Maxwell Technologies (MXWL) – Potential M&A Break – 35% Upside

Current Price: $4.56

Expected Price: $3

Upside: 35%

Expiration Date: Q2 2019

Proxy document

 

This is an asymmetrical bet that Tesla's acquisition of Maxwell Technologies will fail causing MXWL share price to decline towards pre-announcement levels of $3/share (35% upside) or that eventual merger consideration will be below $4.75 due to decline in Tesla's share price. The spread to the acquisition price stands at 4% (downside).

This trade is predicated on continued troubles at Tesla and simply shorting Tesla might provide a better way to play this. However, unlike in Tesla short, the downside here is very limited. As I have explained in the section below.I consider the risk of overbid to be very low.

Maxwell borrow is available at 4%.

I will not elaborate (and also ask members not to start the discussions) on Tesla and its prospects as there are plenty of other venues where this is covered in depth (e.g. start here and here).

 

Ways to Win

On the 4th of February Tesla agreed to acquire Maxwell at $4.75/share payable in Tesla's stock and subject to the upper limit of 0.0193 Tesla's shares per share of Maxwell. This upper limit jumps into effect if Tesla's stock drops below $245.9.

There are a number of ways to win by shorting MXWL close to acquisition price:

  • Tesla's share price continues to decline till merger closes. At $200 merger consideration drops to $3.86/share, at $150 it drops to $2.9/share. Tesla always announces quarterly vehicle deliveries right after the quarter end and if Q1 deliveries are as low as expected by Tesla's bears it might take only couple weeks to reach $150-$200 levels.
  • Tesla's new share registration statement does not get approved by SEC. This was filed on the 20th of February, and there are speculations that due to limited disclosures and ongoing SEC/Musk debacle it might not get approved (note: so far the timeline from the filling date is normal). If equity issuance is not allowed, Tesla in unlikely to agree to acquire MXWL for cash instead.
  • Tesla changes its mind. If the mess within Tesla is as large as seems from it's sporadic announcements so far this year I would not be surprised if acquisition gets cancelled on Tesla's initiative. If I am reading the language in the merger agreement correctly Tesla would not even have to pay termination fee. If Musk is ousted from the company by SEC (no idea how likely/unlikely this is), then new management might be willing to clean the house first before proceeding with any new acquisitions.
  • MXWL shareholders reject the merger. While this seems rather unlikely as premium to unaffected price is large and there were no other buyers,  latest announcement shows that three working days before the initial tender expiration date only 6.5% of shareholders tendered (that might be normal as SEC still has not approved Tesla's new share issue registration statement).

 

No other interested parties in Maxwell

The below excerpts form the proxy clearly indicate that no other parties expressed any interest in MXWL acquisition (emphasis is mine). Also worth noting that the initial bid by Tesla was only $2.35/share and then in two months MXWL board managed to push up the price to the current $4.75 seemingly without any negotiating leverage or any other buyers even remotely interested in the transaction.

On January 18, 2019, a member of the Maxwell Board contacted a strategic partner with which Maxwell has had a commercial relationship for several years (“Company A”). The Maxwell Board member inquired whether Company A would be interested in an acquisition of Maxwell. Company A indicated that it remained highly interested in a strategic collaboration and partnership with Maxwell, but it was unlikely that Company A would be interested in acquiring Maxwell. The same member of the Maxwell Board also contacted two strategic partners in the automotive industry to inquire whether they would be interested in an acquisition of Maxwell (“Company B” and “Company F” respectively). Neither Company B nor Company F responded to the member of the Maxwell Board with any immediate interest in acquiring the Company.

From January 17 through January 22, 2019, pursuant to the Strategic Transaction Committee’s instructions, Barclays contacted ten other potential strategic parties, including Company C. Company C expressed to Barclays interest in a potential transaction and had a call with Maxwell’s management on January 21, 2019. On January 22, 2019, Company C notified Barclays that following the call with Maxwell’s management, they were not interested in pursuing a transaction with Maxwell. On the morning of January 23, 2019, Company D notified Barclays that they were not interested in a strategic transaction with Maxwell. On January 25, 2019, Company E e-mailed Barclays representatives and indicated that it was not interested in pursuing a transaction with Maxwell. The seven other strategic parties contacted by Barclays did not respond to Barclays’ outreach.

The proxy was updated on the 15th of March and one of the updates emphasized even further that noone else was interested in MXWL. I am puzzled why it was so important to add specifically this sentence to disclosures.

None of these efforts progressed beyond the initial contacts and none of the parties expressed an interest in entering into confidentiality arrangements to facilitate further discussions of a potential strategic transaction with Maxwell.

 

Some background on Maxwell

Maxwell is battery technology company developing and producing ultracapacitors (energy storage) and dry battery electrodes that are sold to OEM and integrator customers. MXWL has manufacturing facilities in Arizona and South Korea. The company also owns intellectual property behind its products and technologies.  Two largest customers accounted for 12% and 11% of revenues during 2018.

From financials perspective, during 2018 Maxwell did $90m in revenues at 11% gross margin and managed to burn through $40m in cash (vs $210m market cap). Longer term historical performance does not look bright either - continuing losses and declining revenues. Parts of business were sold in 2016 and 2018 so some of the revenue drop can probably be accounted by these disposals.

Thus the existing Maxwell operations clearly do not seem to be worth $200m+. Gross margin would need to expand multiple times from the current $10m to justify such valuation. Whether the IP of the company has any value I have no idea, but as noone else showed any interest in the company, it looks like Tesla might be significantly overpaying.

Interestingly, prior to the merger agreement Tesla and Maxwell had periodic discussions in connection with a potential strategic commercial relationship. But then during the negotiation process Tesla told that it was no longer interested in 'strategic commercial arrangement' and would move on if the full acquisition was rejected (at that time Tesla's $3.1/share bid was on the table, so MXWL still managed to push the price upwards by 50% despite threats from Tesla). Maybe that was just negotiation tactics, but such statement clearly does not give much confidence in value of MXWL IP/technologies.

32 COMMENTS

  1. Michael Lax

    Is the maximum you can lose the difference between the current price and $4.75, barring an unexpected new bidder, given that the amount of shares MXWL holders received will be reduced if TSLA price increases?

  2. Austin

    The TSLA exchange offer is scheduled to expire on April 2nd, right? Doesn’t that mean that TSLA’s price action in the very near future (basically the next two weeks) will determine the fractional TSLA shares to be received?

    1. dt

      The initial tender was set to expire on the 19th of March and now got extended. Until registration statement is approved by SEC these extensions will continue.

  3. Michael Lax

    I shorted a bull spread; short september call strike price of 5, long september strike of 7, credit of .35. This way, I would not lose money unless price is above $5.35.

    1. na

      What happened when you asked yourself why the 5s are selling for >$0.35 per contract when the TSLA consideration is capped at $4.75.

  4. Michael Lax

    Either people are short and using a long call as a hedge, or are willing to speculate on a higher bid. I have seen this setup before…

    1. dt

      If merger happens your short MXWL call will be converted into short TSLA call.

    1. dt

      This will be determined only when the exchange ratio is known, but directionally it will be at 5% premium to TSLA spot price at the time of merger close.

  5. Michael Lax

    It would be less than 100 tesla shares, I have not seen an option for less than a round lot?

      1. mcg mcg

        That is correct, the options will be swapped out for TSLA options where the consideration is a share count and strike price adjusted by the exchange terms.

        1. na

          The way mcg mcg describes it is how I’ve seen these situations work themselves out. The OCC should have a statement on this. My guess is their will be a new contract at MCWL’s expirys and some fraction of a standard 100 share TSLA contract.

  6. Michael Lax

    So I guess whether I will have a gain or loss will depend on how long this deal takes to close, as the time value of the options written declines as time goes on.

  7. DendriteResearch

    MXWL up sharply the past couple days – looks like someone knows something. TSLA filed another amendment to the agreement, and it’s not just an extension. I can’t see any obvious change to the documents, though. And I still don’t see an SEC notice of effectiveness.

  8. Michael Lax

    How long does it take on average for SEC approval? Are there any other outstanding requirements for closing?

  9. Michael Lax

    I don’t see any extension issued by Tesla, so I would assume they are aiming for 4/10 close, yet MXWL is trading about 2.4 percent below the offer?

    1. dt

      SEC still has not made new share issuance effective, so I am guessing we will see new extension tomorrow.

  10. dt

    Some thoughts and views on delay from SEC:

    The deal was structured as a two-step (w/ a merger sub) exchange tender offer under Delaware law that allows for only majority shares tendered to obtain control. As such and per the merger, it has only 2 meaningful deal conditions. A majority of shares tendered and a means by which to register the shares given in consideration… effectiveness of an S-4.

    It is a very simplified structure available only when both are public co’s used mostly in lightly regulated industries not subject to prolonged regulatory body reviews that would negate its appeal. SEC Aja’s publicly stated its commitment to complete s-4 reviews quickly in such structures to fit the tight time frame constraints of tender offers that is not the case here. Multiple 10 day extensions have now given way to a 5 week extension and this deal is in a different risk category now. The s-4 has not passed SEC muster. What’s wrong?

    https://twitter.com/BSA19741/status/1115440954402574338

    I think the length of the current extension is mainly to accommodate TSLA’s Q1 results, otherwise it would have been shorter.

  11. Michael Lax

    Shares were down about 6% yesterday, market appears to be assessing it as higher risk

  12. dt

    Q1 results are out. Revenues down 33% YoY – in the absence of TSLA acquisition the stock will crash hard.

  13. lyjgeorge

    How will the short position of MXWL be after merger? just transfer to short position of TSLA?

    1. dt

      Yes.

      Shorting MXWL is now almost equivalent to shorting TSLA, just with the added bonus in case the deal breaks for one reason or another.

  14. dt

    New share issuance has been declared effective by SEC. So now there should not be any hurdles to close the transaction.

  15. lyjgeorge

    It’s now transfer to short TSLA, what’s the upside do we expect now ? still 35%?

    1. mcg

      The trade was a potential break of the merger deal, that did not happen. At this point any short tsla shares is a bet on tsla, nothing else

  16. dt

    Closing this one out. This turned out to be a great short as TSLA continued to spiral downwards after the merger, however the gain purely from MXWL share price perspective was only 2.5%.

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