Uplisting: 33%-100%+ Upside
One of SSI members shared this quirky and unusual setup from SRK Capital’s H2 letter:
VASO reported relatively disappointing earnings for Q3 as revenue decreased 2% year-over-year and net income was impacted as operating expenses increased due to investment in new programs and the impact of inflation on wages. In December, Vaso announced that the company is uplisting from the OTCQX market to the Nasdaq Stock Market via merger with a SPAC. The transaction is expected to be completed by the end of this quarter and values Vaso at a pro forma equity value of approximately $176 million. From the S-4 that was filed by Achari Ventures (AVHI) the pro forma equity value of $176 million is equal to a current value of $0.93/share for VASO. This is a significant discount to the current trading price of $0.28/share. This significant discount exists for several reasons, but mostly because $176M is an arbitrary number that doesn’t hold much meaning, it will be up to the market to determine the fair value for the Nasdaq listed VASO. This is a rather odd transaction as SPACs don’t typically merge with already publicly traded companies, but I believe a Nasdaq listed Vaso with improved investor relations and governance is worth a premium to its current status. We will receive new shares of the Nasdaq listed Vaso that I believe will initially trade somewhere around $9.31 and will have to decline by approximately 70% for us to lose money from today’s market value of VASO. Also, due to a put option provision that the SPAC founders have, Vaso is incentivized to keep the newly traded stock above $8/share for six months following the initial twelve months from the closing of the transaction or they will be required to repurchase shares from the SPAC founders.
So the thesis boils down to this: VASO is expected to trade higher after the stock uplists to NASDAQ via a SPAC merger with AVHI. I do not think the above-noted $9.31/share initial price target carries any weight – AVHI shares currently trade at their trust value and any price support will be gone once the redemption period passes. However, the uplisting itself might still catalyze re-rating of VASO. The transaction is set to close in Q1.
At a quick glance, VASO seems extremely cheap, trading at just 3.7x TTM operating income and 3.2x TTM adj. EBITDA. Half of the market cap is in net cash. Management owns 45% of the stock. Furthermore, VASO’s core business – value-add re-seller of healthcare capital equipment for GE HealthCare – is stable, profitable and has been growing at mid-high single digits over the recent years. Rerating to 8-13x operating income multiples would put the new VASO price at $0.4-$0.6/share, implying a potential upside of 33%-100%.
AVHI is a failed SPAC with only $6m left in its trust account as 95% of public shareholders had already redeemed their shares, even before this merger announcement. It is quite likely that the majority of remaining shareholders will also opt for redemption. Effectively, AVHI’s sole asset will be its NASDAQ listing, which VASO will receive in exchange for about 4% share price dilution + a further $6.6m coverage of various expenses and AVHI liabilities.
VASO shares will be exchanged into AVHI at a ratio of around 0.1x. This means that the new post-merger breakeven price will be $3/share. Thus post-business combination SPAC shares would need to fall over 70% before we start losing money. That’s approximately where the majority of SPACs end up trading, but there is a good chance that, at least initially, post-merger price will settle somewhere in the middle between the SPAC trust value ($10.98) and the breakeven price ($3.00).
Here is how Pro-forma VASO would look like at AVHI’s $10/share price and assuming 100% SPAC redemptions.
Although the thesis sounds pretty straightforward up to here, there are several important aspects to consider.
Why is VASO so cheap?
Partially the cheapness of VASO can be explained by its OTC-listing, tiny capitalization and very limited efforts put into the investor relations communication. There are no conf. calls or presentations. Instead, VASO only puts out dry 10Qs and 10Ks, while earnings press releases (also not very detailed) are not even filed with the SEC but posted on the company’s investor relations page. All of these aspects would be improved once the company uplists to NASDAQ, paving the way for potential re-rating. However, there are a couple more concerns at play, which will not be resolved with this transaction, specifically, customer concentration and questionable management’s capital allocation.
VASO operates 3 business segments:
- Professional Sales Service – selling heathcare equipment of GE Healthcare to local hospitals and diagnostic centers. GEHC basically outsources VASO to cover the middle market, while GEHC covers the bigger deals itself. VASO employs 65 sales reps and earns a commission from GEHC for each sale. VASO has been an exclusive partner since 2010 and the agreement has been extended multiple times, with the latest being through 2026. The segment generates 45% of revenues and is the only segment that generates operating profit.
- IT – selling routers, other network equipment, and also diagnostic radiology/imaging software. The segment generates 52% of total revenues and is loss making.
- Equipment – manufacturing and selling of cardiovascular diagnostic and therapeutic applications. This is a very small segment responsible for only around 4% of revenues and is also unprofitable.
VASO is completely dependent on its relationship with GEHC – it is the only segment that is generating profit and growing. The remaining two segments have been unprofitable forever and it’s not exactly clear why VASO continues to maintain them. Perhaps it’s related to the “VAR” or value-added reseller business model, where selling GEHC equipment facilitates sales of additional services/products. The current agreement with GEHC is set to expire at the end of 2026 and may be terminated early by GEHC if VASO fails to meet specific sales goals or to maintain a minimum number of sales reps. While the relationship and sales have been positive thus far, a sudden change of heart by GEHC, such as not renewing exclusivity or terminating the partnership altogether, could have severe consequences for VASO.
The visibility into operations is extremely limited. Their GEHC segment has inflected since 2022 and it’s very difficult to say whether that has been just a temporary boost post-COVID, etc., or whether this is a normalized new level for the business. Annual results are likely to be released in March (as was the case over the last two years). So the merger might close before then.
The other concern is capital allocation and management’s competence. Despite large stock ownership and VASO cheapness, management hasn’t really done much for shareholders. The company has never engaged in share buybacks or paid dividends. There have been no insider purchases over the last 5 years. Instead, the company keeps hoarding cash without a clear plan for its utilization. The last time VASO saved up a pile of cash, they did a large $18m acquisition (back in 2015) that proved to be a complete failure – the IT segment has been consistently unprofitable and revenues have been on a steady decline since then.
Management seems to be overpaying for this uplisting
From the proxy it seems like the total cost of the transaction for VASO will be around $6.6m. On top of that, VASO has agreed to grant a put option to the SPAC sponsor for 750k of founder shares. The sponsor will be able to put these shares to VASO for $8 each. The exercise period will start 12 months after the merger closes. This might cost VASO another $6m.
Assuming the put option gets exercised, the total uplisting cost will amount to $12.6m. This seems egregiously high, especially given that we’re not even talking about the main NASDAQ listing, but a lower tier “Nasdaq Global Markets”. From what I understand, the costs of uplisting to this market (including all fees, bankers, etc.) should be somewhere around $1m-$2m. Management seems to be overpaying by about $10m and I have no idea why would they choose this seemingly more expensive path – maybe there are peculiarities that I am not aware of, or maybe this is just a scheme to cash out the SPAC sponsor.
AVHI background and the de-SPAC cap structure
AVHI SPAC listed in October 2021 intending to look for a target in the cannabis space. The company raised $100m. 1 year later, when the whole SPAC space got turned upside down, 90% of shareholders redeemed their shares and later another 5% asked for their money back. Out of the initial 10m, only 550k of common shares remain in the hands of public shareholders. On top of that, there are about 10m public warrants outstanding that would buy you 3/4 of a common share at $11.5. The sponsor (some kind of cannabis VC firm with no track record) initially got itself 2.5m founder shares and 7.13m private placement warrants. However, together with this merger, the sponsor agreed to forfeit a majority of those and retained only 750k of founder shares (yet those can be put at $8/share) and 750k private placement warrants. Warrant exercise prices remained unchanged.
Hi! sorry for the (maybe) dumb question, but what would be the play here? Long VASO and selling as soon as the merger is completed? long VASO and hedging selling some AVHI (10:1 relation) waiting until the merger completes?
It’s long VASO without hedging. Shorting AVHI will not work out as shares will most likely get redeemed at $10.98 and there is no liquidity anyways.
Whether to sell right after the merger or wait a couple of quarters depends on the price the stock will trade after the business combination and any further communication we get from management. So hard to tell at this point.
The author points out that most SPACs lose 70% of their value after completing their merger. However, typically in SPACs, the target company shareholders are restricted from selling their shares for several months. In this case, there does not seem to be any restriction on VASO shareholders selling their shares immediately. I think this will add significantly to the pressure on the stock.
I really think a more realistic way of looking at this opportunity is to try and decide if you believe that a NASDAQ listing is worth 4% dilution.
Could you clarify where do you read that there will be no lock-ups?
Usually in SPACs mergers both the SPAC and the target shareholders have a portion of their shares locked up (40-70% or similar). VASO merger agreement doesn’t give much details, but it seems that as usual, shareholders of the SPAC and of the target company will have a portion of their shares locked-up following the merger. Maybe the proxy will have more details on this.
“WHEREAS, simultaneously with the Closing, the Sponsor, the SPAC, the Company and certain other parties thereto shall enter into a Sponsor Letter Agreement substantially in the form attached hereto as Exhibit A (the “Sponsor Letter Agreement”), pursuant to which (among other things), the Sponsor shall (a) agree to be bound by certain restrictions on transfer with respect to its SPAC Shares, (b) agree to amend and/or terminate certain “lock-up” and transfer restrictions included in that certain letter agreement, dated as of October 14, 2021, and (c) agree to be bound by certain lock-up provisions during the lock-up periods described therein with respect to its SPAC Shares;”
“WHEREAS, simultaneously with the Closing, certain security holders of the Company and the SPAC shall enter into a Lockup Agreement substantially in the form attached hereto as Exhibit F (the “Lockup Agreement”), pursuant to which (among other things), such security holders shall be bound by certain lock-up provisions during the lock-up periods described therein;”
Do we now have more info on the lock-up arrangement after merger?
Assuming that almost all of the target shareholders will redeem, if there’s very strict lock-up for VASO shareholders, there may be very scarce float (and shortable shares) in the market for very long time.
Historically when a SPAC merges, how confident can we be it closes by end of Q1 (less than a month now). Asking in light of recent VASO pullback as well – doesn’t look like this is on news, rather low liquidity.
According to Spacinsider:
“The average time from announcement to closing for de-SPAC transactions in Q3 2023 was 3.2 months, down slightly from 3.4 months in Q2 2023. This continues the trend of shorter timelines for closing de-SPAC transactions compared to 2021 and early 2022 when the average time to close was closer to 5 months.”
VASO merger was announced in December and is expected to conclude by the end of Q1, which aligns with the average statistics. Since there are no updates from management regarding deadline extensions, I think it’s fair to assume their original guidance remains valid.
Any reason to start worrying without a despac by end of Q1?
It seems that the timeline has been pushed to Q2 2024. Other than that, there seem to be no material changes to the thesis.
In early March, management released a proxy statement indicating that the deal is anticipated to conclude in the first half of 2024, pending shareholder approval. As of now, the specific date for the shareholder vote meeting has not been disclosed, although it appears to be a mere formality given that 44% of shares are already in favor. In the most recent earnings release, which occurred yesterday, management reiterated that the deal is projected to be finalized in the second quarter of 2024.
https://www.bamsec.com/filing/121390024020480?cik=839087
https://www.bamsec.com/filing/121390024028734?cik=839087
Any comments on this idea? Thanks.
https://finance.yahoo.com/news/vaso-corporation-announces-financial-results-200500799.html
“The Boards of Directors of Vaso and Achari have each approved the Business Combination, the consummation of which is subject to various customary closing conditions, including the filing and effectiveness of a Registration Statement on Form S-4 (as amended or supplemented, the “Registration Statement”) by Achari with the United States Securities and Exchange Commission (“SEC”), the filing of a proxy statement by Vaso with the SEC and clearance by the SEC, and the approval of a majority of shareholders of both Achari and Vaso of the proposed business combination (Vaso shareholders representing approximately 44% of Vaso’s outstanding shares have entered into support agreements committing them to vote in favor of the Business Combination). The Business Combination is expected to close in the second quarter of 2024.”
Hey guys anyone have view on ER? Didnt see any mention of AVHI in presser , but they have been filing updated S1s.
On page 6, management reiterated their expectation for the deal to be completed in Q2.
There appear to be no significant changes since my last comment on April 2nd. Shareholder approval is still pending, and while the vote seems more like a formality, it’s unclear why a shareholder meeting date hasn’t been announced yet; I couldn’t find any information on it.
https://www.bamsec.com/filing/121390024043559?cik=839087
End of Q2 is only two weeks away; are they still on track for the deSPAC?
I think the thesis (re-rating as a result of uplisting, improved IR and disclosure) will take very long time to play out, and thus not very suitable as a short-term special situation play. The deSPAC itself is not likely to be the catalyst event.
If the new stock trades significantly higher than $3/share immediately after deSPAC, maybe shorting it is a better idea.
I emailed the CFO and he said “3rd quarter” — didn’t add any more detail, that was the whole email.
LOL
Feels like the real play here is buy VASO, let the despac happen, GTFO, and then short.
Now at pre-deal levels, risk here seems……(non-existent dare i say)
Nasdaq panel just ruled that delisting was final. Does this effectively kill the deal? Whole point of this was to just uplist to Nasdaq.
The situation is pretty weird, but as far as I understand, VASO and AVHI haven’t given up just yet. According to the new AVHI proxy, the NASDAQ-listed shares haven’t been delisted, but are just suspended. And, it is still possible (although no idea how likely) that NASDAQ board of directors could revert the Panel’s decision. From the proxy:
“Pursuant to Nasdaq Rule 5825, the Listing Council’s decision may be called for review by the Board of Directors of Nasdaq (the “Nasdaq Board”) not later than the next Nasdaq Board meeting that is 15 calendar days or more following the date of the Listing Council’s decision. As a result, the Company expects that the Company’s securities will remain listed on Nasdaq until the occurrence of such meeting and the filing of a Form 25-NSE with the SEC by Nasdaq. The Company has not been notified when such Form 25-NSE will be filed, or otherwise informed by Nasdaq of when the delisting of its securities from Nasdaq is expected to occur.”
AVHI is now proposing to extend the SPAC merger period from July 19 to October 19. This should be approved easily since the sponsor owns 52% of the shares. It’s also a clear sign that they’re not canceling the deal just yet.
So, my guess is that AVHI and VASO want to show that they can get this deal done before the NASDAQ board rules, get the listing reinstated, and complete the merger.
The bigger question is, what’s taking them so long? Management’s communication has been truly terrible.
There’s also a part in the proxy that sort of hints that even if the NASDAQ shares get completely delisted, AVHI will just apply for a new NASDAQ listing. It doesn’t really make much sense as VASO wouldn’t even need this merger by that point (it could just apply for the listing by itself). But not sure how else to read this:
“If the Company’s securities are delisted, the Company intends to proceed with its efforts to consummate the Vaso Business Combination. However, Nasdaq approval of the Company’s initial listing application with respect to the Vaso Business Combination is a condition to the closing of the Vaso Business Combination, and there can be no guarantee that Nasdaq will approve such initial listing application, which may delay, or ultimately prevent the consummation of the proposed Vaso Business Combination.”
https://www.bamsec.com/filing/121390024057974?cik=1844507
AVHI approved the extention of the business combination deadline to October 19. However, almost half of shareholders have redeemed their shares, leaving only $3.6m in the trust ($11.48/share). One of the merger conditions is that Achari’s unpaid expenses at closing do not exceed $4.5m. Those expenses recently elevated to $8.6m. However, the proxy downplays this risk, saying that to address the excess Unpaid SPAC Expenses, Achari and the Sponsor are negotiating with vendors and service providers to reduce or settle these liabilities. They believe they can reduce the expenses to or below the $4.5m threshold before closing. VASO is also providing AVHI a working capital loan. It’s really puzzling that VASO continues to pursue this very expensive uplisting.
S-4 effective. Buy more?
https://finance.yahoo.com/news/vaso-corporation-announces-effectiveness-achari-133000806.html
A few details and thoughts:
1) Shareholder meeting date due August 26. Management owns 45%, so this is probably a formality only.
2) The new S4 has kept the pro forma equity value of $176m which implies $0.96/share price for VASO (vs current $0.25/share trading price). This $176m is an arbitrary number that doesn’t hold much meaning and it will be up to the market to determine the fair value for the Nasdaq listed VASO.
3) The last two quarters have been bad. On TTM basis, VASO is trading at 7x adj. EBITDA and nearly 10x EBIT. Looking at 2023 numbers, it’s at 4.4x adj. EBITDA and 5.3x EBIT. The company doesn’t provide many details about its operations, but it seems like gross margins have shrunk, especially in Q1, and SG&A expenses suddenly jumped by $2m in both Q4 and Q1. So, there doesn’t seem to be much upside at current prices and TTM numbers.
It really sucks that management just offers no visibility into what’s going on with the company.
So the right trade is to sell short AVHI before the merger( and hope not to be redeemed for cash) or the newCo after the merger….
What’s the risk of shorting AVHI at $11.5?
If the shares you borrow are redeemed, can you just settle with your counterparty for $10.98 in cash?
Or will you be forced to buy back shares in the open market at any exorbitant price level?
Estimated current cash in trust is ~$11.50, so you won’t make $0.50 if your short shares are redeemed. Only ~310k shares of AVHI are outstanding, so a buy-in is a real risk if your timing is off. Also, unless you have connections at your clearing firm/the transfer agent, there will likely be a delay after the deal closes before you know the status of your short shares (redeemed or not).
Another slight delay from VASO. Shareholder meeting has been pushed from August 26 to September 10. It’s unclear why this was done, especially since the shareholder vote is expected to be a formality.
Anyone able to share the potential technicals/dates of redemption, despac, etc of AVHI and further conversion to VASO before the vote tmrw?
I assume we get concrete details with the vote, but just wondering if we’re able to take an educated guess to prepare for imminent batshit trading.
VASO/ACHI merger has been approved. Vaso expects the transaction to close ‘promptly,’ but there are still a few conditions to be met. I think these include Nasdaq listing approval and ensuring that Achari Ventures’ unpaid SPAC-related expenses do not exceed $4.5m at the time of the merger. As noted in the previous comment, these expenses are estimated to be around $8.6m, and Achari is working to reduce them before finalizing the deal.
https://www.bamsec.com/filing/121390024077416?cik=839087
Looks like AVHI shares have been redeemed since it’s breaking prev trust value of $11.55. Locates look impossible but it’s “safer” to short against VASO now if you could actually locate shares, correct?
https://www.sec.gov/Archives/edgar/data/1844507/000121390024066289/ea0203390-14.htm
Is the next even the de-spac date? Not sure if the Oct 19 deadline applies to that, anyone knowledgeable here?
https://www.listingtrack.io/company?symbol=AVHI&name=Achari%20Ventures%20Holdings%20Corp.%20I
AVHI trades on the pink sheets, so I’m not sure it’s shortable?
AVHI 96.96% redemption so a squeeze seems possible – but since it seems complete there is no risk of shares getting bought in for redemption, accurate?
Prev post about breaking trust value is waiting to be approved so this might not have the right context.
I can short AVHI with a couple of my brokers, very tight supply so can’t share.
Can anyone confirm the despac date/process?
Buehler?
No available borrow for AVHI on IB.
There’s also this October 19 SPAC deadline, which applies to the completion of the business combination (the de-SPAC process). If AVHI doesn’t merge with VASO by this date, it might need to dissolve and liquidate. They probably can just extend the date, but not sure what’s the limit on that as they’ve already extended it a few times, I believe. Most likely, the de-SPAC will just happen before then.
As I understand, these remaining shares would not be subject to being bought in as there will be no more redemptions.
VASO has terminated the merger. Someone hitting bids earlier today. Anyone have a view where this settles out fundamentally?
AVHI to zero. Is it rare to SPACs to fail like this, no trust, etc?
In today’s day and age very common. More likely to fail than succeed, product has a scarlet letter on it.
AVHI didn’t “fail” as far as the SPAC vehicle is concerned. AVHI shareholders will receive ~$11.50 in cash next month (assuming AVHI winds up on its Oct 19 liquidation date).
It is VASO who provided notice to terminate merger; wonder why, just weeks after the S-4 was effective?
VASO considers its stock cheap (this was the reason for the merger and planned uplisting to nasdaq). SSI write-up also thinks it’s “so cheap”.
https://finance.yahoo.com/news/vaso-corporation-announces-termination-business-223000599.html
https://finance.yahoo.com/news/vaso-corporation-announces-effectiveness-achari-133000806.html
The better question is why did they agree to this deal in the first place? It was a terrible move, borderline shady. Honestly, it’s kind of a good thing they cancelled.
Re cheapness, things have changed a bit over the last 7 months. Check out my comment from August 8. At the time of SSI’s write-up, VASO was trading at sub 4x EBIT and adj. EBITDA on a TTM basis. The last two quarters were bad, though. Not sure what happened, but expenses spiked for some reason. Now the stock is at 8.6x EBIT and 6.4x adjusted EBITDA. Still cheap, but not that crazy, especially with all the strange stuff that happened with this “uplisting deal” and the latest earnings.
8.6x EBIT and 6.4x adjusted EBITDA with a $40mm+ market cap right?
Interestingly, in the PR there is no mention of any future intention/plan for uplisting. But the only reason for the expensive merger with AVHI was obtaining uplisting to NASDAQ.
“The Company will continue to seek opportunities to increase stockholder value, including through internal growth, new partnerships, and strategic investments with a concentration on medical and IT service companies.”