Current Price – C$0.95
Merger Consideration - C$0.90 + C$0.45 Earnout
Upside – 45%
Expiration Date – 30th of May, 2018
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.