Radisys (RSYS) – Merger Arbitrage – 14% Upside

Current Price – $1.51

Merger Consideration – $1.72

Upside – 14%

Expiration Date – Q4 2018

Merger Agreement

This idea was shared by Michael.

 

Radisys (RSYS) is a wireless technology firm based in Oregon, specializing in 5G/Internet of Things technology. The company has agreed to a takeover from India based Reliance for $1.72 per share. At the current share price of $1.51 that is a 14% spread.

There is no financing condition on the bid, and Reliance is a multi-billion dollar conglomerate buying something for les than $100 MM, so I wouldn’t anticipate any issues on that front. The reason for the larger than normal spread is likely twofold. The first is that the deal is so small that larger funds in the arbitrage community would not likely be able to put a material amount of capital to work here and may avoid the deal for that reason. The second (and potentially worse) reason is the requirement for CFIUS approval.

Because the company is a technology company and its being sold to a foreign buyer, it isn’t unthinkable that approval could be delayed or denied. I believe there are a few reasons why that is relatively unlikely, although it is definitely a risk.

The first major reason is simply the size of the deal. It would be relatively uncommon for sub $100 MM deal to get blocked, and RSYS technology hasn’t exactly been lighting the world on fire, suggesting that the marketplace hasn’t judged it as especially valuable. RSYS revenue was down 30% from the previous year in the most recent quarter, which isn’t a great sign for the value of their technology (although it also makes the downside risk of the deal breaking a bigger loss).

The second major reason is that much of the technology is in fact Indian in origin. The company states that “Substantially all of our product development and operations centers are located in India and China.” As a confirmation of that, it is worth noting that it their most recent 10-K they disclosed their major facilities, and their Indian development office is twice the size of their Oregon headquarters, so it probably contains at least twice as many staff.

The deal is expected to close in the fourth quarter, which makes for a satisfactory rate of return if the deal closes. The pre-announcement price here was about $0.70, so less than half the current price, which is obviously a concern. On the other hand, Reliance is a big customer of the company, so the fact they see something that makes them want to pay that price suggests that $0.70 probably isn’t the right value for the firm either.

6 COMMENTS

  1. Thinley w

    Any idea how news that the Company would not be in compliance with Nasdaq’s audit committee requirements will impact the merger?

  2. dt

    From Q2 conference call:

    “We expect the transaction to close during the fourth quarter of 2018 after the completion of our shareholder meeting and other regulatory approvals, for which initial filings were made last week. For more detailed information on the acquisition, please refer to our preliminary proxy statement filed with the SEC on July 30, 2018.”

    From the proxy the strange thing is that only RSYS seems to liable to paying termination fee ($3m) and RIL can freely walk away from the transaction.

    https://www.sec.gov/Archives/edgar/data/873044/000119312518231578/d502287dprem14a.htm#tx502287_64

  3. dt

    CFIUS approved the merger and the spread has been fully eliminated. Merger is expected to close shortly.

    14% return over 5 months.

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