Current price: $10.02
Offer Price: $10.75
Expiration Date: TBD
This idea was shared by Paul.
CEO of Asta Funding Gary Stern submitted non-binding proposal to take the company private at $10.75. Sterns have been running ASFI since 1994 and own 60% of it. The offer represents 55% premium to unaffected price and is subject to approval by Special Committee as well as minority shareholders. Spread to the offer price stands at 7%, however timing is uncertain at the moment.
I think the likelihood of transaction closing as announced is very high. The spread probably exists due to non-binding nature of the offer as well as uncertainty regarding timing, both of which are expected to be addressed in the coming weeks. Seemingly large downside (-30% to unaffected price) also adds to this. Special Committee and minority shareholder approvals should pass without issues. Stern family’s previous capital allocation decisions paint them as smart capital allocators who have tried to close the valuation gap and are unlikely to walk back on the current offer. Cash-out price of $10.75 appears to be a fair offer from minority shareholder perspective and makes financial sense for the acquirer.
Some background first. ASFI has three business lines:
- Consumer receivables (70%) – purchasing and then collecting distressed consumer debt, mainly in South and Central America.
- Social security disability advocacy (20%) – services helping people obtain disability benefits from Social Security Administration. ASFI earns 25% of claimants back money.
- Personal injury claims (10%) – funding litigation for personal injury claims and receiving part of proceeds/recoveries if litigation is successful.
Company has no debt and operates profitably. Book value of equity stands at $89m (or $13.57/share) mostly comprised of:
- Cash and investments ($60m);
- Deferred taxes ($10.5m);
- Investment in personal injury claims ($6m);
- Prepaid and income tax receivable ($4.5m);
- Investments in consumer receivables at cost ($2m, but with $27m fair value);
- Settlement receivable ($2m).
As ASFI has been mostly balance sheet business, looking at the current offer from the BV perspective makes most sense. Gary Stern is acquiring the company at 0.8xBV multiple, which is basically the highest valuation this company has achieved in the market over the last 10 years.
With this in mind I do not think Special Committee or minority shareholders will object to the offer, especially if Special Committee will manage to push for a few more incremental cents.
From Stern family perspective the proposal makes sense as well – at $10.75/share they are only paying for relatively liquid parts of the balance sheet (cash+investments+income tax receivable+settlement receivable) and get other investments (consumer receivables + personal injury claims) as well as operating businesses for free. So there is definitely some room for an improved offer (but I am not counting on this).
Market has long been skeptical of Stern family using the company as its own piggy bank (the main concern on VIC discussion), but looking back Sterns have managed ASFI really well and created material shareholder value over the last few years. They have also returned $125m of cash to shareholders through dividends and buybacks compared to current $65m market cap.
This adds confidence that the current offer is real and that Sterns will proceeds with it. It seems that management has tried everything (large dividends / large tenders) to close the valuation gap, but market nevertheless remains skeptical. Then taking the company private at significant premium to market prices and extracting any remaining value for themselves seems to be the next logical step.
The main risk is obviously the offer getting cancelled or voted down by shareholders. I do not think shares will trade down all the way to $7 (unaffected price), especially in the case of shareholder rejection. Stern family is clearly signaling that business + balance sheet is worth more than $10.75. Also if current proposal fails to reach conclusion, I would expect either large special dividend or tender offer – in line with piles of cash returned to shareholders over the last few years.