AutoInfo Sells Out – AUTO

AutoInfo has announced a sale to Comvest Partners at a price of $1.05 per share. The transaction is expected to close by the end of the end of June.

While I applaud the decision to sell, I am extremely disappointed by the price. $1.05 represents a trailing P/E of 8.5 and a trailing EV/EBITDA of 6.2. In reality, the valuation is likely lower. AutoInfo’s last financial statement was for the quarter ended September 30, 2012 and the company has very likely grown and generated cash since then.

An 8.5 P/E is a price you pay for a no-growth, medium-quality business, or a cyclical business more than halfway through its growth phase. 8.5 times earnings is not what you pay for a business that averaged 24% sales growth over the past five years through the a vicious recession.

Why not sell to a competitor rather than a private equity firm? While Comvest Partners will likely find ways to increase efficiency, a competing transportation services firm could find far more. AutoInfo’s legal, IT, finance and marketing functions could all be managed by an acquiring transportation services firm’s existing departments, greatly increasing operating margins.

In the last four quarters, AutoInfo had $41.8 million in operating costs. Reducing these by just 10% would create additional after tax-income of $2.7 million, increasing net income to $7.2 million. The same 8.5 P/E multiple on the post-synergies net income would be $1.70 per share. Was it really impossible to find a larger competitor willing to pay a very conservative multiple of easily achievable post-synergies earnings?

I’d like to know what AutoInfo’s fund investors, Kinderhook Partners, Baker Street Capital and Khrom Capital Management think of the deal. Or what James T. Martin, the company’s largest non-insider shareholder thinks. Together, these shareholders own 48.3% of shares outstanding, enough to exercise de facto control. If these investors haven’t already affirmed the deal, perhaps they’ll make some waves when the time comes for the shareholder vote.

I own shares in AutoInfo and I plan on keeping them at least through the shareholder vote, on the off chance of a higher bid.

 

 

 

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28 Responses to AutoInfo Sells Out – AUTO

  1. HeresyValue says:

    I intend to oppose this sale. The business is worth substantially more than the offer-price just as a stand-alone business and is worth multiple of this price to a competitor. That being said, its really up to the 3 major investors. Management only owns 25.9% according to the last proxy, which ostensibly includes voting agreements and options.

  2. shaun noll says:

    this deal is ridiculous and I intend to vote my tiny stake against the deal also for whatever it’s worth. To an XPO this is a $2 stock.

  3. Thomas Braziel says:

    Hey guys on the valuation I completely agree. On the shareholder base I had a few questions. Just a run down:

    Mgmt: ~26%

    Outside Major Shareholders:
    Kinderbrook: ~18%
    Baker/Khrom: ~14%
    James T Marin: ~16%
    Total: ~48%

    Are all three major holders outside investors? If so, don’t they (with a few small shareholders like us) have enough to block, or a least get a bump? I cannot blame Comvest for trying, but AUTO is cheap even at 1.30-1.50 take out. I’ll look into DE merger laws and post what I find up here.

    Best, Thomas

  4. Thomas Braziel says:

    Interesting side note: Has anyone looked into James T Martin? I triple check it and it’s definitely this guy: http://en.wikipedia.org/wiki/James_Martin_(author). I just tried calling his number in Bermuda. Given his wealth and background, I’m not sure he is going to be interesting in opposing the merger. I’ll keep trying him.

  5. mmel says:

    I think its pretty obvious what is happening here. The CEO is also the Chairman of the Board. If a PE firm buys them, its likely they will still need someone to run operations. If a competitor buys them, its pretty clear where they will look for synergies.

    • Don says:

      Good one mmel. That makes sense…

    • mmel says:

      Merger agreement is out and surprise surprise, senior management gets both employment contracts with the new firm AND equity interest. This is just screwing over non-executive shareholders.

      • otcadventures says:

        Market seems to be anticipating a higher bid or at least a rejection by shareholders. Bid/ask is 1.06/1.07 at the moment. I am going to pick up some more shares and see how this plays out.

  6. theboss says:

    seems like worst case either the deal goes through and you lose low single digits percent (which is not a big deal) or the deal goes through and the stock probably falls in the short term but you’re still left with ownership in AUTO at <8x earnings regardless of stock price action, which is a great value to own it here and it is NOT easy to get shares anyway so you can buy a material amount of stock here. Best case they actually offer shareholders a fair deal or another offer comes in. From people I've talked to there are some pretty big and pissed off hedge funds lined up to sue the hell out of these guys for this blatant robbery if they don't offer something fair so I really hope this gets worked out in a reasonable way.

    • smallcapscrounge says:

      hi
      You guys are correct … this is an attempt to steal the company…but there is more to it.
      I calculate the shares are worth at least $4.00 at a 14 multiple take over… Management has exposed themselfs now by being so obvious … now look deeper.. this company has compounded revenues at 30% for about 8 years (fantastic growth) ,, but look at earnings growth over that period … they have barely budged … question is do you believe the low level of earnings? Logistics companies are low capital intensive and earnings should ramp up fast with revenue growth… thats not whars happening here… bottom line is I am using a 0.30 per share earnings figure as more realistic, what the true earnings power is, for this company and using a 14 multiple for a min reasonable take over price.. By the way I have owned shares in this co for 5 1/2 years.. then it had about 80 mil in revs I think

      I bid for 5000 more shares at 1.06 at 3:00 pm today but got zip….

      • smallcapscrounge says:

        additional comments/thoughts:
        -auto looks like a perfect company for a
        hostile takeover or activist shareholder..
        (loads of value to unlock and it appears management does not have a control lock on the stock votes)… not to mention I think now their reputaions are in peril ….
        -the PE company trying to buy clearly sees auto as a beach head company for further aquisitions in this sector (so great growth opps both by aquisition as well as proven organic growth)..

  7. HeresyValue says:

    FYI, BakerStreet/Khrom has just sold all of their holdings.

    • otcadventures says:

      Just saw the filing. If they sold to Kinderhook or another value firm, the story might still be in play. If not, that makes blocking the sale more of an uphill battle. Disappointing.

      • smallcapscrounge says:

        Shares could have been bought by
        -another trucking logistics co
        -another buy out company
        -an activist sharholder
        -possibly a take over arbitrage firm

        My guess is probably the last choice — an arbitrafe firm..

        • matts says:

          If they sold around 1.04 per share it’s not an arb fund. The spread is to low, and because of the small size you can’t get a big enough position to move the needle of all but the tinniest arb fund. Very unlikely the shares were sold to an arb fund.

        • One additional possibility on the Bakerstreet sale is that it went to an entity alligned with the takeover group (management and the PE firm)…

          A side note here, I doubt this sale will go through, unless the PE firm will massively raise its offer (which in my opinion they would be smart to do)… why….. because the existing directors/management, of Auto, has a mandatory fiduciary
          duty to existing shareholders to maximize their value in any sale…. This means they are liable for the difference in the true value less the sale value …. The PE firm has nothing to loose if they think they can get away with it, and in this sence they are taking advantage of the Auto boards lack of experience in these matters… The bottom line is that if the board lets this go through they will be liable for a value deficit equal to 3 times the total buy out price… and the PE firm would be laughing … I don’t think the board will go down this road…

          • I think any judge will see that in this case the Fiduciary duty has been breached ….
            -they did not shop deal
            -the management is part of the taker over group
            -managements reasoning for going private does not make sence..
            -the overall pattern of shareholder treatment
            -etc. etc.

          • matts says:

            Breach of fiduciary duty is like most white collar crime, very difficult to prove. I don’t think it’s nearly as clear cut as you expect. I think the odds are that they raise the price just to avoid problems, but I don’t think it’s not as probable as you make it sound in your comments.

  8. So far it looks like about 5 law firms believe that there is a valid case to be made that Fiduciary duty has been breached here …

    • matts says:

      Oh those class action “law firms” are vultures who jump on anything remotely interesting. I don’t have any stats on how often they are successful, but I can’t imagine it’s often. It costs them almost nothing to solicit clients so they just thrown them out there. Do a search of these firms, each one is involved in dozens of these “atrocious breaches of fiduciary duty” at a time.

      • You make some good points Matts …However, this case looks a bit different to me than the average case… frankly it looks more obvious and blatent.
        A slick PE firm would maybe think the take over of a micro cap company in the OTC market would not get the kind of deal scrutiny that typical deals get … and also working with an inexperienced board in m&a deals would give them more control, and enticing them to more aggresively take advantage of the situation…

        • HeresyValue says:

          This case is not going to one of these vulture firms. Every single M&A transaction typically has at least half a dozen law firms put out a press release like this. They are all trying to garner clients *in case* things do go to court, in which case they can brute-force their way into some of the lead lawyer’s fees by virtue of their attached clients.

          The likelier legal scenario is an exercise of dissent rights.

  9. Thank you for this wonderful blog and terrific investment idea.

    My reaction: http://seekingalpha.com/article/1284151-dude-you-re-not-getting-dell-or-auto

    My position: http://www.sec.gov/Archives/edgar/data/351017/000091957413002418/d1366726_13g.htm

    -C

    Chris DeMuth, Jr.

    Rangeley Capital
    3 Forest Street
    New Canaan, CT 06840
    203.801.9969
    ccdemuth@rangeleycapital.com
    Blog: http://seekingalpha.com/author/chris-demuth-jr/instablog

    • otcadventures says:

      Chris, thanks for the kind words! I really enjoy your articles on SA. I saw your filing on AUTO today. Good luck! For what it’s worth, I will be voting my tiny stake against the merger.

  10. Auto intrinsic value notes:
    -as many have pointed out here the take over bid multiple based on reported earnings is very low in this offer
    (something like 8 times reported earnings) or around 1/2 of what it should be based on reported earnings and
    current multiples in this sector…
    -Analyzing this company however I feel that currrent shareholders are loosing much more value than above in that the current earnings power of this company is much higher than posted current earnings, I calculate this if this company was cleaned up as a stand alone it should earn 0.30 per share and in a take over , by another logistics company with synergies extracted, in the order of 0.40 per share..
    -last thought, knowing what we now know about how the take over group look after shareholder interests, imagine what management (part of take over group) might dream up to maximize their own value in this take over situation if they know earnings are starting to steam roll… its easy to hold earnings back to keep buy out price low, is my point…

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