Posera (PAY.TO) – Merger Arbitrage – 7% Upside

Current price: C$0.115 - C$0.12

Consideration price: C$0.123+

Upside: 2.5% - 7%+

Estimated closing date: Jan-Feb 2020

Press release

 

Posera, payments solutions provider for hospitality industry, is getting acquired by its peer PayFacto (private). Shareholders have already approved the transaction on the 22nd of January, so only customary conditions remain to be satisfied. The merger should close by the end of this month or beginning of February'20.

The consideration here is not standard and also not explained properly in the PR (use conference call as well). It consists of: C$14.5m (C$0.121/share) out of which C$1m (C$0.008/share) will be held in escrow for 4 years after the merger (conditions are not explained) + the remaining cash balance of PAY.TO at the time of closing (C$0.029/share as of Q3'19). Moreover, shareholders will have the possibility to receive additional C$2.4m (C$0.02/share) from the loan provided to DLT Labs in 2 years after the merger.

So right after the closing shareholders will receive only C$0.113/share + estimated C$0.0104 from cash balance adjusted for the cash burn until Jan'20 and expected transaction fees. This provides 2.5% - 7% upside (bid/ask spread is wide), which doesn't look like much, but considering that this trade is of very short duration and doesn't require intense capital allocation, it seems fairly attractive.

Additionally, investors get opportunity of receiving incremental C$0.028/share (a further 24% upside) from the escrow funds and DLT Labs loan in a few years. DLT Labs looks like a complicated debtor - Posera has provided a C$2.2 credit facility loan to it in mid 2018, however in Sept'19 the loan already had C$1.4m loss allowances (C$0.6m in Sept'18). So most likely the chances of PAY.TO getting anything substantial from it are minimal.

Regarding bid-ask spread - over the last few days several trades have taken place at C$0.115/share, so if one would manage to get a position at this price, it would materially increase the upside.

 

Cash Burn and Upside Calculation

The cash burn for the latest reported quarter (Q3'19) was C$1.45m and C$1.6m average for the last three quarters. I am using the later for the expected Q4'19 cash burn.

Transaction fees (investment bankers, legal etc.) are estimated at an additional C$0.1m.

 

payto

6 COMMENTS

  1. nostradamus

    could you elaborate on your estimated cash burn? 0.1 million in transactional fees???

    1. Ilja

      Maybe $0.1m is a bit understating, but still now it is on top of quarterly cash burn, which already includes at least some of professional fees as strategic review process has been ongoing since May’19.

  2. nostradamus

    Somewhere in the proxy there was an estimate by (I believe, not sure) management. It painted a worse case and a best case scenario, best case was 1.7 millon operational burn, 1.8 million transaction fees, the best case was 1.1 million operational burn and 1.3 million transaction fees. So 0.1 million transaction fees doesn’t seem realistic (and would make it the cheapest merger ever).

    It’s a good idea. But I believe your “estimated C$0.0104” cash component is really best case, not average case. Your estimate might be right or the component might be close to zero, I don’t think there’s any way for us to estimate anything here, it’s a total blind shot.

  3. Ilja

    Nostradamus, thank you for the corrections. Indeed, in one of the filings the management estimates a lower cash balance available for the distribution, which at the worst case would even mean a negative spread. Nonetheless, then it doesn’t match with the numbers in the press release, where the expected distribution amount was estimated between C$0.12-C$0.15.

    https://sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00032304&issuerType=03&projectNo=03004826&docId=4647624 – Management Information Circular

Leave a Reply