be no reason for the stock to trade below the levels where it traded in the beginning of March. Thus, I am expecting a relatively fast rebound to $6/share, which is my key expectation from this trade.

To be fair I have very limited understanding about Tangoe business (enterprise software for IT and Telecom expense management) to fully assess the value of the company (especially with no current financials and loss making operations), but bids by two equity groups provide confidence for holding this stock at least for the short term.

The key risks here is that interested parties might fully withdraw their non-binding proposals (Marlin’s offer was already lowered once), 2016 operations might further disappoint the market when financials are released (Marlin seems to know the numbers and is ok with them) and also there might be negative outcomes from class action lawsuit and SEC investigation (again Marlin seems to be ok with both).

16 COMMENTS

  1. PhilipF

    This looks like an interesting opportunity. In your experience, do these sorts of non-binding interest letters generally result in a closed deal?

    1. dt

      It is really case by case situation, so very difficult to assess the likelihood of the deal closure from these intent letters. So far there has been no opinion issued by the BoD of Tangoe, so it might be that BoD will be opposed to any take-over.
      What gives a bit of confidence is the fact that two separate parties have expressed interest (maybe they are not allowed to do it until financials are current). Also from the letter of Marlin it seems that Tangoe management was quite cooperative and significant part of due diligence has already been carried out. So these are not blind/hostile take-over intentions.

    1. dt

      That’s because some funds/individuals might not be allowed to hold OTC stocks and would need to liquidate their position regardless of the price. The most spectacular forced selling I have observed was with Hanger Inc in February last year. When the company unexpectedly delisted (also due untimely fillings) its stock dropped from $9 to below $2 in a single day on high volume and then recovered to $6+ within the next ten days. It continues to trade OTC, financials are still not current but the share price recovered to $12+.

    2. FM

      Sorry posted wrong question. What I wanna ask is, what will happen if all acquirers withdraw? Will it go to zero?

      And also, if the acquisition process starts, what will be the likely procedure? TNGO’s shareholder must approve it officially? Need to get approval from any authority?

      Thank you.

      1. dt

        I do not think the stock will go to zero, but I have no clue how much would it drop. With no current financials the business is impossible to value, but based on the latest info TNGO was at $200m revenue run-rate in 2015 with revenues somewhat growing. It was also a loss making venture and performance during 2016 is unknown, but the company currently seems to be selling at 1xRevenue which does not look too excessive for software business. Again, with no financials any valuation is really nothing more than a guesswork.

        As for acquisition procedure going forward, this is what Marlin described in their letter:
        “Form of Transaction. We would envision completing the proposed Transaction through a tender offer followed by a merger pursuant to Section 251(h) of the General Corporation Law of the State of Delaware and would require (i) a tender of shares representing a minimum of 50% of the common stock outstanding on a fully-diluted basis, (ii) a fairness opinion to be delivered by Stifel, Nicolaus & Company, Incorporated, and (iii) a recommendation in approval of the transaction from Tangoe’s Board of Directors.”

  2. dt

    Word about TNGO situation is spreading:

    “SA: What’s one of your highest conviction ideas right now?

    ACM: Tangoe (NASDAQ:TNGO) – it’s a reasonably simple thesis.

    TNGO’s shares, as expected for several quarters, were delisted last week. The shares predictably traded down significantly (22%) during the week as institutions could no longer own shares. Average daily volume increased 13x! This price action sets up an interesting opportunity given that TNGO has two competing buyout offers from private equity firms that are also existing shareholders of TNGO. The most recent offer from the first week of March explicitly states Marlin’s intention to buy the entire business for a 30% premium to today’s $5 price. It also indicates an expedited close and full understanding that 1) TNGO’s shares are to be de-listed and; 2) that TNGO is not current in its filings. The competing offer from a group comprised of Clearlake and Vector is for $7 representing 40% upside to today’s prices.”

    From: https://seekingalpha.com/article/4057613-pro-weekly-digest-finding-value-difficult-market-environment-acm-research-team?app=1&auth_param=7284n:1cdf9i1:d23339e7edc0177ffbbb9caf7c9ed8a7&uprof=44

  3. dt

    Activist shareholders are pressing the company to sell:

    “Ancora Advisors and Engine Capital sent a letter to the company’s board of directors last week urging the company to resist the temptation to remain independent, and to do everything possible to seek a buyer, sources said. Ancora, Engine and a third investor are working as an investor group, and own more than 4 percent of the company, sources said.”

    http://whtc.com/news/articles/2017/mar/27/activist-hedge-funds-press-tangoe-to-sell-itself-sources/

  4. dt

    Merger agreement has been signed. TNGO will be acquired at $6.5/share.

  5. dt

    I have closed out TNGO position as the remaining spread is too small (c. 1%).
    Overall a gain of 25% in 6 weeks.

    1. dt

      If all goes according to the plan it should happen by the end of June. From the press release:

      “Under the terms of the merger agreement, an affiliate of Marlin is required to commence a tender offer to acquire all outstanding shares of Tangoe’s outstanding common stock at $6.50 per share in cash no later than May 12, 2017. The merger agreement also provides that, promptly after the closing of the tender offer, any shares not tendered in the tender offer will be acquired by Marlin in a second-step merger at the same cash price as paid in the tender offer. Closing of the tender offer and closing of the merger are subject to certain conditions, including the satisfaction of a minimum tender condition, completion of a 30-day go-shop period, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, and other customary closing conditions. If certain of these conditions are not satisfied, the parties have the right under specified circumstances to elect to terminate the tender offer and solicit proxies from Tangoe’s stockholders for a stockholder vote to approve the merger agreement. Tangoe may terminate the merger agreement to accept a superior proposal, but in such cases Marlin would be entitled to receive a termination fee. If the transaction fails to close as a result of a financing failure, Tangoe is entitled to receive a reverse termination fee.

      The transaction is expected to close late in the second quarter of 2017.”

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