Westell Technologies (WSTL) – Reverse Split – $450 Upside

Current Price: $1.05

Offer Price: $1.48

Upside: $450 (for odd-lots)

Expected Closing: late Q3 / early Q4

Press Release

 

On the 10th of July network infrastructure services provider Westell Technologies announced intentions to conduct a 1 for 1000 reverse/forward stock split and delist from Nasdaq afterward. Both class A and class B fractional shareholders will get cashed out at $1.48/share, so the trade here is to buy 999 WSTL shares and get cashed out during reverse split for a total profit of $450. Shareholders' meeting to approve the transaction is expected to be held in September. Directors own 56% of the voting power (and 26% economic ownership), so the approval is guaranteed.

Despite the attractive upside, a couple of recent cases suggest this is far from being 'risk-free'. The main risks are that either the reverse/forward stock split or the terms get amended (price or the split ratio).

The primary purpose of such a transaction is to decrease the number of its shareholders below 300 (the level at which reporting to SEC is required), however, the transaction is very fresh and in the initial PR WSTL did not provide how many shareholders it currently expects to cash out. Proxy statement is likely to include additional information on this.

Examples of recent odd-lot cases with amended terms:

  • PKD announced a similar reverse/forward split in September'19 at 64% premium. Eventually, the transaction became quite widespread and popular in the media (other blogs, Seeking Alpha, etc.), and the number of new arbitrageurs jumping in exploded (volume stood at 20x to pre-announcement levels). Therefore, in October'19 the company has amended the terms from a fixed ratio of 1 for 100 to a range going from 1 for 5 to 1 for 100 (management would choose the exact at the time of closing). Given the situation, it appeared very likely that the final ratio will stand close to the lower limit, so many arbitrageurs were forced to decrease their position from 99 shares to 4 shares at a loss. Interestingly, it seems that eventually, so many odd-lot accounts dumped the trade that the final ratio was selected at 1 for 50.
  • BLBD is another example - this was a tender offer will odd-lot provision announced in Sept'18 at an 8% premium to pre-announcement price. The transaction also received significant attention on SeekingAlpha and on other platforms and eventually, the management chose to eliminate the odd-lot provision. The stock dropped below the pre-announcement price. The offer ended up being oversubscribed by 12x (6.6% proration). After closing, shares fell down significantly in the following two weeks. Instead of risk-free $200 odd-lot speculators lost around $300-$600.
  • A successful recent case of a similar reverse/forward split is Dynasil.  Transaction was announced on May'19 with only a 6% premium to pre-announcement price or $480 profit for odd-lots (the split ratio was 1 for 8000). The offer went relatively unnoticed by the investing media and closed in August'19 costing the company $2.2m (not including the transaction fees) - so the amount of odd-lot accounts (calculating at the maximum amount of odd-lot shares - 7999) was standing at about 275. Still, despite a relatively low premium and the fact that most of the time DYSL traded very close to the offer price and low attention from media, the number of shares expected to be cashed out increased 2x from the levels (from 1.4m to 2.8m) indicated in the initial announcement (until final proxy).

 

Further notes on Westell Technologies

WSTL is essentially a "melting ice cube" company that is facing significant issues with scale and competition. It operates in 3 segments:

  • In-building: enables cellular networks in stadiums, arenas, malls, buildings, and other indoor areas.
  • In site management: provides machine to machine systems to monitor site infrastructure and support systems.
  • Communications network solutions: provides integrated cabinets, power distribution products, copper and fiber network products, etc.

wstl rev

As of Mar'20 the company had no debt and held $20m in cash.

Recently the company received delisting notice from NASDAQ (due to share price being lower than $1/share) and has until Dec'20 to regain compliance (however, apparently decided to delist voluntarily anyways).

78 COMMENTS

  1. W51W52

    A couple of counter points from the preliminary proxy statement that was filed:

    https://www.sec.gov/Archives/edgar/data/1002135/000100213520000034/pre14a2020.htm

    Treatment of Beneficial Holders (Stockholders Holding Shares in “Street Name”)
    We intend to treat stockholders holding our Class A Common Stock in “street name” in the same manner as record holders. Prior to the Transaction, we will conduct an inquiry of all brokers, banks and other nominees that hold shares of our common stock in “street name,” ask them to provide us with information on how many shares held by beneficial holders will be cashed out, and request that they effect the Transaction for those beneficial holders. However, these banks, brokers and other nominees may have different procedures than registered stockholders for processing the Transaction. Accordingly, if you hold your shares in “street name,” we encourage you to promptly contact your bank, broker or other nominee.

    Source of Funds and Expenses
    Expenses
    Based on information dated June 1, 2020 that we have received from our transfer agent, Broadridge, as to holdings of our record holders, and reflecting the distribution of the accounts of our stockholders who hold shares in “street name,” as well our estimates of other Transaction expenses, we believe that the total cash requirement of the Transaction to the Company will be approximately $8.1 million, as described below. This amount includes approximately $7.8 million needed to cash out fractional shares (although this amount could be larger or smaller depending on, among other things, the number of fractional shares that will be outstanding at the time of the Transaction as a result of purchases, sales and other transfers of our shares of common stock by our stockholders, and the number of “street name” shares that are actually cashed out in the Transaction). In addition, the following approximated legal, accounting, and financial advisory fees and other costs will be incurred by the Company to effect the Transaction:

    $200,000 estimate for legal expenses (including the Special Committee’s legal expenses)

    $70,000 for the investment banker’s fairness opinion, of which $70,000 has been paid; and

    $30,000 for filing, printing, mailing and other miscellaneous fees

    Per the most recent 10-K, there are 12.324775 million Class A shares and 3.484287 million Class B shares outstanding as of 05/18/20. The Penny family owns all of the Class B shares, so they will not be eligible for the reverse/forward split. $7.8 million / $1.48 per share = 5.27 million shares, which is 42.8% of all Class A shares outstanding.

    1. bigdaddy85

      Based on filing that just came out thru ended up buying 4.9m shares for a total of $7.2m. This is less than what was estimated earlier, which I find rather surprising given this was more well known and offered a good arbitrage opportunity

  2. g4734g

    odd lot in this case is anything less than 1000 rather than the more typical less than 100, so the 600 calc is correct

    The transaction includes a proposed 1-for-1,000 reverse stock split of the Class A Common Stock and Class B Common Stock, in which holders of less than 1,000 shares of the Company’s common stock would be cashed out at a price of $1.48 per share for their fractional shares

  3. Brian

    I agree with W51W52, it seems based on the language that they’re being relatively insensitive to the number of shares they cash out.

  4. g4734g

    W51w52 Thanks for posting this idea very intriguing. i am trying to follow your logic on the 677 hypothetical sub 1000 share owners. You’re saying it will cost About 1 million to cash them out and then the company would not want to go much above this given the savings is about $1 million?
    But the savings occur on an annual recurring basis, so it seems to me the company could spend upwards of $5 million to buy out shareholders and if they’re getting a return of $1 million Per year by eliminating filing fees, they are still staring at a very healthy 20% ROI. Am I misunderstanding your thesis or the way this deal is structured?

    I find the fact that the company has no debt and 20 million in cash and even after a recent run up in price still only has market cap of 17.5 million interesting. Also wondering if it’s safe to assume 56 Percent ownership by directors means those shares are off the table, another 15 or 20% of thousand plus shareholders would make this an interesting play

  5. dt

    This was a mistype on our side (now corrected). A more detailed proxy indicates that the company is willing to spend $8m on this transaction, which is 9x the expected cost savings ($900k).

    Management (who are also significant shareholders) benefit not only from the savings on public listing/reporting costs, but also from cashing out other shareholders potentially below the cash on the balance sheet and intrinsic value of the operating business.

    The $1.48/share cash-out price is justified by reserving $5m of cash for the operating business, so that part is not considered as excess cash. See slide 6 here: https://www.sec.gov/Archives/edgar/data/1002135/000100213520000036/exhibitcii.htm

    Management’s/board’s ownership stands at 26% (all class B shares and 5% of class A shares; 56% is the voting power). As noted by W51W52, 5.27m shares are expected to be cashed out, which is almost half of all the outstanding class A shares. This is materially higher compared to any other reverse splits that I can recall.

    I think this offer has relatively high chances of closing as indicated. The success of the case really depends on the value of the operating business in the eyes of controlling shareholders.

    At $1.48/share they are paying only $4m (counting all cash as excess cash) for the business which has $8m in tangible book value (mostly working capital), did $30m in revenues, and has $137m in federal net operating losses (expiring in 2022). Comparative transaction data shows far higher EV/sales multiples – an average of 1.44x and median of 1.2x (vs 0.25x-0.3x range used for valuing WSTL). Comparison to publicly listed peers also shows that the proposed transaction is potentially undervaluing the company. However, worth noting that most of the companies/transactions in the comparative lists are/were profitable and with positive revenue growth – both metrics point to the other direction for WSTL.

    1. g4734g

      DT thanks much for the additional detail. Couple of quick follow up questions. Those NOL’s are transferable in an acquisition are they not? Seems you would want to monetize that value prior to expiration? 137 million is a big number

      Also in a previous comment it was discussed that the multiple account, same serial number, prohibition which exists in odd lots does not apply here, which makes sense as the company cant afford not to cash ALL sub 100 out, otherwise getting below 300 shareholders becomes a challenge. Is this your understanding?

      I wonder if there is a bigger play here as I would expect shares may become more and more scarce as both odd lotters and managemnt (26%) sit tight on their holdings.

      Thanks muuch

      1. dt

        Regarding NOLs – this is what I found in the proxy:

        “During the Special Committee meeting, management presented information on the Company’s historical federal tax net operating losses which total $137 million and expire beginning in March 2022. Management explained the Internal Revenue Service (“IRS”) tax rules which limit the use of net operating losses if the Company repurchases a certain amount of shares and the Special Committee discussed with management who indicated that a reverse stock split of 1,000 or less is expected to permit the Company to retain the utilization of its net operating losses.”

        I doubt management will be able to extract much (if any) value from these NOLs during the two remaining years before expiration. My understanding is that those NOLs could be applied only if WSTL acquires some sort of profitable business or existing operations turn positive.

        Regarding the 300 shareholder threshold – keep in mind the requirement is for 300 shareholders of record rather than 300 beneficial owners. So they are cashing out the beneficial owners ‘voluntarily’ and could easily deregister without doing that.

        Re multiple accounts – all will depend on the rules of your broker. I am not sure how would IB treat WSTL holdings in separate accounts under the same name. But for accounts at different brokers, it should work out as you suggest.

  6. Ilja

    I have adjusted the ‘current price’ in the write-up header from $0.87 to $1.05 to more accurately reflect the post-announcement price. The $0.87/share price after the initial press release was available only for 30min before Friday’s close and before proxy statement release on Monday’s open.

  7. fishwithwings

    Did the fact that the write up was moved from “quick ideas” to “idea” push the price up?

  8. fishwithwings

    If this trade gets crowded and the $8m isn’t enough to payout all odd lots holders, I think management would likely modify the number of shares that are eligible for the reverse split. The $8M was based on info obtained on June 1, 2020 and I’m pretty sure as the expiration date nears it will cost much more to cash out odd-lot holders.

  9. RJChicago

    W51W52, or anyone else – what do you make of the “Street Name” language in the proxy? Does that mean that if someone tries to do 999 shares in multiple accounts in their name – the company will not treat them as odd lot holders or just in general what do you think the import of that language is for this transaction? Thank you!

    1. W51W52

      I refer you to this Q&A section in the proxy:

      What happens if I own a total of 1,000 or more shares of Class A Common Stock beneficially, but I hold fewer than 1,000 shares of record in my name and fewer than 1,000 shares with my broker in street name?

      We may not have the information to compare your holdings in two or more different brokerage firms. As a result, if you hold more than the minimum number of shares, you may nevertheless have your shares cashed out if you hold them in a combination of accounts in several brokerage firms. If you are in this situation and desire to remain a stockholder of the Company after the Transaction, we recommend that you combine your holdings in one brokerage account or become a record holder prior to the effective time of the Transaction. You should be able to determine whether your shares will be cashed out by examining your brokerage account statements to see if you hold more than the minimum number of shares in any one account. To determine the Transaction’s effect on any shares you hold in street name (and possible payment of the cash consideration), you should contact your broker, bank or other nominee.

    1. caddystocktips

      Part of a PR: “Additionally, the Company announced that it decided to forego the quarterly investor call that would have been scheduled in August 2020 in light of the proposed reverse/forward stock split transaction. Results for the quarter ended June 30, 2020 will be reported a separate press release that is expected to be issued on or about August 14, 2020.”

      Maybe people didn’t like that.

  10. bigdaddy85

    I didn’t see any press releases from the company. My guess is you have some decent selling for people/ funds who want to get under the 1000 share mark because they don’t want to own a dark company

  11. bigdaddy85

    Anyone have an idea of how shareholders will be treated who own less than 1,000 shares in the SAME brokerage firm but in different accounts? For example, I own 999 shares in my TD Ameritrade Roth and 999 shares in my TD Ameritrade Margin account

    1. wuchun

      My experience with IB is they will identify you with your SSN and aggregate your holdings.

      1. Zulu Investor

        Different brokerages seems to work but NOT different accounts in the SAME brokerages.

  12. bigdaddy85

    I meant to say if you own MORE than 1,000 shares at the same brokerage but they are in different account. For example, I own 999 shares in my TD Ameritrade Roth account and I own 999 shares in my TD Ameritrade Margin account. Will these be treated separately since they are different account numbers? Anyone know the precedent in this?

  13. Ilja

    The meeting date is set for the 29th of September. Upside of $380 remains available for holders of 999 shares.

  14. smartone capital

    What kinds of updates would you expect for this type of transaction before it occurs? Just curious

    1. EvP

      For instance, an official notification with deadlines regarding the dates of the split. Don’t want to miss it.

      1. Dan Silverstein

        The annual meeting is Sept 29th. Shareholders will vote on the reverse split at that time. I would expect an update on the reverse split shortly thereafter.

  15. Brian

    A bunch of insider buying in Late August at ~ $1.07.

    The vote is 9/29, then if they follow the usual playbook they’ll declare the reverse split shortly thereafter.

    1. jwestern

      I think it’s important to note they say that the transaction will only occur “directly” with stockholders of record. In my opinion it’s possible to square that with their earlier detailed statements about them dealing with stockholders of record (like brokers), whereas specific questions on how brokers would handle it from there would have to be asked to each broker.

  16. EC

    It went through

    https://ir.westell.com/press-releases/detail/280/westell-stockholders-approve-reverse-and-forward-splits

    “AURORA, Ill., Sept. 29, 2020 (GLOBE NEWSWIRE) — Westell Technologies, Inc. (NASDAQ: WSTL), a leading provider of high-performance network infrastructure solutions, announced that at the Annual Meeting on September 29, 2020, the Company’s stockholders voted to approve proposals authorizing the Board of Directors of the Company to amend the Company’s certificate of incorporation to effect a 1-for-1,000 reverse stock split of the Company’s Class A and Class B Common Stock, followed immediately by an 1,000-for-1 forward stock split (the “Transaction”). The reverse and forward stock splits will be effected on October 1, 2020 and the Company’s Class A Common Stock is expected to begin trading on the NASDAQ Capital Market on a post-forward stock split basis upon the opening of trading on October 2, 2020.”

  17. dt

    The proxy clearly stated that WSTL intends to treat beneficial owners the same way as record holders. And there was no amendment to the proxy. So my understanding is that nothing has changed and beneficial owners should still be cashed out, as this proxy with that particular note on beneficial owners has been approved by shareholders. However, worth noting that the proxy used the word ‘intend’, which is clearly not a guarantee. We will know for sure on the 2nd of October. I also posted a ticket for IB regarding this, but not sure if they will respond before that.

    Nevertheless, the press release is a bit puzzling and my understanding might be proven wrong. It has the two statements on ‘record’ holders:

    “To be entitled to such cash payment, a stockholder must be a record holder of fewer than 1,000 shares” – this might refer to T+2 requirement when the transaction in securities settles, rather than record owner vs. beneficial owner.

    “The Transaction will apply directly only to record holders of the Company’s Common Stock” – as jwestern noted above, this might refer to transfer agent dealing directly only with record holders, which then in turn would have to beneficial owners within their systems.

  18. RJChicago

    That language is a little concerning but if they were not treating individual shareholders as “record holders” in their understanding of it, then this transaction would not make sense right? The point of it is to cash out individual shareholders so they can delist. Given that, I think [hope] that language was included in the press release to cover the timing aspects – and the fact there is a clarifying sentence about purchasing stock before but settling after the effective date gives those purchasers no right to a cash payout – that qualifier seems to me to make it more likely that the “record holder” language in the sentence before relates to that timing issue. This may, however, be wishful thinking on my part.

  19. g4734g

    So my understanding is today’s buyers will not settle in time to qualify. Will be interesting to watch today’s price action

  20. riskarber

    looks like Oct 1 is the cut off.

    “to effect the Reverse Stock Split, followed immediately by the Forward Stock Split, both to be effective on October 1, 2020 at 5:01 and 5:02 p.m.”

  21. Ben

    Wells Fargo changed the CUSIP to a temporary XXX and marked it for exchange. I didn’t do anything to prompt that.

  22. Go Anywhere Fund

    RJChicago, I agree if this were an issue, they wouldn’t accomplish their goal of reducing the share count. The language was confusing, but the whole event seems dependent on cashing out those shareholders. If the record holder language didn’t allow for that, I don’t think the transaction would work.

    1. lupolupus

      At IB, my Westell corp action position is valued at 1.48, so presumably they are planning to cash out based on individual shareholders as record holders.

  23. nuggy5

    I got a message from my broker when I asked about the cashing out that said: Your request is currently being processed. Please note DTC extend the due date to Oct 5, 2020.

    1. R

      Not yet at Fidelity. My position changed to cusip 957CSH562. I assume the “CSH” is for cash unless that is a coincidence?

    1. bigdaddy85

      I’m still waiting as well for payment in all 6 of my brokerage accounts. Anyone have any updates on payment status??

      1. jwestern

        I’ve received nothing yet. But the ticker for my shares changed to some cryptic code. These things take time for the bureaucracy.

  24. fishwithwings

    anyone look at this as a long-term investment? Management must be pretty bullish for purchasing shares significantly above market price.

    1. Terence

      Valuation opinion at $1.48/sh, vs $0.87 current price, or 70% upside (see link per DT 7-15 post above, copied below). So, I second the motion of Fishwithwings. Move this to “active ideas” again?
      https://www.sec.gov/Archives/edgar/data/1002135/000100213520000036/exhibitcii.htm

      The cash-out should not change the $1.48 valuation. Per filing today, “$7.2 million of cash was used by the Company to cash out approximately 4.9 million pre-split shares of common stock.” Per my rough calculations, the new WSTL consists of:

      Fully diluted shares outstanding: 16.5m, less 4.9 cashed out, = 11.6m shares
      Excess cash, no debt: $15.7m, less $7.2m cash out, less 0.3m expenses = $8.2m = 71c per sh
      Cash needed for operations to fund losing business, etc: = $6.6m = 57c per sh
      Losing business valuation, per Emory the appraisal company (page 62 of report): $8.5m gross, less cash needed above of $6.6m, = $1.9m = 16c per sh
      TOTAL VALUE = $14.8m of cash + $1.9m business = $16.7m or, $1.28 per share cash + $0.16 per share business = $1.44/sh

      Comments:
      No value given to NOLs, correct or not.
      Business might remain unprofitable, and management might completely “melt the icecube” and just draw salaries until cash is zero, so equity value =0.
      Less info on going dark.

      I post this primarily hoping that our more knowledgeable members will comment.

      1. RJChicago

        I would say one of the things that makes this idea worth considering is that I don’t think that management would have an interest in doing the cash-out/go dark transaction they just executed if they didn’t believe there was significant value here. If they just wanted to draw salaries for as long as possible – I would think the transaction would impede their ability to do that unless there is significantly more value in the company that is left than the cash they gave up for those shares.

      2. Platitudes

        @fishwithwings and @terence are you two aware of the complaints made by activists in this company?

        1. Terence

          RJChicago: Why would the cash-out impede management from drawing salaries forever (if this is the plan)?
          Platitudes: No, what are the complaints?
          Thanks! Obviously, I are learning from you guys.

  25. RJChicago

    Terence – my earlier statement may not be accurate if they are activists involved. Solidifying your group’s voting control could eliminate the possibility of an activist taking over and getting rid of you or otherwise cutting your salary. I did not know there were activists involved so that is a possibility.

    But absent that possibility – if what you want is to draw as much payment as you can out of the company to yourself – then generally paying $7.2 million for shares of the company generally impedes your ability to do that. That is $7.2 million less that you can pay out. What you have instead for that $7.2 million is shares in the company. That transaction only enhances you as a remaining shareholder/employee if those shares turn out to be more valuable then what you gave up for them.

    1. Writser

      What are activists going to do? You guys do know that there’s a dual class share structure in place?

  26. Platitudes

    Terence, i believe after a long hold, the activists are out of the stock. But a review of their 13D filings gives you some idea of the poor governance history behind WSTL. Worth a read.

  27. RJChicago

    Has anyone received their cash for their Westell shares yet? Kind of surprised it is taking this long.

    1. Terence

      “.. surprised .. taking this long”? PKD/PKDC took “only” 5 months (3-19-20 effect to first half of August payment)! Seriously, PKDC is unusual, but just pointing out these cash-outs can be unpredictable.

      1. RJChicago

        Oh my goodness I had no idea. I have done lots of tenders and am used to the 1-2 week timeframe and since the cash out process in their security filings for this seemed like a similar process – I had assumed (perhaps naively) that this would operate under a similar timeline.

        1. Terence

          RJ, having said that it can be unpredictable, I do think cash will come at most in a month, maybe just a week more.

  28. R

    I called Fidelity yesterday. They said they expect WSTL to be processed either today (10/13) or tomorrow (10/14).

    1. bigdaddy85

      My TD Ameritrade funds came through this afternoon. Nothing yet for my other brokerage accounts.

  29. jwestern

    Scotia iTrade paid. But I got absolutely raped with a 15% withholding tax on the entire payout of $1.48, rather than the difference between my $1.05 cost and the $1.48 payout.

  30. R

    Does anyone participate in these deals in their kids UTMA account(s) in addition to your own individual account? Anyone have issues with the UTMA account being tied to your SSN that prevented you from participating in both accounts? I have participated in both my and my wife’s individual accounts without any problems but have not tried participating in my kids accounts as well on the same deal.

    Also I got paid for WSTL at Fidelity after market close today.

  31. Slow

    It appears that Westell no longer has a stock symbol or ticker, at least that I can see. It would seem any trades would have to be done privately. Am I misunderstanding the situation? Any thoughts much appreciated.

    1. Wu

      They have completed the going private transaction, and the <1000 shareholders got paid.

  32. Terence

    I don’t see it trading also. Per press release dated 9-29 (see 9-30 posts above), it may be traded in the pink sheets after delisting, but only if market makers are interested. Maybe none are, or maybe later. Else, holders are stuck forever until any corporate event, except for private sales as you mentioned.

  33. Terence

    WSTL went “dark” (no sec filings), not went “private” (no public shareholders), per my understanding. Most stock gone dark, are still trading OTC, like PKDC, but less liquid. I’m a little surprised WSTL is not trading at all (if true).

  34. Slow

    Thanks MCG & Terence for your comments. I’ll be curious how it trades going forward.

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