EBIX is something of a battleground stock. It’s been bashed by short-sellers who have questioned it’s accounting methods and tax treatment. Some of the short sellers have also called it a “house of cards.” At the same time, some value investors have been absolutely enthralled by the stock. It was, by far, the most mentioned stock in my “call for investment ideas.”
I avoided the stock, because while I understood the long thesis (cheap stock plus a dynamo CEO), I did think some of the accting was a bit funky, I didn’t like the roll up model (it appears there’s little to no underlying organic growth behind it), and in general I didn’t think I had any form of edge.
However, that all changed when EBIX announced they were going private in an MBO. Yes, you heard me right, I’m pitching another MBO; long time readers (actually, even recent time readers) know why I think MBOs are so interesting.
Let’s do a very fast recap. EBIX is getting private by a team that consists of management and Goldman for $20 per share. The company also has a 45 day “go shop” period. The proxy is not out yet, so we haven’t seen the merger background, but I’ll be interested to see how this thing was shopped and how much interest there is in it.
The company is valued at $820M EV in the takeover, or under 9x EBITDA. I think that’s a bit on the cheap end, but not necessarily insanely so. I do think there’s a decent chance a competitor sees some synergies here and is willing to pay a bit higher of a multiple. Also note that EBIX’s tax rate is lower due to foreign earnings, so 9x EBITDA might equate to 7x or so for a fully taxed company.
So I really wouldn’t be shocked to see a higher bid. Somewhere around $24-26 makes a bunch of sense to me. As backup to support that thinking, I note that the company repurchased almost $6m worth of shares from July to September at $20.50 per share (see page 18 of 10-K), so they clearly saw some value at prices higher than today’s.
Overall, I think it’s a pretty attractive set up. Again, the merger hasn’t come out, but given Goldman’s backing and mgmt rolling their equity interest into the company, I think the odds of this deal going through are extremely high and the chances of a competitor coming in with a higher bid are decent. The market seemed to agree with me, as shares closed yesterday at ~$20.60, or a 3% premium to the deal price. I thought that was too small and picked up a few shares around $20.40.
Today, this Bloomberg article came out and shares went tumbling. They traded as low as ~$19 before closing at $19.50.
The reasoning is simple: while the facts in the Bloomberg article are, on the surface, quite damning, none of them are new to the market. Those facts are the exact same short case that bears have been making for over a year. Given that all of the allegations in the article have been out for so long, I think it’s a given that Goldman did some due diligence on the allegations and get comfortable with them before making a bid.
(There’s also the somewhat strange fact that, in the past year, there seems to be a negative Bloomberg article that comes out every time the stock runs up. I’m not a conspiracy theorist by any means, but it’s certainly possible that the shorts have a connection there and are using it to try to keep the stock down or incite fear in the merger).
And that’s how simple the long case is. A merger arb that, before today, was priced at a -2.5% spread (that I felt was still too cheap) is today priced above a 2.5% spread simply because of a Bloomberg article that rehashed a bunch of old short arguments.
So I’ve added to my position. It’s not a huge one (yet) (currently, I’m about equal between it and American Greetings); I’d still like to see the merger proxy and see if any other parties have been bidding for the company. But it is an attractive one. I think people are panicking on news that is frightening on the headlines but that has no impact on the merger prospects. Time will tell.
Disclosure: Long EBIX and AM.
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