RMG Networks (RMGN) – Going Private – 6% Upside

Current Price – $1.2

Merger Consideration - $1.27

Upside – 6%

Expiration Date –TBD

Announcement

This idea was shared by Thinley.

 

On April 3, 2018, RMG Networks agreed to be taken private by Mr. Gregory Sachs, RMG’s Executive Chairman. RMG stockholders will receive $1.27/share valuing the company at $16.8m. Sachs and associates currently hold 18% of the stock and have entered into a voting agreement to vote in favor of the merger. Transaction is subject to approval of majority of shareholders not affiliated with the Chairman (meeting not yet scheduled, but proxy has been released). Financing is already in place.

Transaction is expected to be completed in Q2, 2018, current spread stands at 6%.

Shares were trading at $1.4 when the acquisition at $1.27/share was announced. So chairman is taking the company below market prices, albeit these higher prices persisted only for couple of weeks.

 

Background

For more background on the company and its business I recommend reading through  Greenhaven Letter, this VIC write-up as well as quick pitch by Dane Capital.

“RMG Networks is a global provider of end-to-end enterprise digital signage solutions that allow its customers to deliver intelligent and real-time visual content to customers and employees.  These solutions encompass installing and maintaining the hardware and the software which include the content and the content management systems that drive the content on the screens. “

The turnaround that these investors were expecting did not happen and shares lost c. 70%-80% relative to the write-up prices (after 4:1 reverse stock split).

In Q1 2018 revenues dropped by 17% and company burned through $1.5m in cash. If similar trend continues company will be out of cash by the end of current quarter. To avoid default, a bridge loan has been provided to the company by the current acquirers.

 

DRW shareholding

The largest investor in the company is Donald R. Wilson (DRW) who collectively holds 38.1% of the shares outstanding and has not officially entered into voting agreement. It is not clear whether he is supportive of the deal or no. But my guess is that Mr. Sachs would not try to take the company private if he did not have the unofficial ok from DRW. One of the possibilities is that voting agreement with DRW was skipped on purpose in order to keep him as unaffiliated shareholder allowing for easy transaction approval – DRW owns 46.5% of unaffiliated shares so only few additional shares would be needed for the voting to pass.

See further discussion on the topic on the CoB&F – the bottom line is that DRW vote is the key wildcard here.

 

Risks

If the deal is rejected by shareholders or cancelled due to some other issues, RMGN will probably need further financing to stay afloat – agreed bridge loans is a clear sign of liquidity issues. Thus downside might be material. That said, the unaffected price is higher than the acquisition offer.

10 COMMENTS

  1. dt

    Would not call it an upside as shareholders will not be cashed out. Press release states:

    “Under the terms of the Acquisition Proposal, the company, or a successor to the company, would remain a public company. The company’s existing stockholders would not receive any cash consideration and would continue to own their shares of the company’s stock”

    “At this time, the Special Committee has not changed its recommendation with respect to, and continues to support, the company’s pending sale to an entity controlled by Mr. Gregory Sachs.”

  2. Thinley w

    I sold out at breakeven. As mentioned in the CoB&F forum, I think there are lots of different possible outcomes. With a spread of 6%, I no longer feel comfortable with this special situation.

  3. dt

    Seems like active discussions are ongoing regarding the alternative Proposal, so the risk is increasing that there will be no cash out for shareholders.

    https://www.sec.gov/Archives/edgar/data/1512074/000104746918004780/a2236035zprer14a.htm

    “Also on June 5, 2018, the special committee issued a press release in which it announced that it had received the Proposal and stated, among other things, that it (i) had designated the party which submitted the Proposal as an “excluded person” under the merger agreement, (ii) intends to continue negotiations with that party, (iii) had not determined that the Proposal in fact constitutes a superior proposal under the merger agreement and that the Proposal was not at that stage sufficiently detailed or definitive for such a determination to be appropriate, and (iv) had not changed its recommendation with respect to, and continues to support, the company’s pending sale to Parent.

    Later on June 5, 2018, the special committee and representatives of DLA Piper received a letter from Parent informing the special committee that it disagreed with the special committee’s designation of Party A as an “excluded person” under the merger agreement as it did not believe that the Proposal would reasonably be expected to lead a superior proposal under the merger agreement. Parent and the special committee disagree about such designation.

    From June 5 to June 10, 2018, representatives of Carl Marks and Party A continued negotiations regarding the key business terms of the Proposal and proposed legal documentation.

    On June 7, 2018, representatives of DLA Piper held a telephone call with representatives of Baker & McKenzie to further negotiate the Proposal, including with respect to the legal structure of the proposed transaction and certain key business terms.

    Following those negotiations, on June 11, 2018, Mr. Trutter held a telephone call with representatives of DLA Piper and Carl Marks to direct DLA Piper to proceed to revise certain of the proposed transaction documents.

    On June 13, 2018, representatives of DLA Piper provided representatives of Baker & McKenzie with revisions to certain of the proposed transaction documents. That evening, representatives of Carl Marks held a telephone call with Party A to discuss their initial review of the revisions provided by DLA Piper.

    On June 14, 2018, Mr. Trutter, Party A, representatives of DLA Piper, representatives of Baker & McKenzie, and representatives of Carl Marks held a joint telephone call to discuss the revisions provided by DLA Piper and to negotiate certain key business and legal issues related thereto. Following the telephone call, Mr. Trutter, representatives of DLA Piper and representatives of Carl Marks had a subsequent telephone conversation to discuss the key issues raised by Party A and discuss a potential response.

    On June 15, 2018, Mr. Trutter and representatives of Carl Marks again held a call with Party A to discuss the special committee’s response.

    On June 20, 2018, representatives of Carl Marks held a telephone call with Party A to discuss Party A’s response to the special committee’s key business concerns.

    On June 21, 2018, Mr. Trutter and representatives of Carl Marks again held a telephone call with Party A and Party A provided to Mr. Trutter and representatives of Carl Marks a revised draft of certain terms with respect to the proposed legal documentation for discussion.

    Later on June 21, 2018, the special committee and representatives of DLA Piper received a letter from Parent informing the special committee that it believed that the Company had failed to comply with the terms of the merger agreement, specifically that the Company had failed to keep Parent informed on a reasonably current basis of the status of the Proposal as it believes is required under the merger agreement. Parent and the special committee disagree about what is required under the merger agreement in this regard.

    On June 22, 2018, Mr. Trutter, representatives of Carl Marks and representatives of DLA Piper held a telephone call in order to discuss the revised terms received from Party A as well as the letter received from Parent. Following such discussion, Mr. Trutter directed representatives of DLA Piper to discuss with representatives of Baker & McKenzie the revised terms received from Party A.

    On June 23, 2018, representatives of DLA Piper held a telephone call with representatives of Foley Gardere for the purpose of discussing the status of Parent’s activities relating to any potential rollover investors and debt financing.

    On the morning of June 24, 2018, the special committee held a telephonic meeting at which representatives of DLA Piper and Carl Marks were present to discuss the outcome of DLA Piper’s call with representatives of Foley Gardere and the status of negotiations with Party A.

    Later on June 24, 2018, representatives of DLA Piper held a telephone call with representatives of Baker & McKenzie to discuss certain key business and legal issues with respect to the revised draft of certain terms of the proposed legal documentation received from Party A.”

  4. dt

    Interesting developments at RMGN:

    http://ir.rmgnetworks.com/phoenix.zhtml?c=251935&p=irol-newsArticle&ID=2362110

    - Special committee finds alternative proposal to be superior;
    - However, the vote does not pass in the board;
    - This results in the resignations of all of three independent directors that were part of the Special committee.

    My understanding is that Sacks going private transaction at $1.27 is back on the table – 13% upside. 10Q states that transaction is expected to be closed by the end of Q3.

    Interestingly Chairman even improved his offer with backstop (equivalent to the alternative proposal) in case the going private transaction does not close. From the language in the letter Sacks seems to be very determined to complete this transaction.

    https://www.sec.gov/Archives/edgar/data/1512074/000158069518000375/rmgn-sc13da_073118.htm

    And the board meeting itself does not seem to have been friendly:

    https://www.sec.gov/Archives/edgar/data/1512074/000110465918050183/a18-18346_28k.htm

  5. Rick Sanchez

    Item 3.01. Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing

    On August 21, 2018, RMG Networks Holdings Corporation (the “Company”) received notice from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company no longer complies with Nasdaq Listing Rule 5550(b)(1) due to the failure to maintain a minimum of $2,500,000 in stockholders’ equity, and that, as of August 20, 2018, the Company does not meet the alternatives of market value of listed securities or net income from continuing operations.

    Nasdaq advised the Company that the Company has 45 calendar days to submit a plan to regain compliance. If the Company’s plan is accepted, Nasdaq may grant an extension of time to evidence compliance of up to 180 calendar days from the date of the notice letter.

    The Company is considering its options with respect to the actions it may take in response to Nasdaq’s notice.

  6. dt

    Shares started trading at $1.29, which is the buyout price.

    Overall 7% return in 4 months.

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