Aveda Transportation & Energy (AVE.V) – CVR – 45% Potential Upside

Current Price – C$0.95

Merger Consideration - C$0.90 + C$0.45 Earnout

Upside – 45%

Expiration Date – 30th of May, 2018

Merger Announcement

This idea was shared by Michael.

 

Aveda is a company that specializes in moving drilling rigs from one well site to the next. The company currently trades at C$0.95, and is getting taken over for C$0.90 CAD in cash plus an earnout of up to C$0.45. The contingent value rights are the potential play here.

Earnout – the deal is that 2.75xEBITDA of Aveda (for the period Jun-2018 to May-2019) that exceeds C$18m will be paid to Aveda shareholders, up to a maximum of C$0.45 per share. In other words, every C$1.1m of EBITDA above C$18m is equivalent to C$0.05/share in earnout (using fully diluted share count of 60.6m). Current AVE share prices implies EBITDA expectations of C$19m-C$20m.

Aveda had EBITDA of over C$15m in 2017. As the company operates a specialty business moving drilling rigs for the oil and gas industry, suggests it is extremely likely its EBITDA for the specified period will improve dramatically over 2017, simply because more rigs are operational.

In fact, when they released their Q4 MD&A the company issued guidance that Q1 2018 adjusted EBITDA would be C$4.4m-C$4.6m (compared to C$2.6m Q1 2017). Thus, the C$18m is a reasonable estimate of forward EBITDA, for a company in an extremely cyclical business in the midst of a big commodity driven upswing. The cost of moving a drilling rig is insubstantial to the total cost of drilling an oil well, which makes rig moves extremely price inelastic.

The risk here is that the buyer transfers EBITDA to their own operations or otherwise somehow screws the sellers out of the payments. The 25% stake held by David Werklund (a oilfield services entrepreneur in Calgary) provides some comfort here, as there is someone who has both the incentive and competence to see that shareholders are treated somewhat fairly.

Transaction is subject to 66.6% shareholder approval. Meeting has been set for 30th of May. Werklung Capital together with insiders (27% combined ownership) have signed lock-up agreement in support of the transaction.

20 COMMENTS

  1. dt

    Thanks Michael – couple questions:
    - what is your expectation for the forward EBITDA?
    - earnout aside, do you see any risks in this merger getting derailed/cancelled?
    - merger consideration can be paid either in cash or in stock. Usually there is a cap on cash consideration, but have not found any clarifications in the announcement. So is the cash consideration uncapped up to full value of the merger? Daseke seems to have sufficient cash for that.

    1. Michaelx

      I don’t have a hard target on EBITDA going forward, but I would expect it to be at least another 10-20% above the $18 MM base rate just from momentum on volume. In 2014, they did $24 MM of EBITDA, which seems doable based on momentum. That would add roughly $0.27 of contingent consideration.

      I don’t see any other risks here, the major shareholder is selling, and the contingent consideration gives a powerful weapon to anyone who says the price is too low. I think this will close.

      I went through the merger contract, and it says that shareholders can elect either cash or stock, and there is no mention of a limit at all.

  2. davea500

    Dang it, I was going to write this up. Nice work.

    As a shareholder of the company acquiring Aveda, Daseke, let me add that there is some comfort against DSKE screwing Aveda out of the CVR payments.

    1. DSKE is rolling up flatbed and specialty truckers. Without any CVR consideration, this acquisition is at a higher valuation (7.1X EBITDA) than DSKE has completed previously. On the call about this merger, the CEO and (40% owner of DSKE) said he hopes (or words to that effect) to make payments on the CVR to bring the acq mulitple down. There was even a slide showing decline EBITDA acq. multiple as CVR payments increase.

    2. I can’t put my finger on it, but there is reference in the docs to a mechanism to credit the AVE EBITDA for business that DSKE does. If you listen to the 4/16 call/webcast you will hear it – link to webcast: https://investor.daseke.com/events-and-presentations/default.aspx

  3. davea500

    DSKE Management Comment on Earnout from 4/16/18 conference call:

    “Question – Paul Richard Penney: Could you — this is a slight change in terms of your previous statements and your previous strategy in terms of: one, you’re buying a public company; and two, you’re going in multiple of 8x is about 200 basis points higher than the high end of the range before. Can you just give us some more comfort on both of these in terms of why you’re so motivated to act? And how this is different from your past path?’

    “R. Scott Wheeler: Paul, I’ll take that one. I don’t think if you look at the 2017 annual number, that’s representative of the business. You need to look at the run rate of the business. And today they released not only their fourth quarter but also some estimates on the first quarter. And you should also look at the contingent consideration that was constructed to be achieved. We certainly did our work, but the only kind of third-party public information that’s out there is from analyst estimates and those estimates are obviously stale at this point. But they would have put the — if you use their 2018 multiple — estimate for EBITDA, I would put the multiple at just over a 6. And certainly we believe that what we will end up paying is about a 5. The earnout is probably the headline difference from what our traditional differences — difference from our typical deal structure. But given the growth of the business, certainly the owners felt like that it was important that they receive some consideration for that, but we certainly didn’t want to pay for something that we didn’t necessarily get. So earnout seemed to make sense in this situation. Also, yes, we say typically we are looking for businesses of a certain type. But we will, and we’ll continue to look at a variety of structures depending upon the situation, and it’s a benefit to Daseke and its shareholders, and there are only so many public companies in this space anyway. But clearly, these are — I think these are variations on a theme and not clear departures. Don, would you say anything different?

    Answer – Don R. Daseke: No, I think that’s absolutely right. Paul, to a certain extent, the 2017 numbers are very stale now for Aveda. Obviously, they showed that their revenue in the first quarter of this year was about 50%, their EBITDA is about 70% from last year first quarter. So that shows the track that they’re on. And that’s obviously before any synergies, before any cost reductions that we can bring them. So we think this will be an exceptionally attractive transaction for us.”

    And DSKE business mechanism:

    “Question – Kirk Wilson: Most of my questions have been answered, but I do have one regarding the earnout with Aveda. I assume going forward or for the period of the earnout, June 1 ’18 to May 31 ’19, that Aveda will be accounted for as a subsidiary, you can correct me if I’m wrong there. So one of the key improvements in margins, then talked already about their refurb program they are putting into place, they were — the intention there is to move a material amount of their third-party revenues to revenues from company-owned assets. You talked already about the material improvement in synergies between the companies. But when we’re looking at the earnouts on the EBITDA basis, will the third-party revenues that Daseke will provide to Aveda will those be handled separately from Aveda’s accounting for the earnout period?

    Answer – R. Scott Wheeler: Yes. The Aveda shareholders would receive a credit of 7% of the revenues towards their EBITDA earnout calculation. So they would not be penalized for that being moved to Daseke capacity.

    Answer – Don R. Daseke: Concern over there is not receiving that credit, Scott. It goes into the calculation of the bonus for the Aveda people. But their shareholders aren’t receiving the credit. But the EBITDA is credited — yes, 7% of the revenue they direct to other Daseke companies is credited in the EBITDA in computing the deferred payment going to the Aveda shareholders.”

  4. Michaelx

    @davea500 Thanks for the additional details! The slide in the presentation deck that shows the possibility of exceeding the entire CVR payment is especially comforting to me. This business has tons of momentum, so if they think that’s possible then I think the price here is pretty attractive

  5. Vincent

    Thanks for the idea. I’m struggling how to estimate the likelihood that the EBITDA will be in the C$22-C$28 million range. With Q1 at ~C$4.5 million it needs to increase a lot in the coming three quarters. Does anyone have an idea how to get to an educated guess for that?

  6. Fa

    Now AVE traded up to 1.04 valuing the CVR 0.09, is it still worth holding the position through the merger?

    1. dt

      All depends on your expectation of EBITDA for the period under considerations.
      Judging from management’s comments as well as discussion above there is a decent possibility that EBITDA might be sufficient for the $0.45/CVR valuation.

    2. Vincent

      In my opinion, taking the middle scenario of $0.225/CVR payout is a good way of not being too pessimistic and not too optimistic. This would mean selling AVE at around $1.10-$1.12. But of course if you have a strong opinion on EBITDA expectations, like dt said, it will change your valuation.

    3. work 22

      i sold up there, bird in the hand versus two in the bush. Most CVR’s in my experience don’t pay out. While this one seems more likely than others, its more likely to be a payout that just covers the premium here, or a little more. I figure if you make a little on each one of these and take that bird in the hand, it will add up over time, rather than hoping for more and losing back each premium you paid. Just a thought

  7. Michaelx

    Worth noting that Daseke has appreciated, and the share option is now more valuable than the cash option.

    0.0751 Daseke shares at $9.58 (May 21st close) is 71.9 cents USD, or approximately $0.92 CAD, which gives a bit of extra potential upside here.

    1. dt

      EBITDA at the low end range of the guidance but impressive growth continues. In any case these results do not count yet towards earnout.

  8. dt

    Transaction was closed on the 6th of June. Daseke share price appreciated significantly after closing and total merger consideration approximates the write-up price of AVE.V – meaning CVR was received for free.

    Now another year will need to pass to get CVR payout.

      1. Vincent

        I can’t see the CVR in my IB account as a separate ticker, do you?

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