TCP International (TCPIF) – Going Private – 23% upside

Current Price – $0.81

Expectect Payout – $1.00

Upside – 23%

Expiration Date – Q1 2018

SEC Filling

This idea was shared by Vladimir.

TCPIF (producer and marketer of CFL and LED lighting products) has agreed to be taken private by founder, major shareholder and ex-CEO at $1.0 per share. Merger agreement has already been signed. The acquirers (Yan family) own 70% of the shares.

Company stopped publishing its financial results in 2015 (so it is dark OTC company avoided by absolute majority of investors), had a conflict with its founder and CEO (resigned) and lately filed a suit against him for unfair competition. Also audit committee investigation in 2016 revealed misbehavior by the previous execs (i.e. Yan family) and independent accountants resigned recently. Company IPOed in 2014 and than ran into reporting problems a year later. On top of that this is a tiny nano-cap with very limited trading liquidity. So there are plenty of reasons to doubt that Yan family’s true intentions and whether they will carry out the transaction as expected.

Deal is subject to financing (equity + refinancing of debt) and approval of 90% of shareholders (suggesting that 2/3 of non-affiliated shareholders need support the offer). As of 2015 company had $98.7m in debt and $34m in cash.

Unaffected price is $0.27 (66% downside) and merger agreement expires by the end of Q1 2018.

It is really hard to judge about the value of company as of now, but it dropped almost 10 fold since 2014/2015. The latest reported financials indicate that operations have been cash burning in 2015 (but the disclosed weakness in financial reporting makes even these financials questionable).

Yan family signed a supporting agreement prohibiting to sell their shares before long stop date or completion. So they can’t use the price bump to exit from the company (anyway I don’t think it is possible given very low trading volume).

It is dark OTC with significant risks.

 

 

14 COMMENTS

  1. Jesse

    Thanks for sharing. Have you tried asking for financials as a shareholder (if you own shares)? It sounds from the press releases that they may not even have financials to provide if they wanted to. Agree that raising new debt is the risk here. Leverage in 2015 was pretty conservative on a net debt / EBITDA basis, but hard to know how accurate those numbers are.

  2. over2u

    There is NT10Q document as of November 2017 (can’t insert link), where it stated that Company employed BDO as an auditor and provided preliminary estimates of FY2017 and FY2016:

    “- Revenues within the range of $59 million to $61 million, compared with revenues within the range of $102 million to $104 million for the quarter ended September 30, 2016. Revenues decreased from the third quarter of 2016 primarily due to lower sales of LED and CFL products to retail customers in North America and Europe.
    • Cash and cash equivalents of approximately $12 million, compared with cash and cash equivalents of approximately $26 million at December 31, 2016.
    Total debt of approximately $35 million, compared with total debt of approximately $33 million at December 31, 2016. The remaining borrowing capacity under the U.S. revolving line of credit was approximately $19 million at September 30, 2017.”

    In my view there are two interesting points in this obviously high risk situation:
    1. After Company filled lawsuit against Yan’s family, they become somewhat motivated buyers to acquire the company and close the litigation
    2. Yan family actively destroyed business of TCP (details in a filled suit), so I assume (pure speculation) that business itself not that bad and if run properly can be profitable. So, for Yan family it may look as very intersting opportunity to buy out shareholders @ $1

    1. Jesse

      Thanks for pointing me that way. That’s helpful. So on one hand net debt of $21M versus revolver capacity of $19M would imply that financing shouldn’t be too difficult, but on the other hand the company is currently cash flow negative and has a ton of noise around it.

      In 2014 the company had gross book value of $57M for land and buildings. That also should help with financing assuming they still own it.

      1. Jesse

        I was thinking about this wrong. Really $35M drawn, plus $19M of availability. So as long as the lenders are ok with the purchaser getting them to consent should be easy. Main risk then is that the lender rejects the takeover I suppose.

  3. thinleyw

    The form 8-k says “An unaudited Merger Balance Sheet is attached hereto as Exhibit 1.2.2. Pursuant to the unaudited Merger Balance Sheet, TCPI has assets of CHF 116,141,842 and liabilities of CHF 2,935,550 and accordingly an asset surplus of CHF 113,206,293.” Anyone find the balance sheet?

  4. over2u

    Company sent an extraordinary general meeting notice: Record date February 1, EGM will be held on Feb 13.
    Interesting comments on financing:
    “In addition, MergerCo and TCPI have agreed in the Merger Agreement to cooperate with
    each other and use their respective reasonable best efforts to enter into an agreement with PNC
    on terms reasonably satisfactory to MergerCo and TCPI pursuant to which PNC shall agree,
    through June 30, 2018 or longer, not to (i) accelerate the obligations outstanding under the Credit
    Agreement, (ii) terminate the Credit Agreement or (iii) terminate the obligations of the lenders
    under the Credit Agreement to make advances thereunder (the “Credit Agreement Extension”). “

  5. over2u

    AURORA, Ohio, Feb. 13, 2018 /PRNewswire/ — TCP International Holdings, Ltd. (TCP) today announced that, at TCP’s extraordinary general meeting of shareholders held today, over 90 percent of TCP’s outstanding common shares voted to approve the adoption of the merger agreement with Quality Light Source GmbH, an entity affiliated with Ellis Yan and Solomon Yan. The transaction is expected to close in the first quarter of 2018. Upon completion of the transaction, TCP shareholders will receive $1.00 in cash per share.

    1. dt

      Spread has closed significantly since the idea was posted, but my understanding is that the risk remains more or less the same – i.e. as before Yan family can still walk away from the deal. Positive shareholder vote was kind of expected, especially with unaffected price at $0.27. So is it worth holding TCPI for the remaining 7% gain?

      1. over2u

        dt, sorry, but why do you think Yan family can still walk away? It is not clear from CP or Termination section.

        In merger documents you can find company’s balance sheet and P&L – so my idea here is that company worth its price at $1 and this transaction will unlock BS value of the company (more than $63m of inventory and more than $43m of AR). On exit, stock is highly illiquid, so it may be challenging to exit – I have my limit price slightly less $1.0 and will be happy to exit with slight discount not waiting the situation to finally resolve.

  6. over2u

    Currently, TCP trades at $0.995, so I decided to exit the position. The trade resulted in c.20% for 2 months

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