Quick Pitch: Harte Hanks (HHS)

Merger arbitrage: 17% spread (at $4.20)

This is a merger that is expected to close in one to two months and has a ~17% gross spread.

Harte Hanks, a provider of business outsourcing services, is being acquired by Star Equity Holdings. HHS shareholders will receive either $5/share in cash or 0.5 shares of Star’s preferred stock. The cash portion is capped at 50% of total consideration. The preferred trades publicly under the ticker STRRP at $9.7/share, close to the $10 par value. At current prices the arb spread is 17%. Closing is expected between mid-October and mid-November.

Only an HHS shareholder vote will be required. Directors, including prominent activist Bradley Radoff, own 9.6% combined and have already entered into voting agreements. The buyout price represents a 100% premium to pre-announcement levels, so I expect the remaining holders to vote in favour. The founding family holds 8.6%, William Blair 8.9% and the Rosenbach family 28.6%.

One reason the spread exists is that STRRP is illiquid. Borrow is technically available at 8%, though selling the borrowed shares in the market would be difficult, so hedging is impractical. However, I think the trade can be done unhedged. STRRP will account for less than half of total consideration, and it is a high-yield security, so its price should remain rather stable after closing. An immediate dip is possible, but the price should recover quickly and trade on yield. Over the last five years STRRP has been hovering around its par value with the dividend yield of 10%.

Another reason for the spread is that the financing for the cash portion ($19.2m) has not been secured yet. It will be funded from a combination of Star Equity’s cash on hand ($11m as of Q2), HHS’ cash on hand ($5m) and an up to $15m draw on HHS’s credit facility. The catch is that the current facility agreement does not permit HHS to draw for any merger purposes, so the deal requires an amendment from the lender.

Star Equity notes that it already has a relationship with this lender, so the odds are high that consent will be given. From STRR’s CEO on the merger call:

In terms of where will the cash come from, I would point you to the cash we have on our balance sheet, the cash that Harte Hanks has on its balance sheet. And importantly, Harte Hanks has a $25 million revolver in place with a well-known financial institution that we also have a relationship with. And those 3 sources will be how we fund this acquisition. So we don’t believe we’ll need to raise any external capital in order to close this deal.

If the lender does not agree, the buyer will seek alternative financing from other sources.

The buyer is unlikely to walk away. Star Equity is a holdco positioned as a tiny private equity firm – one of those aspiring Berkshires of the micro-cap world (the CEO says as much himself). HHS would be its sixth acquisition since 2022, and it fits neatly alongside Star Equity’s largest subsidiary, which provides HR recruitment services. HHS itself offers call center, fulfillment and logistics, and marketing agency solutions. Star Equity is positioning the deal as a step towards a larger BPO platform.

One of the key points for the merger, is the $10m of synergies management expects to achieve within a year of closing. That would lift the combined adj. EBITDA by 50%, from $20m to $30m, and mark a major step towards STRR’s 2030 goal of $40m adj. EBITDA. The table below shows management’s presentation of the combined companies’ financials.

It’s worth noting that the calculations above use 2025 earnings, though HHS trailing 12-month EBITDA as of Q2 2026 is actually negative. HHS management did not detail the reason behind the decline, except to say that it was mostly due to the “legacy offerings” performance. In any case, the merger was announced after Q2 results. STRR’s reported TTM earnings are not a useful reference, as a large merger last year muddies the numbers.

Downside to pre-announcement levels is steep, at around 40%.