HEAR - Believe the Buyout Rumors
The market has yet to appreciate that a deal should probably get done. And even if it doesn't, shares are still cheap.
Last week, as I had (sort of) speculated about in my original HEAR long idea post, it was leaked that Turtle Beach (HEAR) had started a process to sell itself.
(source: Seeking Alpha, Reuters, some paid publication I couldn’t access that SA cited, etc.).
And it makes a lot of sense.
As noted in my original post, HEAR trades at ~7x TTM EBITDA and approximately 8x expected 2021 EBITDA after raising their full-year forecast to $50m following a very solid Q1.
(source: their Q1 press release)
Incredibly, after the M&A rumor came out, shares closed *LOWER* which is pretty much unheard of considering it came from a reputable source. I added to my position in the $26s slightly increasing my cost basis from $24ish previously.
As someone who (tangentially) works in M&A, I have zero doubts that HEAR could get a deal done at an advantageous price for current shareholders. At $50m EBITDA expected in 2021 and an enterprise value of about ~$400m today, the 8x multiple is well below-market for a pretty attractive, pretty well-performing company that stands to benefit from the continued trends in gaming, working from home, etc. I’d personally expect a deal to go off around 12x, or $40 or a few bucks more. That’s me spitballing, I admit it, but it’s my gut feeling after seeing thousands of deals a year.
Of course, the process *could* get derailed. Turtle could have hired incompetent bankers. They might balk at offers in that range if they consider it below their inherent value (and I would be disappointed but couldn’t blame them given where public comps trade, though HEAR has underperformed those public comps for quite some time).
However, I believe that everyone from private equity to a Gamestop (why not have a captive accessories brand and absorb HEAR’s margin?) to a competitor (such as Corsair, CRSR, which has a $3b market cap and trades at 1.5x revenue and ~12x EBITDA, both about a ~50% premium to HEAR’s comps) should be champing at the bit.
As to timing and how to play it -
The buyout process rumor leaked on May 10th. As noted, shares poo-pooed it initially but have now perked up a bit.
Assuming it is true:
I’d expect that initial bids are probably due in the next week or so (call it end of May).
Second round bids are probably due a couple weeks later and a winner would likely be selected a few weeks after that (call it end of June). Of course a lead bidder may circumvent the process at that stage and work to sign the deal ahead of the official process.
Options on HEAR are thinly traded and I haven’t found a very attractive strategy yet (I will update you if I do) but for now, as noted, I just added some shares and a couple of spreads that’ll pay if they get bought at $40 or above this summer. I think it’s a lot easier to not overthink this one and, if, you choose to get your toes wet (and as always, this is never advice), shares that are currently not expensive at all potentially getting bought out at a ~30%+ premium 6-8 weeks from now is a lot easier than trying to get cute with an esoteric options play.
Good luck to HEAR’s management team and let’s put a bow on this prized asset at $42.
May be I am too emotional, but I cant imagine my life without @PlugInFUD. Without thoughts that he is outside somewhere doing fine, I collapse literally. I know it sounds girlish, but I truly put my soul in Elmer.
Hey man, please take care if yourself. We love you so much!!! ❤️❤️