Yatra (YTRA) – Merger Arbitrage – 71% Upside

Current Price: $3.10

Merger Consideration: $5.31

Upside: 71%

Estimated closing: Q2 2020

This idea was originally covered on Value Investors Club.

 

India based (and NASDAQ listed) online travel services provider Yatra Online is getting acquired by financial services provider Ebix. The transaction was announced in March '19 and definitive agreement signed in July. During September-November companies have made some minor updates stating that they are still committed to the transaction and are working on a proxy statement. Few months later proxy is still not out, shareholder meeting date is not set yet (two thirds of YTRA holders approval is required, the date will be set in the proxy statement). Moreover, according to the initial agreement, the merger was estimated to close in late '19 and now both companies can terminate the transaction if it is not consummated prior to the 16th April. So the late timeline and lack of clearer updates from the management don't add much confidence here and probably are the reasons for the spread.

Merger Consideration: each holder of Yatra will receive 0.005 of new class of Ebix preferred shares. Then shareholders will have an option to exchange  the received preferred shares into common shares of Ebix (1 new pref = 20 Ebix common shares). This means that the actual exchange rate is 1 YTRA = 0.1 EBIX. According to the conference call, there is will be no deadline for the exchange (can be exchanged at any point in time). Another option is to exchange the new pref shares (0.005) for $5.31 in cash two years after the closing (exercisable ONLY on the 25th month after the closing). The straight equity (1 YTRA = 0.1 EBIX) part of the consideration currently offers 2% spread, but just recently was as wide as 5% and might widen again. Put option ($5.31/share in two years) provides 71% upside.

Downside is hard to estimate as Yatra already trades at its all-time lowest point. Recent quarterly results were quite poor and showed negative growth in revenues (Q1 = -21%, Q2 = -14%) and significant fall in the performance within the core segments. Air ticketing down 9% in Q1 and 25% in Q2, hotel and packages fell 55% in Q1 and 61% in Q2.

 

Brief background on the companies

Ebix - derives its revenues from three main segments:

  • EbixCash exchanges (56%) - customers pay commissions and transaction fees for various exchange operations;
  • Insurance exchanges (32%) - licensing of software and SaaS;
  • Risk compliance services (12%) - certificates of insurance and consulting services.

Ebix operates in multiple countries, yet India is its largest market contributing about 50% of revenues.

Yatra Online - India's second largest online travel agency. It provides services to retail customers (B2C), corporate travelers (B2C) and travel agents (B2B2C). Revenues are primarily drawn from commissions and service fees on air ticket sales (37%) and hotel reservations (53%). Other services (11%) include advertising, sale of rail & bus tickets etc. You can find more detailed background of the company here.

 

Main merger concerns

  • Ebix abandons the transaction;
  • Yatra shareholders reject the merger;
  • Shareholders lose the put option - merger terms get amended or Ebix is not able to fulfill the obligation when the time comes.

 

EBIX abandons the transaction

  • Ebix operates in India since 2017 and has made numerous acquisitions since then. Yatra will be their largest.
  • There is a strategic rationale. This summer the company plans to launch an IPO of their EBIXCash, which apparently would have many cross selling opportunities with Yatra. A few examples mentioned in July conference call: Yatra has 800 corporate customers and most of them are looking for a foreign exchange platform, Yatra services can be sold in Ebix exchange points in 29 out of 32 Indian airports and retail stores, EBIXcash services and credit cards can be used to cross-sell Yatra's travel products etc. In November update the company said it was finalizing the selection of investments banks for the IPO (three out of four already selected).
  • Ebix heavily targets the travel segment. In '18 it acquired two luxury travel brands Mercury and Leisure corp. In '19, it acquired 80% in  Zillious, SaaS provider for travel industry, remittance provider Weizmann, online cab hiring platform AHA Taxis, India's most luxurious train Bakken Odyssei. Moreover, recently Ebix has taken over the business contracts of Cox and Kings (major Indian corporate travel player that went bankrupt). Ebix also owns assets in Delhi-based Pearl International Tour & Travels and Mumbai-based Lawson Travels & Tours.
  • Although it looks that Ebix is quite committed to expanding within the travel industry and should not walk away from the transaction, the lackluster performance from Yatra is concerning. The initial consideration here was $7/share (March '19), but eventually got decreased in the definitive agreement most probably due to the poor performance. So given that Yatra results are still falling sharply, there is a non-zero chance that Ebix will renegotiate acquisition terms.

 

Yatra shareholders reject the merger

  • Shareholder base is quite concentrated - 8 largest shareholders own 68%, while management controls only 4.7%.
  • In mid 2018 the company did a +$50m rights offering at $5.50/share, which makes the current offer pricing not so attractive. Nonetheless, the performance of the company was significantly better at that time as well.
  • The company plans to raise additional $100m during the next 2.5 years, so in the face of a considerable dilution, shareholders might choose to vote for the acquisition instead.
  • Major shareholders:

Annotation 2020-01-12 005706

 

Shareholders lose put option

  • According to the current agreement, Ebix won't be able to touch the new preferred shares without the 50% holders written agreement.
  • Proxy is not out yet and in the merger agreement there is nothing stated about such situations where Ebix won't have enough cash to pay for the put option. In case of a liquidation or winding up, new preferred holders will share the proceeds in the same principle as common stockholders.
  • Ebix is already highly leveraged ($721m debt as of Sept '19) and given its intensive acquisition driven growth strategy the risk of it not being able to core $250m proceeds for the put option definitely exists. Nonetheless, the company should be able to receive considerable amount of funds from the EBIXCash IPO - estimated valuation of the subsidiary stands $2bn and with 20% of shares sold Ebix should receive $400m of proceeds which can be used to cover the obligations.
  • Its too hard to estimate the likelihood of bankruptcy, however so far Ebix seems like a consistently profitable and rapidly growing company (most of the growth comes from acquisitions).

 

Spread volatility

Since the announcement of definitive agreement the spread (to straight equity consideration) was always tight. Only when Ebix released Q2 results in Aug '19 and the Ebix share price declined, the spread temporarily turned negative (even reached -21% on the 15th of Aug). Only later when EBIX rebounded the spread returned to being very tight again and only recently has increased to current levels.

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