Current Price – $8.3
Buyout Price – $8.71
Upside – 5%
Expiration Date – H1 2018
This opportunity was suggested by Jesse.
B. Riley is acquiring CALL for $8.71 in cash and current spread stands at 5%. This merger agreement culminates almost 1.5 year long saga of CALL negotiating with interested parties as well as launching strategic alternatives process. Initially somewhat higher bids for the company have been quoted (e.g. $9.5 from YipTV) and activist shareholders cited potential valuation as high as $27/share a year ago. Clearly none of the higher bids materialized. A good overview of the proxy fights and events leading to current situation can be found here.
MajicJack operates in VoiP industry and its business has been on a gradual decline over the recent years - Q3 revenues are down 12%, operating cashflow turned to zero, monthly churn is at 2% and new user activation are dropping. The business is likely to be in a terminal decline although management has recently somewhat stabilized the operations. Due to its strong (even-tough declining) cashflow generation CALL was value investor's darling back in 2014 and there is plenty of coverage for anyone interested in further background.
Main risks for the merger:
- Riley walking out from the deal due to continued CALL business deterioration. We are likely to see couple more quarters of earnings before this merger closes and if business starts declining faster than expected Riley might decide its better to pay termination fee (amount undisclosed) than proceed with the merger.
- Merger is conditioned on CALL shareholder approval - do not see this a a big risk as shareholders are likely already tired of 1.5-year-long sale process. Also so far (more than a month after announcement) there have not been any objections from any of the institutional holders.
- Regulatory approvals from both US and Israel anti-trust authorities - keeping in mind small size of the transaction ($140m) and overall declining industry, regulatory approvals should be easy to obtain.
- Financing - merger is not conditioned on financing and as of Q3 Riley had $102m in cash and raised further $70 in recent bond offering. So the company should have sufficient funds for the acquisition of $143m
- If merger fails, pre-announcement share price was $5.5 - 33% lower compared to current levels.