Quick Pitch: Startek (SRT)

Startek (SRT) – Potential Buyout – 20% Upside

Startek’s (call center operator) controlling shareholder CSP is making the third attempt to take the company private. The current non-binding offer comes at $3.8/share. It is not contingent on financing and will need approval from SRT’s special committee as well as minority shareholders. SRT’s management hasn’t made any response yet.

My previous attempts to take advantage of this potential privatization (during the earlier CSP offers) have been unsuccessful and I must admit that I still lack a clear understanding of the dynamics between CSP and Startek’s management, as well as the prospects of Startek’s business. However, there’s a sizeable 20% spread on the table and this new situation involves some interesting nuances that might suggest that this time will be different. The downside to pre-announcement levels is at 10%.

First, a very quick recap. CSP is a PE firm, which holds a 56% stake in SRT and controls 4/7 board seats. Last year, CSP tried to take Startek private twice. The initial offer came at $5.4/share. After 6 months of silence from the parties, it turned out that the buyer ran into some financing issues. Eventually, the bid was lowered to $4.65/share, this time without any financing conditions and with funds to be provided by CSP’s managed affiliates. Importantly, while the second bid presented a significant discount to the original offer, the price gap simply aligned with the overall decline in share prices of industry peers. Despite the supposedly large influence of CSP on Startek’s management, the special committee of SRT rejected the bid stating that it undervalued the company.

Given the last year’s failed takeover saga, the market is understandably cautious regarding the prospects of the current buyout. However, there are a number of positive points worth considering:

• The whole industry outlook has experienced a significant downturn this year, providing a stronger incentive for SRT’s board to consider privatization. Since CSP’s last offer in Aug’22, shares prices across the sector crashed with TIXT down -67%, TTEC -57%, CNDT -26%. Another peer ATTO is down -98% and is now very close to bankruptcy (mostly due to extreme leverage). The industry is currently grappling with a double challenge – on one hand, there are inflationary and macro pressures to contend with, and on the other hand, the rapid rise of AI is presenting new major headwinds. CSP stated that to cope with these new challenges SRT will need to raise substantial amounts of debt and equity to fund investments into IT, operational reorganization, and strategic acquisitions. The buyer argued that financing needed for these endeavors may prove challenging to obtain for such a relatively small public company.
• Valuations across the board have plummeted accordingly. The CSP’s new buyout offer compares much better to peer valuations vs the previous two bids. The bid for SRT comes at a slightly higher TTM adj. EBITDA multiple of 5.6x vs the previous two offers at c. 5x. Meanwhile, in this timeframe, peer valuations (which are significantly larger and better run operators) have crashed from 6x-14x to 4.1x-7.2x EBITDA.
• The primary reason that was cited in the buyout rejection press release last year was that the special committee believed CSP’s offer to be inferior to the standalone growth and value prospects of SRT based on a certain financial forecast extending up to the year 2026. This forecast was prepared at the request of the special committee. At the time, the annual revenue growth rate for SRT was expected to exceed +5%. The actual performance of SRT has been nowhere close to that level so far – Q3’22 revenues declined by -6%, Q4’22 by -18%, and Q1’23 by -9%. This poor performance, coupled with the industry downturn and the rise of AI likely makes the previous financial forecast no longer relevant. This should make it much more challenging for the special committee to reject the current buyout offer.
• Despite the strange dynamics that we saw between CSP and SRT’s management so far, CSP kind of does look like a serious buyer with firm intentions. The PE firm has recently raised $700m for its new fund. And this same fund is now acquiring SRT, which, as I understand, will be the inaugural investment for the fund. This should provide extra incentive for CSP not to screw up and safeguard its reputation. CSP has experienced significant growth during this year and has almost tripled in size – from $500m AUM to $1.4bn.
• A few more aspects indicate that the full acquisition of SRT has always remained in the game plan for CSP, even after the rejection last year. Recently, SRT has reorganized its business by divesting two major assets for around $100m of net proceeds (vs $123m market cap right now). The proceeds were used to significantly clean up SRT’s balance sheet. During 2023, SRT has reduced its debt by 60% and now has the strongest balance sheet in 5 years. One of the divested assets was acquired by CSP itself (for a $46m consideration), further confirming CSP’s interest in the sector.

A few more background details on this setup:

• Aside from the pending response from the special committee, another potential risk/hurdle here will be getting the minority shareholder approval. Another major shareholder MCI made a tender offer for SRT last year and acquired a 7.4% stake at $4.2/share. The current $3.6/share offer is below MCI’s cost basis, which adds a chance that the shareholder might oppose. MCI is a private peer of SRT and also operates call centers.
• SRT management owns 4% and two more private investors A. Emmet Stephenson and Steven D. Lebowitz own around 7% each.
• CSP, or Capital Square Partners, is a Singapore-based PE firm focused on telecommunications and tech. CSP says that co-investors of its funds include Hermes GPE, Partners Group, AlpInvest Partners, Aberdeen Private Equity, etc. CSP does have experience in BPO/call service industry and has previously acquired MINACS ($260m, 2014) and a 55% stake in Indecomm ($90m, 2016).
• The recent divestment, which was acquired by CSP (subsidiary was called CSS Corp, now rebranded as Movate), was likely one of the most attractive parts of SRT and has previously received recognition from Morgan Stanley and Onex Falcon. The financials for CSS are not available, so it’s not clear if CSP screwed SRT minorities with this purchase or not. Nevertheless, the transaction was carried out at nearly at 2x higher prices than the $25m that SRT paid for CSS in Feb’21.
• The buyout of SRT minority shareholders will cost the PE firm $67m.