Merger Arbitrage – 12% Upside
This idea was shared by Giorgi.
Here’s another interesting potential buyout situation.
Learning Technologies Group provides workforce management consulting and software. Though the company is listed on the London Stock Exchange, most of its business is US-based. The stock is pretty liquid.
The company has recently become a private equity buyout target. At the end of September, LTG announced that it had received multiple bids from PE firm General Atlantic (ref. GA), with the most recent one at £1/share. The spread is at 12%. Management noted it would back the latest bid if it’s made binding at that price. Due diligence and negotiations are ongoing, with a PUSU deadline set for November 22.
With management indicating support for the price, most major shareholders likely rolling over their stakes, minimal regulatory risk, and a serious buyer, the spread will almost certainly vanish if a definitive agreement is reached. The downside to pre-announcement levels is around 16%, but I believe the probability of a definitive agreement is high enough to outweigh this risk.
There’s also a chance that competing buyers could step in, but I’ll cover that a bit later. First, let’s take a look at the offer at hand.
GA is definitely a serious buyer with $83bn in assets under management and notable expertise in the workforce management software space. They’ve previously invested in Crehana, a platform for workforce training and management in Latin America; led a $1.5bn Series A financing for Articulate Global, a player in workforce training and e-learning space; and acquired a 20% stake in ATOSS Software AG, which provides technology and consulting for workforce management in the EU. At the time of the investment, ATOSS’ management noted that GA would bring “deep sector expertise in digitization and cloud strategies, along with an extensive understanding of growth drivers.”
Regulatory risk seems minimal as GA doesn’t own any controlling stakes in LTG’s peers, whereas the workforce optimization market is very large and fragmented. The buyer is also based in the US, where most of LTG’s business is located.
GA’s bid allows shareholders to roll over their stake. This is primarily aimed at LTG’s two founders, who hold a combined 24% stake. However, it wouldn’t be surprising if more shareholders would be allowed to roll over (no limits have been detailed regarding this so far). GA’s usual playbook focuses on sizeable equity investments (up to 20%-30% stake) rather than outright buyouts. This deal is a bit atypical for them, so they might be looking to reduce exposure by facilitating a sizeable portion of roll-overs.
Besides management, there are 4 other major shareholders on LTG’s register. All of them are PE firms that hold around 30% stake combined. These PE firms have been with LTG for several years and all are sitting on substantial losses, so it’s quite possible they would agree to stay involved.
Valuing LTG is tricky, as it’s a mix of lower-margin HR service and higher-margin SaaS businesses, with no clear comparables. LTG used to be primarily a SaaS provider, trading at 20x-30x EBITDA until 2021, when it acquired a much larger consulting business GP Services. Since then, the company’s business performance (and share price) have sharply declined, as LTG has rapidly shifted from a high-margin, fast-growing software provider to a struggling business with declining revenues and a complex mix of services. General macro-related headwinds in the UK stock market and tightened corporate budgets have also played a part in this. Further background on the company can be found in this VIC pitch (Aug’23).
The current offer values LTG at 7.3x 2024E adj. EBITDA and 8.5x adj. EBIT. In July, LTG sold its workforce platform Vector at 7x 2023 adj. EBIT. The bid also nearly matches VIC author’s price target of £1.11/share. I think the current proposal might be “just enough” to appeal to minority shareholders while also allowing management and other major investors, who would choose to roll over their stakes, to bet on a potential turnaround under GA’s wing.
Potential competing bids
After GA’s bid was announced, FT reported that other private equity firms had also been eyeing LTG. Although these are still rumors, recent developments suggest there may be some truth to them.
GA’s latest bid surfaced on September 27. On October 25, the PUSU date was extended to November 2, with a note that negotiations have progressed significantly. Besides that, two other interesting and important details were announced:
- GA stated that the offer would be conditional on irrevocable support and a roll-over agreement from LTG’s two founders;
- In response, LTG’s board formed an independent committee (excluding the two founders) to evaluate the offer.
It was expected that GA would want the founders to roll over, but the real twist is GA now pushing for the irrevocable support – essentially to lock the founders in and prevent them from switching to any competing bidder. The fact that management didn’t agree to this immediately but instead formed a special committee is also intriguing. Why would they do that, if they’ve already noted they like the current bid? It seems quite possible that management has caught wind of potential additional bidders and decided to explore all options.
The thesis doesn’t hinge on a bidding war, and I’d be happy to simply take the current spread on GA’s offer. Obviously, any competing bid would be a nice bonus. I wouldn’t expect a huge premium on top of GA’s current offer, but an additional 10%-15% could be realistic.
It’s up to the two founders personally (in their roles as shareholders), and not LTG, to negotiate support and roll-over agreements with GA.
So it’s expected that LTG as a company or the founders in their roles as management can’t sign such agreements with GA.
DT are you staying away due to the market cap and subsequent assumption that the risk/reward is likely to be priced more correctly than if it was a micro/nano cap merger arb?
I’ve got a tiny position here, as I like the setup overall. But it’s still a non-binding deal, which carries higher risk and isn’t guaranteed to close. Plus, the roll-over situation is somewhat murky. Giorgi’s explanation makes sense, but there’s a chance the founders actually don’t want to roll-over and that’s why the company started the strategic review.
PUSU deadline extended from November 22 to December 6. The stock is trading nearly in line with write-up prices.
Happy to see this one working out. Definitive agreement has been signed. The company will be acquired at 100p the spread has now narrowed from 12% to 1.5%. Shareholder meeting date will set shortly, but most likely it will take a further couple of months to get this over the finish line. I do not think the remaining 1.5% is worth the wait. So I am out.
Thanks for sharing this idea Giorgi.
Meetings were adjourned for three three weeks to Feb 6 “to provide further time for discussions with LTG Shareholders and to allow LTG Shareholders additional time to consider the Acquisition”
Spread has widened to >10%
Giorgi / All , any thoughts here on why the spread widened?
Couple of negatives here that may be responsible. Some excerpts below for your easy ref.
24 January 2025
https://www.londonstockexchange.com/news-article/LTG/full-year-trading-update/16869285
Update on Affirmative Action and DEI in USA
On 21 January 2025, President Trump rescinded Executive Order 11246, which since 1965 had imposed Affirmative Action planning obligations on federal contractors in addition to non-discrimination requirements. As a result of this order, corporations in the US who are servicing federal contracts will no longer have to comply with Affirmative Action requirements from Q2 2025. Affirmity, a business wholly owned by LTG, provides software and services that assist US clients to comply with such Affirmative Action planning regulations.
We expect some corporate clients to continue using Affirmity’s services and other clients to significantly reduce or no longer take those services. Under this new Executive Order non-discrimination obligations still exist, and we expect to be able to continue to assist our clients with those and other data requirements. While it is too early to quantify the exact impact of this change, we expect President Trump’s Executive Order to have a highly material impact on Revenue and Adjusted EBIT at Affirmity for 2025 and beyond, which generated c.$21m and c.$10m respectively in 2024. We are actively assessing how to meet the evolving needs of Affirmity’s extensive customer base and will update the market as the situation becomes clearer.
GP Strategies US Regulatory Update
As a US company that performs work for the US Government, GP Strategies requires certain approvals and is subject to restrictions intended to protect classified information. In July 2024, LTG was notified by GP Strategies of the invalidation (“temporary suspension”) of the eligibility for GP to work on new classified contracts.
The GP Strategies executive team continues to be in constant dialogue with the DCSA (Defense Counterintelligence and Security Agency) and is making good progress on resolving the issues pertaining to certain approvals, with full resolution our key objective. A new subsidiary, solely focused on all forms of federal US Government contracts, has been established and is operational for non-classified contracts from January 2025. It has applied for approval to work on classified contracts and expects the application process to conclude within H1 2025.
Factors within the influence and control of the LTG Directors
There is no material change to the Group’s existing and prospective customer contracts or agreements since 3 December 2024.
The GP Strategies situation seems like old news. The real concern is outlook for Affirmity, which doesn’t look great at all. The business makes up around 12% of LTG’s EBIT. The takeover agreement includes this line:
“There is no material change to the Group’s existing and prospective customer contracts or agreements since 3 December 2024.”
Impact from Trump’s executive order could arguably qualify as a material adverse effect.
However, I’m not sure whether LTG is a long or a short at this point.
Affirmity is a small part of the company and I don’t see GA pulling the plug just because of this.
Arguing that the price will be cut is also not easy. Prior to these developments, the deal had faced opposition from major shareholders, including Liontrust (14%) and Octopus (7.7%). Liontrust, for instance, called the board’s decision to back the deal “amazing and dismaying,” describing the price as “uninspiring”. That’s why shareholder meeting was previously adjourned to Feb 6.
https://www.msn.com/en-gb/health/other/london-hit-by-cheap-takeover-disease-again/ar-AA1vueY7
The risk is that the opposition might now be gone, and the buyer will just proceed with the deal as is.
Gun to my head, I’d probably say it’s a long. The price cut would probably be 10–15% max, which limits the downside, or the deal could go through as is, which would result in 12% gain.
However, worst case is the deal falls apart entirely, and the stock drops to 60p (30% loss). So unless the price drops further, it doesn’t look very exiting.
General Atlantic reaffirmed the offer at 1gbp/share. The current spread is at 8%. Court and shareholder meetings are scheduled for the 6th of February.
This one seems to have minimal risks to close – in my eyes an easy 8% in short order. I am guessing the spread is due to the previous adjournments as some of the shareholders apparently considered the 1gbp offer to be too low. But as General Atlantic iterated in their letter (along similar lines to what Giorgi said above), the offer is looks way fairer in light of material negative effects on Affirmity’s business by Trump’s executive order. From General Atlantic statement:
https://polaris.brighterir.com/public/ltg/news/rns/story/x5nep2x
https://polaris.brighterir.com/public/ltg/news/rns/story/x5njq8x
Announcement must be imminent following on from today’s meetings. Price action post 10.30am implies someone knows something.
Shareholders have approved the merger, and the spread narrowed to minimal levels–a nice 8% return in a week.
Although I though this transaction will get an easy pass from shareholders (see my last week’s comment above), the vote barely passed the 75% threshold: 79% voted for the deal and 21% against.
Giorgi, thanks again for sharing this one. It was nice to play this one twice.