ZAIS Group (ZAIS) – Going Private – 23% upside

Current Price – $3.25

Acquisition Price – $4.00

Upside – 23%

Expiration Date – TBD

This is a microcap arbitrage opportunity  that was suggested by one of the members (thank you Ivan). CEO is willing to take this failed SPAC private at 23% premium to current share price.

 

Background

Couple days ago CEO (Christian Zugel) of ZAIS Group made two announcements in one go:

1) He agreed to acquire 6.5m Class A shares of ZAIS Group from the third party (Ramguard) for $4/share and now will own c. 50% of the economic interest in the company. His previous ownership was mainly through Class B voting shares, with which he had 93% voting control.

2) He also expressed interest to take the company private by acquiring the remaining Class A shares at the same price, subject to approval by Special Committee and majority of the unaffiliated shareholders.

“Earlier today the undersigned and Z Acquisition LLC entered into a share purchase agreement with Ramguard LLC pursuant to which Z Acquisition LLC will acquire 6,500,000 shares of Class A common stock of the Company at a purchase price of $4.00 per share for a combination of cash and a note. After giving effect to this transaction, the undersigned will be the beneficial owner of 7,631,250 shares of Class A Common Stock, or approximately 50% of the outstanding shares of Class A Common Stock.

We are interested in pursuing discussions with the Special Committee to acquire the remaining issued and outstanding shares of Class A Common Stock of the Company at $4.00 per share in an all cash transaction by way of a merger.”

So if this deal gets done as described, then shareholders stand to make 23%. There is no timeline indicated and the whole processes is likely to take at least half a year. Payment for Ramguard’s stake are due by April 2018 so it might be that no further deal can be made before this date.

With CEO already putting significant money on this (by acquiring Ramguard’s stake) the full go private transaction is very likely. Worth noting that CEO founded and has been running this business since 1997 so he will clearly not be giving up on it easily and it must have been frustrating to watch the share price drop from $10 to $2 during the public markets debut. Being private might seem like safe-haven to avoid unnecessary costs of public company and right the ship.

 

Further considerations

- ZAIS Group is a failed SPAC. In March 2015 SPAC acquisition transaction was consummated whereby 66.5% of economic interest in ZAIS Group operating company (asset manager focused on specialized credit investments) was exchanged for $78m (see current structure on page 13 of 10K) . The whole voting control was retained by the previous management of ZAIS Group. At $4 per share the public company is worth $58m, which is less than the cash that was contributed to it couple years ago. Assets under management have declined from $4.1bn at the time of SPAC transaction to $3.7bn in the latest quarter. BV per share has dropped as well and company continues to generate losses.

- Largest shareholder of economic interest is Ramguard (previously Quant Special Opportunities Fund), which was involved with the company since the SPAC transaction. My understanding is that Ramguard acted as a backstop financier if too many shareholders decided to redeem their shares instead of participating in the SPAC conversion. Eventually Ramguard ended with 66% ownership of ZAIS Group as big part of SPAC owners decided to redeem their shares for cash. SPAC sponsors also gave up almost all of their shares and transferred them to Ramguard almost for free (at $0.0006/share). So it seems that Ramguard simply ended up holding the bag when everyone else ran away. By my calculations Ramguard’s cost basis is >$5/share, so they are loosing money by selling at $4 (but $4 is definitely better than <$2 pre-announcement).

- Following the sale of 6.5m shares, Ramguard will still own almost 3m shares which is close to half of the remaining minority shareholdings in ZAIS Group (probably that is the main reason why only part of Ramguard’s stake is being acquired). I would expect Ramguard to vote their remaining shares for the sale of the company and finding few other shareholders to get over the 50% threshold should not be an issue, especially keeping in mind the large downside in case the deal gets cancelled.

 

Risks

- Acquisition of Ramguard’s stake is currently in agreement level only and there is a risk it might not happen. However, I consider this risk minimal. For Ramguard this is a great exit opportunity on the failed investment and for CEO of ZAIS this is the first step in taking his own company private again.

- As noted above the risk of shareholders voting against going private is also minimal as Ramguard will have almost 50% of the minority Class A shares.

- With CEO having full voting control, the recommendations of Special Committee are likely to be biased towards the deal. Besides, recommending the sale at $4/share which is above book value and at >100% premium to the recent market prices is unlikely to damage the reputation of the Special Committee members.

- It is not clear yet how will the CEO finance the acquisition of the whole company. He is already using $13m promissory note and $13m cash to buy out Ramguard’s stake, likely indicating that he does not have the full amount of cash lying around. Full acquisition of the company would require another $30m.

- With pre-announcement price of less than $2/share arbitrageurs stand to lose almost 40% if the deal gets cancelled. Also even if the deal happens, the buyout price might be less than the $4/share, however that would be very hard for the CEO and special committee to justify – business would need to deteriorate significantly for this to occur.

- Transaction might get delayed – currently there is no indicated timeline.

7 COMMENTS

    1. dt

      Yes, I do. Whenever I am posting an idea where I haven’t got any position, I am explicitly stating that. So, if there is nothing mentioned you can assume I have a position.

  1. thinleyw

    This may be a low probability risk, but how do you assess if the CEO has enough cash to pay for the transaction?

    1. dt

      I thought about it as well. My only comment is that he should have enough money or at least plenty of connections who would entrust him with funds due to his good track record. Back in 2012-2013 his fund was ranked as #1 of hedge funds by Barron’s.

      “Zugel’s flagship fund, the $462 million Zais Opportunity fund, is No. 1 on Barron’s Hedge Fund 100 ranking for the second consecutive year, the first time any fund has posted back-to-back wins in the eight-year history of our tally. Playing a variety of mortgage- and asset-backed securities as well as collateralized loans, the Stuttgart, Germany, native, 53, posted remarkable three-year annualized returns north of 50% through Dec. 31, 2012″

      http://hedgefinger2.blogspot.de/2013/05/barrons-best-100-hedge-funds.html

  2. dt

    Shareholder meeting has been postponed:

    “today announced that its Board of Directors determined to postpone the Company’s 2017 annual meeting of stockholders (the “Annual Meeting”), previously scheduled for November 7, 2017. The Company’s Board of Directors determined it is in the best interest of the Company’s shareholders to postpone the Annual Meeting until the Special Committee of the Board of Directors (the “Committee”) and its advisors have reviewed and evaluated, and obtained further information concerning, the proposal with respect to the Company’s Class A common stock contained in a letter, dated September 5, 2017, to the Committee from Christian Zugel, as previously reported by the Company on September 7, 2017.”

    https://www.sec.gov/Archives/edgar/data/1562214/000114420417051176/v476255_ex99-1.htm

  3. dt

    As I have noted yesterday in the Nov Updates post, I have closed ZAIS position.

    The only development with regards to ZAIS going private transaction has been postponement of the annual shareholder meeting (no date set yet). Spread has narrowed significantly since the initial write up (now 7% vs 23% initially), however all the risks outlined in the write-up still remain.

    Due to uncertain timing and limited remaining upside, I have decided to exit the position pocketing 14% for two month holding period.

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