Merger Arbitrage – 27% Upside
I’ve received several questions from subscribers about TTEC’s privatization at $6.85 per share (27% spread). While I personally am not interested in this opportunity, I’m sharing my research and notes below.
Call center operator TTEC Holdings has received a privatization offer from its Founder/CEO/Chairman Kenneth Tuchman, who currently holds 58% stake in the company. The offer stands at $6.85/share and is contingent on financing, recommendation by the special committee, approval of minority shareholders.
The bullish side for this merger arb
Buyouts by controlling shareholders, especially founders, are always intriguing and quite rare to come by. When the founder, who built the company from scratch and knows it inside out, steps up with a 69% premium offer to buy out the remaining shareholders, it’s clearly a strong positive signal. Having a buyer like that adds confidence that he’ll be able to push the deal through with the special committee and lock in a binding agreement. In my experience, more often than not, acquisition attempts by controlling shareholders tend to close successfully.
The timing of the proposal is opportunistic. TTEC’s share price is at rock-bottom following rough Q1 and Q2 results this year. Call center industry is in downturn. However, management mentioned in Q2 conference call that the demand for call center services has likely hit its lowest point in Q2, so improvement is expected during the second half of the year.
Regardless of the turnaround prospects, minority shareholders would probably be quite happy to cash out at $6.85. The bid values TTEC at 5.9x 2024E adj. EBITDA. That’s a slight premium to TIXT and IBEX (less levered peers), which trade at 5.5x and 5x multiples respectively. Aside from the founder, there are no other active major shareholders on the register. Index funds hold just 12% of the stock.
Kenneth Tuchman is a pretty wealthy man, with a net worth of around $1bn according to Forbes. Buying out the minority shareholders of TTEC would take around $140m. Even though it looks like the founder won’t be using personal funds, the size of the deal relative to his wealth makes it seem very manageable (at least optically).
The founder also argues that taking the company private makes sense, given the industry’s ongoing AI transformation. TTEC needs significant investments into tech, which would be easier to manage as a private entity. The same reasoning was used in last year’s privatization of TTEC’s peer SRT (covered on SSI here).
So why am I skeptical about this opportunity?
Playing this merger arb seems far too risky now. Even if we assume the offer from the controlling shareholder is a genuine one (as opposed to just putting the company in play), the main hurdle is questionable financing of the transaction. There are a couple of red flags suggesting the buyer will struggle to raise the necessary funds. And it’s unlikely he’ll use his personal wealth for this either.
The company is heavily leveraged – market cap is at $260m, while the debt stands at $930m. Net debt / EBITDA is around 4.5x. While this debt is relatively cheap (SOFR + margin of 1.375%-3.5% based on net leverage), the credit facility matures in Nov 2026. Covenants on this facility have already been relaxed a number of times to accommodate struggling performance. TTEC might face problems refinancing or extending maturity of this debt.
Over the last 3 years TTEC’s market cap has crashed from $4.2bn to $260m, while adj. EBITDA, which had been previously growing at a 17% CAGR, has dropped by 41%. The current guidance for 2024 projects $209m in adj. EBITDA. TTEC already needs to cover $60m in capex and around $80m in interest payments. If business performance doesn’t improve and the company has to refinance its debt at a higher rate (let’s say 12-13% seems reasonable), all or more of its current FCF would likely be consumed by interest payments. If credit facility is not extended beyond 2026, TTEC might face insolvency.
The prospects for turnaround don’t look great. The call center/BPO industry is being disrupted by AI. Bloomberg recently had a nice piece highlighting how AI-driven layoffs are hitting the Philippines, which is a major hub for call centers and where a significant portion of TTEC’s operations are based. Some competitors are already able to shift 20% of customer interactions to AI and expect that to triple in a few years. Customers are looking for providers of AI-based support solutions, which might be carried out by new industry entrants. The legacy call center businesses are crumbling and the entire industry is undergoing a massive transformation, with little clarity on how it will shape out in 3-5 years.
The Chairman (and the bidder) has been completely denying any AI impact on the business during the conference calls so far. There’s a chance he could be one of those “players in denial” described in the Bloomberg article.
TTEC has some AI related capabilities yet it’s still in the experimental phase, primarily helping clients to set up basic AI bots for tasks like call summarization. Other competitors are doing the same, so TTEC doesn’t seem to have a distinct moat when it comes to AI. Navigating this industry shift will require substantial investments into new tech.
Given this industry backdrop, the founder will likely struggle to raise the funds to take TTEC private. The language in the press release suggests the process is still in its early stages. I would not be surprised if the offer gets withdrawn due to financing challenges. This is excatly what happened with SRT when its controlling shareholder attempted the first buyout back in 2022, even though SRT was less levered than TTEC and the industry was in a much better state at the time.
Another point to consider – Q3 results will be released in a few weeks. These are more likely to surprise to the downside rather than the upside.
TTEC released a series of announcements yesterday after market close, which, in my view, reinforce doubts about the likelihood of a takeover:
– The company sold a former office building for $45.5m, with proceeds earmarked for debt reduction. The proceeds are only a fraction of the $930m debt load.
– The dividend has been cut to conserve cash and prioritize debt repayment.
– TTEC has relocated its principal place of business from Colorado to Texas (which offers lower taxes, etc.)
https://www.bamsec.com/filing/110465924114375?cik=1013880
Weak Q3 results, with revenue down 12% YoY. The company attributed the decline to industry headwinds and a challenging macroeconomic environment, with clients delaying decisions and focusing on cost-cutting measures. Management still doesn’t talk about AI. But I think that’s what embedded in that “client delaying decisions” dynamic. Probably most clients have slowed down spending and are simply waiting until better AI tools emerge. Nobody wants to spend on the traditional BPO anymore. TTEC reiterated its full-year 2024 guidance near the lower end of the range.
TTEC is back to pre-announcement levels, with the spread widening from 27% to 75%. Could it be a long now? Maybe, but the downside risk is hard to pin down. This is a highly leveraged BPO company, and the endgame could turn out like ATTO’s.
Here are some additional bullish and bearish considerations to build on the write-up above.
Bullish points:
– The founder was clear that he’s not just looking to put the company in play. From the offer letter:
– Peers TIXT and IBEX are up 10% since the offer announcement.
– Q3 results, released after the offer and write-up, were business as usual. Full-year guidance remained unchanged, and Q4 implied guidance suggests sequential improvement. On the earnings call, the founder was vaguely bullish about 2025. The company is also targeting substantial cost savings of $30m in 2025.
This all suggests that the downside could be somewhat protected, even if the binding offer doesn’t materialize. But to believe this, you also need to have some faith in the BPO industry.
Bearish points:
– Performance of the BPO business is a wildcard. The combination of bad performance, heavy leverage, and shrinking timeline to debt maturity could be deadly for the stock price. However, Q4 results should be out only at the end of February.
– The offer might not be about putting the company in play – it could be about putting the refinancing in play. With the business struggling and a hefty pile of debt maturing in November 2026, maybe the founder just wants to send a confidence signal for future negotiations, something like: “founder wanted to buy at a big premium, but management rejected the offer because they believe the company is worth even more. Insiders clearly think that rebound is imminent, etc”
– Net debt increased by $80m in Q3, pushing the offer price multiple from 5.5x to 5.9x 2024E adj. EBITDA. For context, TIXT trades at 5.5x 2024E, and IBEX at 5.7x FY25 guidance. Both peers are way less levered. The risk of a price cut is very real, but that would be far from the worst case scenario.
Interesting 8k just dropped. It describes a cash bonus of 225K to be paid to TTEC CFO if the take private transaction is completed between 8/25 and 1/26. Might this suggest that the proposed transaction is progressing?
https://www.sec.gov/Archives/edgar/data/1013880/000110465925014330/tm256737d1_8k.htm
From what I gather, the bonus isn’t tied to the deal. It’s getting paid either way in Aug’25-Jan’26, just earlier if the deal closes before then. I haven’t found any similar bonuses previously paid to him before (or, at least, announced in the same way). What a weird signal to send to the market. And the amount is basically pocket change for the CEO. No clue what to make of it, but my best guess is that the deal gets done, but at a (probably big) price cut.
TTEC’s special committee is open to engaging with CEO Kenneth Tuchman on his $6.85 per share take-private offer but hasn’t committed to any deal yet.
https://investors.ttec.com/news-releases/news-release-details/update-ttec-special-committee
I posted this somewhere else two days ago when the price shot up due to the news release but I still think it’s relevant:
I thought the phrasing of the PR was very peculiar:
“The Special Committee [..] has completed its review of the Non-Binding Proposal and its preliminary valuation analysis of the Company, and REMAINS READY to consider and engage with Mr. Tuchman with respect to a definitive transaction proposal.” (emphasis mine)
They remain ready to engage and consider? Apparently there is nobody to engage with right now? And how long have they been ready to engage? I interpret that as the board saying ‘hey shareholders, we like this deal but we’ve been waiting for a while now and nothing happened’. Which seems .. questionable, given how long the buyer had to come up with financing etc.
On top of that there’s the general market decline, the fact that the company has a ton of leverage and is putting up questionable results and the fact that they had to sell their HQ in november to pay down debt ..
I don’t like this as a long at the current price. In fact, I wouldn’t be surprised if the market is interpreting this press release in exactly the wrong way.
Would you consider this as an opportunity to short?
Good question. I was short a tiny bit above $5 as I thought the stock was pumped a bit with quite a bit of volume on news that seemed excellent at first sight but that I interpreted as being questionable. But I covered quickly when the stock cratered. In general I don’t like shorting. Also note that it was a 0.x% position, shorting more out of principle than anything else :) .
At this point I’m happily staying on the sidelines, unless anyone here has good arguments otherwise.
Without hindsight, would this have been a good shorting opportunity, if properly sized?
Just trying to do a post-mortem so that we could potentially act on a similar situation in the future.
Scary to short stuff like this, especially given the leverage. And also the recent peer takeovers, with some trading above offer prices.
Tuchman has officially withdrawn his offer, but surprisingly the stock is down 40% on the news. I kind of thought cancellation of the bid had already been baked into the share price, but apparently that was not the case. Tuchman vaguely cited “market conditions” as the reason for the failure, but as noted by Dt in the pitch, the offer seemed sketchy from the very start.
This should not bode well for the other ongoing buyouts in the BPO space, such as TIXT and TASK.