ROTTEN TO THE CORE
Westport's Proposed Takeover Of Fuel Systems Solutions: 'Rotten To The Core'
Jan. 11, 2016 7:55 AM ET| About: Fuel Systems Solutions, Inc. (FSYS), Includes: WPRT
Disclosure: I am/we are long FSYS. (More...)
Summary
WPRT is capturing $63 million net cash from FSYS, with no money down.
WPRT will swap 38.5 million of their shares, to seal the deal.
FSYS' market cap, now equates to its cash holdings.
FSYS was buying back their own shares at $11, but will settle for just $3.50.
This proposed transaction is outrageous and a white knight could emerge.
Talk about sheer insanity. That's a gargantuan understatement when it comes to the caper Westport Innovations (NASDAQ:WPRT) is about to pull off. It is even more inconceivable when considering these guys have been burning through cash, have net debt of $24 million, and shareholder's equity of just $1.33, yet will be nabbing Fuel Systems Solutions (NASDAQ:FSYS), easier than taking candy from a baby.
The guys at FSYS are no babies either. They have been in business several decades, possess a pristine balance sheet, and tally annual sales of over $300 million. In fact, I have been promoting them for many years, because of their superior value metrics. FSYS has $63 million of cash, is EBITDA positive, and features a book value of $9.22.
They even have a stock buyback plan in effect, and have already bought back over 10% of their shares outstanding. The company's market value of $3.56, is just a few pennies more, than its cash value per share of $3.48. Can you believe that? It is a extremely rare occurrence when a enterprise has more cash, than its market value.
They were buying back their shares in 2015 in the open market, under their $25 million stock repurchase plan, at an average price of $11. Why on earth would they be content on selling those same shares today at $3.50? This adds up to nothing short, of lunacy.
Now, WPRT intends to print up 38.5 million shares and swap 2.129 Westport shares for every single FSYS share, to consummate the marriage. In the process, they will immediately capture $63 million of FSYS' cash hoard. They are essentially being paid to take over the company, suffering only "share dilution" as a consequence. A wonderful deal for WPRT shareholders, and the clear perception of a more than "woeful" transaction, for FSYS shareholders.
If anyone would have told me, that FSYS was going to be acquired, and just three months after the announcement their shares would be trading 50% lower, I would have thought they were absolutely out of touch with reality. Normally when a buyout occurs, the acquired company's shares go up, not down. Just last Thursday, the shares lost 25% of their value, on absolutely no news.
It appears I'm the one that is out of touch because due to this coming debacle my portfolio value has been sliced in half. To make matters worse, I am being forced out of my position due to margin calls. You see, when a stock falls below $4, the lending broker basically does not allow borrowing power on it.
There is no one to blame but myself. I simply had too much skin in the game because of the attraction and lust I possessed for this name. Its extreme bargain metrics looked just too good to be true, and guess what? Evidently they were not. I simply drank the Kool Aid and became too emotional and stubborn about this stock.
I am unclear why this proposed deal has not been revised, cancelled or subject to a new bidder (the cancellation penalty is a mere $5.5 million), especially considering the vote (by each board) to approve it, occurred when the shares of both companies were twice the price. In my opinion, that is a game changer. What was good three months ago, is definitely not good today, and please don't blame it all on the fall in oil prices.
This transaction seems dubious at best, and I am completely dumbfounded that WPRT hasn't even raised its payment ratio to at least a 2.50 exchange rate considering the tragic decimation of both these stocks. I am also puzzled why a white knight hasn't evolved with a sweeter offer such as T Boone Pickens' Clean Energy Fuels (NASDAQ:CLNE), the final public company of three, in the alternative fuel sector. Perhaps all three of these companies should combine forces?
I spoke with WPRT's investor relations manager and he relayed the voting materials will be out in mid Feb. and the deal will close just three days later. He said he is more than confident that FSYS shareholders will approve it. I am flabbergasted why shareholders would vote for something so outrageously unfair - most notably, activist hedge fund Becker Drapkin (FSYS' largest shareholder). Any way you slice it, this apple is rotten to the core.
