A BRIEF CASE STUDY OF A PIPE TRANSACTION: PtekHOLDINGS

admin — Fri, 05 Jun 2009 18:55:12 +0000

Ptek Holdings is a global provider of business communication services to large and medium-sized corporate customers. The company has two business units, Premier Conferencing and Xpedite. Premier Conferencing offers a variety of conferencing and Web-based data collaboration services, and Xpedite offers enhanced electronic messaging through various distribution channels including e-mail, fax, wireless, and voice. The company has a global presence and an established customer base of over 32,000 corporate accounts, including a majority of the Fortune 500 firms, spanning virtually every industry group.
A large number of businesses rely on data, audio, and web conferencing or electronic transactional messaging to manage a wide variety of important communications. The growth of these communication technologies and the increasing complexity of service requirements have created a large market for companies that wish to outsource these group communication processes. In addition, the current geopolitical climate coupled with corporate cost-cutting trends have encouraged companies to replace business travel with more convenient, reliable, and economical communications such as teleconferencing and videoconferencing. Ptek went public in 1996 at $25.00 per share. The company had $52 million in revenue and was marginally profitable during its first year of operation. The company began a rapid expansion program in 1997 that included deploying a large number of assets into fixed infrastructure in order to accommodate the growing volume of conferencing activities. In addition, the company made a number of acquisitions of smaller enterprises and quickly grew sales from $52 million in 1996 to a peak of $458 million in 1999. However, the company was not able to execute this growth strategy at a profit. On a per-share basis, the company lost $.78 in 1997, $1.67 in 1998, $.72 in 1999, and $1.22 in 2000 as sales declined to $423 million in 2001. As a result of write-downs and charge-offs as well as continuing losses on its operating business, the company reported a loss of $4.84 per share. Although the company was largely unprofitable on a generally accepted accounting principle (GAAP) earnings basis, between 1998 and 2001 the company generated large internal cash flow through depreciation and amortization of capital equipment. So, although the company had had significant GAAP earnings losses, it managed to generally break even and even create positive cash flow during the period through 2001.
During 2001 and 2002, the company presented what seemed to be an interesting investment opportunity. Sales had stabilized at around $425 million and the company was trading at a relatively low multiple of book value as well as a low multiple of cash flow. In fact, during 2000, 2001, and 2002, the company traded in a range as low as 1.0 times cash flow and as high as 6.4 times cash flow. On a cash flow basis, this was an extremely cheap company. Furthermore, in 2002 the company had created a stable EBITDA margin of 17.5 percent and a net profit margin of 4.2 percent, which created a return on equity of 17.7 percent. All these financial metrics suggested that if the company could continue growing, it would present a fairly attractive investment opportunity and would ultimately show the ability to convert revenue to earnings and allow for expanding margins and growing profitability.
On August 7, 2003, Ptek Holdings announced the pricing of an offering of $75 million of 5 percent five-year convertible subordinated notes due in 2008. The press release stated that the notes were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 as amended. In addition, certain persons in offshore transactions relying on Regulation S also purchased the offering. In essence, that press release announced to the world that the company had done a PIPE offering of convertible subordinated notes. The press release indicated that the notes were convertible under certain circumstances into the company’s standard stock at a conversion rate of 149.4 shares per $1,000 of principal amount. That equaled a conversion price of approximately $6.69 per share. At the time, the common stock of the company was trading at about $5.50 a share, so the $6.69 conversion price represented a conversion premium of 18 percent. This indicated that institutional investors believed that the potential return on the common stock would be no less than 18 percent, based on the trading premium for which they negotiated upon the pricing of the securities. On August 21, the company filed a registration rights agreement between Ptek Holdings and CIBC World Markets, an affiliate of UBS Securities, as the initial purchasers of the 5 percent convertible subordinated notes.
For purposes of micro cap analysis, UBS Securities would be considered a technical investor, and it’s likely that these convertible subordinated notes went into one of its hedge fund vehicles. It would also be safe to assume that at the time, the time horizon on these notes, although having a useful life through August 2008, would for practical purposes be shorter than the five years indi- cated by the registration rights agreement.
In part, the company used the proceeds to fund several acquisitions of complementary business lines and fund several joint ventures with other service providers that would provide increased revenue for the company. The year 2003 was solidly profitable for the company, with the real profitability starting with the June 2003 quarter. However, sales began to increase with the September and December quarters, along with real net income, with the company showing $.42 of adjusted gap earnings for the year ended December 2003.
Since the August 2003 offering of convertible subordinated debentures, Ptek Holding stock has increased in value from approximately $5.50 per share to approximately $11.00 per share, showing about 100 percent appreciation over the time period.
On June 14, 2004, Ptek Holdings announced that all outstanding 5 percent convertible subordinated notes due in 2008 would be converted into approximately 12.7 million shares of common stock, all of which had been included in the company’s diluted shares outstanding. As a condition of the conversion, Ptek would pay converting note holders accrued interest of approximately $1.4 million and also pay them a make-whole provision, essentially a prepayment penalty of approximately $16.3 million, which represents the net present value of future interest payments on the bonds.
During the first quarter of 2004, Ptek continued to perform strongly, with revenues increasing from $89 million in March 2003 to $105 million in March 2004. The company earned $.13 per common share on a fully diluted basis, an increase of 25 percent over the $.09 per share the company earned for the quarter ended March 2003. Since 2003, five well-known research organizations have elected to begin coverage on Ptek Holdings, including CIBC World Markets, which were the initial issuers of the convertible subordinated debt, and Morgan Keegan, a well-known regional brokerage firm. This is just a brief example of the private investment and public equities transactional activity that takes place in the capital markets. These types of transactions are worth scrutinizing in order to determine whether there is an opportunity available as a private micro cap investor. The addition of capital allows companies like Ptek Holdings to continue executing their business plans, along with increasing equity capitalization through ongoing conversion of convertible securities, all of which points to positive future valuation potential for the company.

TRACKING PIPE TRANSACTIONS

admin — Sun, 24 May 2009 18:55:00 +0000

Regulation FD, which is now known as Reg FD, was enacted in 2000 in order to deal with the issue of selective disclosure of material nonpublic information by public issuers of securities. Reg FD was designed to create a level playing field between institutional and individual market participants. The fair disclosure rules of Reg FD prohibit a company from revealing material nonpublic information to selected investors without disclosing that same material to the public at the same time. While material nonpublic information does not have an exact definition under the regulations, most investment professionals would agree that corporate information can be viewed as material if there exists a substantial possibility that a reasonable investor would consider the information as important in making an investment decision. Information can be viewed as nonpublic if it has not been disseminated in a way that makes it available to all investors at the same time. Thus, a private placement of securities by an issuer in most instances would be a material fact.
Because the fair disclosure regulations would apply to public companies conducting any type of private offering, the information that companies are able to disclose to potential investors during the PIPE marketing process is restricted to publicly available information. However, through the use of confidentiality agreements, potential investors at times expressly agree to keep the information that the issuer is considering an equity offering in confidence until the transaction has been publicly announced or terminated. So a potential investor in a private investment offering for a public company would not be allowed to trade in the issuer’s securities prior to such an announcement or termination of the offering. After a PIPE funding has been agreed to, the public issuer would be required by SEC guidelines and fair disclosure regulations to publicly disclose the transaction. Typically, an issuer would file a current report Form 8-K and issue a press release regarding the funding. It is the Form 8-K filings and press releases that provide a fertile opportunity for micro cap investors to discover potential candidates in the micro cap arena. This is a very useful screening technique when looking at micro cap opportunities.
Private investments in public equities would be considered smart-money transactions. The investment professionals who are in a position to make a large private investment in a public company will typically have extensive industry and investment knowledge and will see there an opportunity that may not be apparent to the broader equity markets. In addition, because these investors may have a limited time frame, particularly in the case of technical investors, it is possible to construct a series of logical assumptions that would lead to an end point or exit strategy for a typical PIPE investor. There are several good venues for obtaining information on PIPES and private equity deals. Of course, the SEC, in its daily filing reports, would allow an investor to download and review all 8-Ks filed by public companies. Although this is a cumbersome process, investors who monitor such activity on a daily basis become fairly efficient at weeding through 8-K filings. However, there are several private databases available via the Internet that provide information about equity private placements. PrivateRaise.com is a web site that compiles statistics about private investments in public equities. The transactions on the web site are contained in a database that includes Rule 144A PIPE transactions, registered direct PIPE transactions, and non–rule 144A transactions. The database also documents the issuance of any equity or equity-linked security of over $1 million in nominal value that has been executed by a public company domiciled in the United States or public foreign-based company that has its primary trading listing or a significant trading presence on any of the U.S. stock markets. Equity and equity-linked security-type structures included in the database are common stock, convertible preferred stock, nonconvertible preferred stock that has warrants attached for common stock, convertible debt and nonconvertible debt with warrants attached for common stock, prepaid warrants, and equity lines of credit. This is a useful resource if you are going to seriously consider a focus on PIPE transactions as part of the micro cap screening process.

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A BRIEF CASE STUDY OF A PIPE TRANSACTION: PtekHOLDINGS

TRACKING PIPE TRANSACTIONS