InnerWorkings (INWK) – Merger Arbitrage – 8% Upside

Current Price: $2.78

Offer Price: $3.00

Upside: 8%

Expected Closing: Q4 2020

Proxy

This idea was shared by Make9.

 

This is an arbitrage situation on a fresh merger between two providers of outsourced print management solutions.

InnerWorkings is subject to an acquisition by privately held peer HH Global. The definitive agreement was announced on the 16th of July and the consideration stands at $3/share in cash ($177m equity value). Conditions include regulatory approval (antitrust) and consent from the target company’s shareholders (meeting date has not been set yet). The transaction is not conditioned on financing and the required funds have already been secured (the equity part is backed by Blackrock). Closing is expected by the end of Q4.

Overall, this is a strategic transaction between two complementary businesses, and taking into account the involvement and support from Blackrock, seems quite likely to close. The major risk is INWK shareholder approval as the offer price is significantly below the levels INWK used to trade over the last 15 years except for GFC and COVID sell-offs. However, given the recent operational struggles of the company, impact from COVID, and 125% premium to pre-announcement price, the chances are high that the vote will go through.

If the merger breaks downside could be material (as the price premium of the offer is high).

 

INWK

InnerWorkings is a technology-driven company that generates revenue from the procurement of marketing materials, branded merchandise, and retail displays for customers across various sectors. Its software stores equipment profiles of more than 12,000 suppliers (graphic designers, paper mills and merchants, digital imaging companies, etc.) and matches the client orders with the most suitable supplier at the most competitive price. On top of that, the company offers various other services (logistics, kitting, assembly, event management, display installations, etc.), which are needed for the completion of the final product. The majority of the revenues are generated from NA (71%), and the remaining in 21% – EMEA and 7% – LATAM.

INWK is facing considerable headwinds from the declining printing business, which resulted in relatively flat revenues, issues with profitability (10 negative net income quarters in a row), and high SG&A expenses. To reduce the expenses the company has been trying to refocus on larger corporate clients, however, so far no major improvements happened  – over the last two years, InnerWorkings has cut its guidance several times, which was strongly reflected in the fall of its share price (traded at $7-$10/share in 2018 and $3-$6/share in 2019 and finally at $1.33/share following covid sell-off and before merger announcement).

The company hasn’t provided many details on the COVID-19 impact so far. However, on top of the previously mentioned struggles, the business definitely took a hit as a result of the disrupted marketing industry – many clients and prospects have reevaluated their marketing plans and budgets. Guidance for 2020 has been withdrawn.

Directors own 4.5%. Otehr major shareholders:

Note: Richard A. Heise Jr. is the founder of the company (no longer on the board). So far shareholders have not made any comments on the transaction.

 

HH Global

HH (based in the UK) is a provider of outsourced marketing execution services. Gross revenue-wise it is 2x smaller than INWK ($584m vs $1.1bn) and operates primarily in EMEA and APAC regions.

For the combined company, this merger will ensure a stronger operating model, better balance sheet, global presence, and also will boost InnerWorkings’ transformation to refocus on large corporate clients. Moreover, in the press release, it is stated that:

The combined company will benefit from the support of funds managed or advised by Blackstone Tactical Opportunities, an existing strategic minority equity investor in HH Global.

Blackstone has invested $100m in HH at the end of 2019 and apparently this expansion through M&A has been in the cards back then already. Managing director of Blackstone stated:

We look forward to working with Robert MacMillan and the excellent management team he has assembled. The Company is one of the few truly global operators in the market, which we believe is a strong differentiator to capture the exciting growth ahead of us. We look forward to supporting HH Global’s impressive growth trajectory, both organically and through M&A.

Back in Feb’19 HH has made two acquisitions (consideration size was not revealed):

• Alecom, a print and luxury brand marketing services provider.
• A majority stake in Blueberry Wave – a provider of analytical, data, and communication tools for marketing.