Well, today the company announced they were selling themselves to a PE firm for $1.05 per share. My buddy OTCAdventures has a nice review of why this sale doesn’t make any sense.
To that post, I’m going to add this quote from the CEO of XPO logistics. I’m taking it from this filing, which you should definitely read if you’re interested in the situation.
I would say that at this point in time, from my perspective — and I’ve made a career of studying almost every roll-up opportunity — this is the last large opportunity to be found in an industry that is fragmented and growing, offers a competitive advantage of size, has a large imbalance of sellers to buyers, with hundreds if not thousands of good companies that can be bought at significant discounts to our expected cost of capital. XPO is the most exciting venture I’ve taken on yet.Now, compare AUTO’s multiple on takeout (either P/E or EV / EBITDA) to any of their competitors, especially the pure plays (CHRW, LSTR, ECHO). AUTO is selling themselves for way, way less than those guys trade for.
Does that make sense? No.
Does it make sense for AUTO to sell to a P/E firm instead of a competitor who could realize significant synergies? Absolutely not.
Now, the merger proxy hasn’t been filed yet, so we don’t know if there’s a go shop period, what the history of the acquisition looks like, how many firms were contacted, etc.
But what we do know is that this industry is getting rolled up. AUTO is right in the sweet spot for an acquisition by their larger competitors, and their competitors have plenty of financing to work with.
Plus, activists and outsiders have a big, concentrated position. I’d be shocked if they were ok with this price. I bet they vote against the merger, or at least explore a possible competing bid first. You can bet they’re contacting all of the larger competitors, especially XPO, and seeing if they might be interested in a topping bid.
So what you get here is really a “heads, I win, tails, I don’t lose situation”.
Tails, the deal goes through, and you make a small premium to the current stock price ($1.05 vs today’s price of $1.03/1.04). I can’t imagine there’s any issues with financing, so I’m viewing this deal as pretty much a sure thing. Even if it didn’t go through, I think AUTO is cheap as a standalone at $1.05 (less than 9x P/E for a growing company with ROE > cost of equity).
Heads, a competitor comes in and starts a bidding war. In that case, I’d imagine there’s at least 25% upside potential, and possibly a good deal more. Given their growth rates, trailing ebitda, potential synergies, and cheap financing due to open credit markets / low rates, I think a strategic could bid $2 and still realize a ton of value, even if they need to pay a small break up fee to cancel this deal.
So limited downside vs plenty of upside with a tight time frame (deal closes in Q2 of this year, so less than four months). I’ll make that bet every time and twice on Sunday’s. I’ve been loading up on shares today and will continue to do so as long as there’s a small spread between deal price and offer.
I’ll post my thoughts on merger proxy and other materials when they come out.
Disclosure: Long AUTO