HEAR update - free money or too good to be true?
Turtle Beach has rejected a $36.50 buyout offer from Donegal Group. Is that the floor? Or is management just out of their minds?
First, my apologies that it has been a while since my last posts. As you may or may not know, my day job is in an M&A-adjacent capacity, and the M&A market has been absolutely out of control. But things seem to be calming down a touch and I hope to return to regular updates here (and I have a few more ideas for posts in the pipeline, as long as I have the time).
Anyway, the topic at hand - $HEAR (Turtle Beach).
I wrote about HEAR earlier this spring and made some money on the run from the mid /high $20s to the high $30s on the first round of M&A speculation. I took some money off of the table near the top, but held some shares, which are now more or less back to where things started.
HEAR has been pursued by at least one potential acquirer, Donerail. They put in firm bids, apparently at $34.50 and $36.50, which to their credit are at fair enough premiums to current and recent average prices.
HEAR rejected the offers, claiming that it undervalues the company. I personally do not disagree - in my earlier posts, I had penciled in $40-45 as my expectation for a transaction price, so Donerail’s offers were indeed a bit under what I saw as being the winning bid in a competitive auction process.
That being said, HEAR’s management is notoriously not the best. There have been prior issues. This rejection, on its face, seems to be potentially logical, but it also could be ineptitude.
There is now apparently an ongoing sales process which, if true, should result in a conclusion, one way or another, within the next ~2 months. One would think that the $36.50 offered by Donerail should be the floor price, and thus we might expect a winning bid in the $40-45 dollar range that I originally speculated on. With shares at $28.50 as of the 9/3/21 close, $40 would represent a 40% premium - not a bad return in a few months time. On the other hand, given management’s track record of being jabronis, who knows if the “process” is a sham and they just turned down the best offer that they will receive for reasons unknown. From my experience with processes, Donerail may take the scorned lover approach and I do not think that $36.50 is on the table from them anymore. So, it’s either a deal at $40+ or it is no deal and a big selloff when it is announced that the process concluded with no transaction.
As for how I’m playing this (and as always, this is never advice), I am still holding a decent sized position of shares from a cost basis of ~$26 earlier this year. I may add more next week. There is zero deal premium built into the current price. But there is a discount related to subpar management.
And I know you sickos like to lever up, but unfortunately I have not seen great options plays yet. The below picture is a snapshot of the October chain. Volumes are pretty low so prices look a bit wonky (the column to the right of the strikes is the last trade). Something like a 35/40 spread might be worth a small gamble if one can execute it at the ~.30 that it looks to be going for, but the process may not have concluded (or the in-process outcome may not yet leak) in the next 6 weeks. After that, the next available strikes are January, which are fairly expensive, but I will keep my eyes peeled for a spread play and update if I find a good one.
In conclusion, on its face, this seems like a slam dunk (the floor should be $36.50!!) but when things seem too good to be true, they often are. I will continue holding my shares (and potentially add more) as shares are in no way overvalued based on earnings, especially in this market. But management’s track record of bumbling, and the baffling rejection of a decent offer, should give an investor a bit of pause. I have not and will not bet the farm but I plan to see this one through to its eventual conclusion in the next couple of months.
Sorry for the wait,
Elmo
Just looked a bit into Donerail, it doesn't strike me as a fund that can acquire companies, no PE only stakes in public traded Co's. It seems more like a strategy to see if they can lure out a competitor with a higher bid
Hey Elmo, when I look at the shareholder structure, the who's who of the arbitrage community is involved? How crowded do you think is the name?