Current Price: $0.99
Offer Price: $1.25
Expiration Date: 16th of November 2020
This idea was hinted by Ryan.
Atlas Technical Consultants intends to eliminate all of its outstanding warrants (23.75m) and on the 19th of October has made an offer to exchange them into 0.185 ATCX shares. The expiration date is set for the 16th of November. At current prices this offers 25% upside, however, there is no borrow on IB at the moment (yesterday IB had 1.5k shortable shares at 26%). The offer itself is likely to close as 53% of warrant holders support the transaction. The company needs to simplify its capital structure to ease access to capital markets.
However, playing this trade unhedged seems very risky:
- The exchange will almost double the count of Class A shares, which is likely to result in considerable selling pressure afterwards.
- 37% of total warrants are held by Bluecrest Capital Management, which was probably one of the initial SPAC investors and chose redemption instead of the business combination. I would expect Bluecrest to be an eager seller of newly received common shares.
- Due to a ‘failed’ SPAC transaction (i.e. 99% of SPAC shareholders chose to redemption), the company is now over-levered and likely experiencing a “cash crunch”. Therefore, substantial dilution going forwards seems imminent.
- Moreover, most of the class A shares are held by the sponsor and certain pre-SPAC investors (77% combined), so the free-float is very small (less than $8m) and there’s a risk of price manipulation as well.
The offer is not conditioned on the receipt of a minimum number of tendered warrants. In order to secure the exchange of all of the outstanding warrants, the company is also soliciting consents to approve the warrant amendment. It would allow to squeeze out the remaining warrants at 0.1665 ratio (10% discount to the current offer). It seems that this amendment will pass as holders of 53.1% warrants (Bluecrest and the sponsor) already gave their consent.
ATCX is a result of a failed SPAC merger that closed in Feb’20. Boxwood (the SPAC) conducted the IPO in Nov’2018 raising $200m with the intention to find a target in tech or industrial services sector. In Aug’19 Boxwood announced a merger with Atlas Technical Consultants – a provider of professional testing, inspection engineering, and consulting services. Vote on the transaction got adjourned several times until finally, it appeared that nearly all SPAC investors have redeemed their shares.
Pretty much the only holders of common shares remained to be the sponsor (Boxwood Sponsor) and GSO – Blackrock entity that agreed to provide financing to the company to get the deal done. At the moment ATCX has 29.7m common shares – 5.8m class A and 23.9 Class B. All of the Class B shares are controlled by the seller (BCP – the fund which owned Atlas) and its affiliates. 77% of Class A shares are owned by the sponsor and GSO.
This situation resulted in the company having to acquire a significantly larger amount of debt than initially planned, while the seller pretty much received the ownership of the company.
As of Q2, the company $285m of debt + $145.8m of preferred shares (redeemable after two years for 103% liquidation value). During 2019 company generated EBITDA of c. $15m/quarter, while at the moment just the interest expenses + pref stock dividends amount to $11m/quarter. Revenues were impacted by Covid and declined during Q2. Not yet clear what was the effect on Q3.
The company might need to carry out another equity raise shortly (probably the reason for warrant elimination), especially with its strong focus on growth through acquisitions. ATCX already completed 2 acquisitions this year – Alta Vista and Long Engineering, while the combination with WesTest is still outstanding. Comments from CEO indicate that the company intends to continue this streak going forwards:
We have now quickly pivoted back to our more balanced and long-term approach. And this includes investing in our growth through acquisitions, enhancing our balance sheet strength and providing maximum financial flexibility for the firm to optimize shareholder returns.
ATCX has already tried to raise $43m of equity at $9.20/share (equal to market prices at the time) in August to repay debt and for general corporate purposes. However, after the announcement (11th Aug), the ATCX share price dropped to $7.67/share, and a few days later the company canceled the raise.