Zagg (ZAGG) – Merger Arbitrage & CVR – 7% Upside

Current Price: $4.17

Offer Price: $4.20 + $0.25 in CVR

Upside: 7%

Expected Closing: Q1 2021



This situation offers an opportunity to collect a seemingly ‘free’ option of potentially receiving 7% payout sometime over the next 2 years.

Mobile accessories manufacturer Zagg is subject to an acquisition by a consortium led by Evercel (small investment shop). Consideration stands at $4.20/share + a CVR of $0.25/share (total transaction value around $200m in total including debt). CVR is conditioned on Zagg’s PPP loan forgiveness until Dec’22. Zagg’s shareholder approval will be required. The merger is expected to close in Q1 2021. So the whole idea here is to buy Zagg, get your investment +1% back in less than 3 months, and then have an option to get paid another 6% sometime in the future.

In short, there are multiple arguments that suggest the merger should close successfully and there’s a very decent chance that CVR will pay out.

Moreover, what I also like here is that in case the merger breaks, the downside seems very limited/non-existent. The pre-announcement price is ($4/share), while Q4 results are expected to be positive (holidays and new iPhone release). The acquisition price stands at 4.4x 2019 adj. EBITDA (4.1x pre-COVID 2020 guidance), which seems low for a business, which is poised to generate considerable cash flows after recovery from COVID.

This transaction is the biggest Evercel has ever done and the target is larger than the buyer (on market cap basis). However, the merger is not actually contingent on financing and Evercel has already received a $160m financing commitment from two credible parties – Lynx and Keybank. Lynx was introduced (detailed in the proxy) to Evercel by the representative of Arex (activist and largest shareholder at the time), while Keybank is a subsidiary of KeyCorp ($17bn market cap bank).

Overall, I don’t see any prominent risks for this merger not to close.


The merger is likely to close

  • The buyer seems credible and competent. Evercel is a small listed investing shop with a very concentrated portfolio and investment style of “finding unique situations overlooked by the broader private equity industry, possibly due to some undesired complexity”. In the last several years, they’ve made some very successful investments, i.e. SharpSpring (2x net return in 1.5 years) and Printronix. The company acquired troubled Printronix in 2013 for around $18m, optimized the business and its cost structure, paid off the debt, and in 3 years returned 100% of the investment from one of the segment’s sale. Currently, Evercel still retains an 80% stake, while Printronix has generated $58m in revenue and $14.4m in adj. EBITDA in 2019. So if they sold the business now, the actual return on investment should be generous. At the end of 2019, Evercel was highlighting readiness to make further investments/acquisitions, while also noting that they’ve been slow on that so far as due diligence efforts proved the potential targets to be too expensive or not worthy of acquiring.

Evercel now has a very strong balance sheet to pursue new opportunities, which is our primary focus this upcoming year. […] Although we are disappointed that we have not closed on any large new investments, we have been disciplined about walking away from opportunities we deemed to be too expensive or that subsequent due diligence proved not worthy of acquiring.

  • The due diligence with Zagg has already been completed. I found no cases of EVRC walking away from a definitive agreement in the past. It seems that Zagg is their first acquisition in a few years (and quite a large one compared to their other acquisitions), so I would expect them to stay committed to close the transaction.
  • Target company’s business is recovering from the pandemic and the transaction looks somewhat opportunistic. Q3 results were better than expected, while Q4 should be even stronger given the holiday season and an additional catalyst of iPhone 12 release. Even if Q4/annual results are released until the transaction is closed, Zagg’s performance should not get in the way of the transaction closing.
  • EVRC is acquiring Zagg cheaply. Assuming the business recovers in 2021, the 4.4x 2019 adj. EBITDA (4.1x pre-COVID 2020 guidance) acquisition multiple looks like a bargain. Following the announcement of the transaction, EVRC price jumped 30% suggesting shareholders recognize the attractiveness of merger and price.
  • One of the risks was opposition from two activist investors – Arex Capital Management (owned 8%) and Roumell Asset Management (4%). However, neither of them have voiced dissatisfaction and seem to be fine with the merger. Both activists were actively pushing the company for a sale in 2020 and each of them put one nominee on Zagg’s board. Arex used to be the largest shareholder with 8% stake, which was acquired at around $6+/share. 3 days after the merger announcement, Arex sold its stake at a significant loss. RAM acquired its stake in early 2020 at around $3.35/share and after the merger announcement has remained silent so far. Aside from that, there was some noise from Zagg shareholders in the social media and various retail investor forums arguing that the price is too low, however, given the stance of the activists, it’s fair to assume that the vote will go through.



In April’20 Zagg received $9.4m loan from the Paycheck Protection Program (PPP) to tackle the costs and impact of the pandemic. If the company meets certain requirements and passes the audit of the U.S. Small Business Administration, the loan will be forgiven and under the merger agreement, loan amount will be distributed to CVR holders.

The requirements for loan forgiveness are:

  • Only the expenses incurred 24 weeks after receiving the loan are eligible for forgiveness.
  • At least 60% of the loan was used for payroll costs.
  • Full-time employee equivalent headcount was maintained. If 8 or 24 weeks after receiving the loan the number of employees was not lower than in the period either from (Feb’19 to June’19) or (Jan’20 to end of Feb’20), then the requirement was successfully met.
  • Wages were not cut by more than 25%.
  • Rent/utility/mortgage contracts were in place before the 15th of Feb’20.

There are more nuances to the requirements, like the calculations of payroll, exemptions, etc. You can find more info here, here, and here.

The fact that they’ve agreed to include CVR into the consideration clearly indicates that Zagg beliefs it satisfies all of the requirements. Q3 report also states that the company is compliant so far, however, is cautious regarding potential regulation changes:

We made good faith certifications of our necessity for the PPP Loan, and believe that we are in full compliance with the terms and conditions outlined in the CARES Act. […] Due to the incomplete and changing regulations around the PPP, new pronouncements may also change our current compliance status under the law, and any potential allowable forgiveness of the outstanding PPP Loan amount

Two more points worth noting:

  • In contrast to pharma merger CVRs, the risk of the buyer messing with the process to derail the payment seems significantly lower. The period which will be audited has already ended (in 2020) and the proxy states that the required filings for loan forgiveness will be made by the 31st of Jan’21 (the merger is expected to close at a later date).
  • $9.4m is a considerable sum for Zagg and if it’s not forgiven the company might be even forced to take on additional debt. Considering that, it’s fair to assume that the management did its best to comply with the requirements in the 24 week reference period and there’s a high likelihood that eventually the loan will be forgiven.


Some Zagg  Background

Zagg manufactures smartphone screen protection and various other mobile phone/tablet accessories. Despite the increasing competition, the company has retained a leading U.S. market share across its key segments (presentation):

zagg share

Since 2019 the company has faced several headwinds (slowing new phone sales, competition, etc.), however, the largest impact came from the increased China import tariffs, which considerably impacted Zagg’s margins and earnings. As a result, the company had to adjust its adj. EBITDA guidance two times in 2019. This caused 3% YoY fall in revenues in 2019, while adj. EBITDA of the year fell 41% to $45m from $76m in 2018. This resulted in a failed strategic review and significant share price deterioration from $12/share to $6-$8/share. The company has started various cost-cutting initiatives and began transferring its manufacturing operations outside China. The start of 2020 was solid (15% revenue increase in Q1’20 YoY), however, the company was hit with COVID outbreak and closures of wholesale partners stores (online segment is just 10%-12% of revenues). This resulted in significant sales and profitability drop. Q2 revenues fell 28% YoY and adj. EBITDA was zero. The business started recovering by the end of Q2 and Q3 results came in relatively strong, beating analysts’ and management expectations. Revenue was still -20% YoY, however, EBITDA returned to growth levels and was $15m vs $21m YoY. Due to conservative inventory approach, Zagg had to take increased expedited freight costs ($2-$3m estimated by the management) to meet the higher than expected demand. In the Q3 call (November), management stated that the business seems to be normalizing and that it sees “some strong signs that we’re kind of getting back to a more normal Q4 experience.”.

So overall, the recent two years were very troublesome for Zagg. However, there are multiple catalysts ahead now, including the recovery from COVID in 2021 (elimination of extra freight costs, which persisted throughout 2020) and the eventual transfer of manufacturing away from China (elimination of tariff burden). The company has already moved its screen protection and wireless power products to Vietnam. The company holds a leading market share in the U.S. so it poised to experience the quickest benefits of the recovery.

Major shareholders:

  • Dimensional Fund Advisors – 5.8%
  • RBC Global Asset Management – 5.2%
  • Directors – 3.5%.


One more thing worth mentioning

Aside from Evercel, the company had several other bidders in 2020 and the offers were similarly priced. However, none of the other parties indicated a willingness to proceed after the DD. The most recent proposal ($4.90/share) actually came on the 24th of Dec, after the agreement with Evercel was already signed. However, after a few days of DD, the bidder walked away.


19 thoughts on “Zagg (ZAGG) – Merger Arbitrage & CVR – 7% Upside”

  1. one problem is EVRC is smaller than ZAGG, so financing has to be good!!!

  2. I like this idea, but the attractiveness depends a bit on CVR payout timeline. What is your estimate here? I haven’t done any research into this, are there many PPP loans forgiven already?

  3. 2 things

    1) deal has been approved and is expected to close early next week
    2) cvr payout may be up to $0.30 apparently

    “Based on management’s estimate of the amount of the PPP Loan expected to be forgiven, each PPP Loan Forgiveness Right could represent the right to receive an additional contingent amount of up to $0.30 per share, but we make no assurances as to what the actual amount might be or when it might be paid. The additional amount due to holders of PPP Loan Forgiveness Rights is contingent on a number of factors and could be zero. The PPP Loan Forgiveness Rights generally may not be transferred and, to the extent the conditions to payment of the PPP Loan Forgiveness Rights have not been satisfied, will expire on December 31, 2022.“

  4. Zagg acquisition was completed on the 22nd of February. So far the idea has returned 1% and up to $0.25/share (7% upside) upside from the CVR might be paid out, dependent on the PPP loan forgiveness. The exact timeline of PPP loan audit and further review is unknown, however, the expiration date (Dec’22) provides sufficient time. The initial investment has been recovered with 1% gain. Arbitrageurs received CVR for free and might expect another $0.25/share of distributions by the end of 2022.

  5. No news on the CVR payout here yet. Not aware of any color from the acquirer either, but would be interested if anyone has any updates. In my view, the amount of time that’s passed without forgiveness suggests payout is less likely than previously expected, although there are still ~13 months until expiry and there has been no indication the forgiveness application has been denied, so it seems it is likely still in process with plenty of runway from a timeline perspective. Of course, this isn’t particularly useful speculation as the CVR is untradeable.

  6. FWIW, several sites list the loan as ‘forgiven’ per July, 8. (note: CVR payout of $0.25 depends on loan forgiveness).

    Though one other site indicates that it is either paid in full or forgiven:

    Not sure which interpretation is correct but I think this is looking good.

  7. The loan has been forgiven, but not that the audit has been complete or will be in time?

    Any thoughts on this:
    EVRC Annual Report
    The SBA, at their discretion, may undertake a review of a loan of any size during the six-year period following forgiveness of the loan. The audit will include the loan forgiveness application, as well as whether ZAGG met eligibility requirements of the program and received the proper loan amount. The timing and outcome of any SBA review and audit is not known at this time. If the PPP Loan passes an SBA audit by December 31, 2022, the funds will be remitted to the former shareholders of ZAGG.

    Shortly after the passage of the CARES Act, the SBA announced that it would be auditing every borrower with a PPP loan in excess of $2 million. What is meant by ‘audit’ remains to be seen. To assist with its reviews, the SBA implemented a Loan Necessity Questionnaire known as Form 3509 and Form 3510 (“Questionnaire”) “… to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that borrowers, who together with their affiliates, received PPP loans totaling $2 million or greater, made on their PPP Borrower Application (SBA Form 2483 or Lender’s equivalent form) that economic uncertainty made the loan request necessary.” Recently, the SBA withdrew the Questionnaire and many borrowers have heard from the SBA that their loan is forgiven.

    However, that does not mean that PPP borrowers (including those who have obtained forgiveness) are out of the woods and no longer need to concern themselves with substantiating that they made loan certifications in good faith. The SBA requires that borrowers maintain documents supporting their applications for six years and the SBA has six years to audit borrowers from the date forgiveness is granted. In contrast, the SBA established a 90-day timeframe within which they must make a determination concerning whether a borrower’s loan may be forgiven. It is unclear whether the SBA considers its forgiveness review to be its ‘audit’ or whether additional procedures will be performed. Many experts believe the forgiveness process to be an administrative assessment whereas the audits may focus on whether or not the borrowers had sufficient basis to make the necessity certification in good faith.

    • Thanks for this. The concerning aspect to me is that there may be enough grey area with respect to the prior guidance of audits, as referenced in the deal docs, and as a result of policy changes and/or long potential audit timelines, to argue the CVR is not owed without further regulatory clarity.

  8. Thanks all, hopefully this fulfills or will soon fulfill the CVR requirements.

    I’d also remind folks – not to get everyone’s hopes up – that the payout could be as high as $0.30:

    “ On January 20, 2021 we applied for forgiveness of the entire $9.4 million, which if forgiven could result in additional consideration of up to $0.30 per share, based on updated information from the U.S. Small Business Administration (“SBA”), but we make no assurance…”

  9. So, the deadline of end of 2022 has passed. Are there any news/updates on this?

  10. Broker removed worthless CVR from account 3/7/23
    Screwed by govt bureaucracy.

    • Or we were screwed by a crafty buyer because we didn’t read the fine print good enough .. Always easy to blame something or someone out of our control, but the phrasing in the CVR agreement was very specific and narrow.

      • Tbh I’m done with these CVRs. The main issue is that investor’s incentives here are opposite to those of the company liable for payment. Why do we expect any positive outcome then?

      • Evg, you are correct to point out that in some cases incentives between CVR holders and the buyer are not aligned. And that is definitely a factor to consider when investing in any CVR. As is any fine print in CVR agreements. However, when CVR payout is driven by FDA approval or certain sale milestones, the incentives at least theoretically are well aligned, except for certain edge cases where delaying the approval by a month or two makes a difference.

      • Judge each case on it’s own. I agree that usually CVR’s are skewed towards the buyer. However, each individual case depends on the price, the incentives of both parties,the fine print, insider ownership, etc.

        You don’t say ‘I’m done with stocks’ either if a few if your picks don’t work out.

  11. @dt
    Even sales milestones and FDA approvals can be manipulated: sales can be recognized somehow in another year, FDA application sent a few months later.

    Also while investing in these CVR the size of investor matters. There are very often settlements with big CVR holders. However, most of investors on this website probably don’t have enough size to participate in this. As a result this further decreases the expected results for small investors potentially making them un-investable.

    I wouldn’t even be surprised that ZAGG acquirers would have to pay smth, but only to big holders willing to go to court.


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