Monday, August 16, 2010
Considering how the merger revival that so many strategists and analysts predicted has not occurred, the event-driven community is in all the same names. Since there is an inadequate number of situations to follow, spreads are tight. However, ATC Technology Corp (ATAC) is an merger arbitrage opportunity with an attractive 14% annualized return to a mid-November close.
On July 19, GENCO Distribution System Inc announced a definitive agreement to acquire ATAC for $25/share in an all-cash merger valued at $512 million. Privately held GENCO provides contract logistics, reverse logistics, product liquidation, and government solutions for manufacturers, retailers, and US government agencies. ATAC provides comprehensive engineered solutions for logistics and refurbishment services to the consumer electronics industry and vehicle service parts markets. The merger consideration represents a 43% premium to ATAC's July 16 closing price. The agreement contains a go-shop provision to allow ATAC to solicit superior proposals until August 17. GENCO has been afforded the right to match any competing offers. The companies expect to close the deal during the fourth quarter.
There appears to be no regulatory risk. As GENCO is privately held, they do not provide as much information as we would like, but the required antitrust approval should be a non-event. We've spoken to some investors who are concerned with financing. GENCO said that it intends to finance the acquisition through the application of proceeds of approximately $125 million from the sale of GENCO shares to Greenbriar Equity Group LLC and from borrowings under a $450 million new line of credit to be extended by PNC Bank and Wells Fargo, in addition to cash on hand. GENCO executed a definitive stock purchase agreement with Greenbriar for the equity financing. The commitment letter GENCO entered with the banks is not conditioned upon syndication of the credit facility. Taken together, the financing looks pretty stable, so perhaps those concerns are overblown. It is worth nothing that the merger agreement contains a $2 million fee payable to ATAC if GENCO is unable to complete financing. This is a fairly uncommon feature in merger agreements, and it shows that financing was a part of the negotiations.
Another aspect of this transaction that could cause some to be wary is investor support. ATAC was trading over $24/share in March, so the 43% premium can be misleading. Some shareholders are bound to think that GENCO is making an opportunistic purchase. This is a valid argument, though GENCO's response will be "you have until August 17 to find a better deal". Here is the case those shareholders would make, graphically represented:
The preliminary proxy has not yet been released, so we do not know if they were any other bidders for ATAC. Spreads often move on the release of this information. ATAC was asked on the July 19 conference call whether a competitive bidding process took place, and CEO Todd Peters simply answered "this is an unsolicited offer from GENCO". We don't know if Mr. Peters did not understand the question, or if he was intentionally being vague, but he did not answer the question (an unsolicited offer from GENCO does not preclude a competitive bidding process). After evaluating the risks, with the current opportunity set, one could do worse than a position in ATAC.