SPAC ATTACK.

This is a limited time offer, (well, ok, it may well persist, but anyway, I HOPE it’s a limited time offer…) to buy a well-run business that is about to escalate earnings due to a capital infusion on the heels of past efforts finally coming to fruition.

 

The special offer to which I refer is AVPA’s (a SPAC; $5.74) deal to purchase 180 Connect (NCT/U in Cda; OECYF in US. $US for both as it’s listed in Cda in US$. $2.17) for 0.627 shrs of AVPA.

 

First, the yada yada stuff:

 

About 180 Connect Inc.

   180 Connect Inc. is one of North America's largest providers of
installation, integration and fulfillment services to the home
entertainment, communications and home integration service industries.
With more than 4,000 skilled technicians and 750 support personnel
based in over 85 operating locations, 180 Connect is well positioned
as the only pure play national residential service provider in the
market. 180 Connect Inc. shares are traded under the name of 180
Connect Inc. on the TSX .

 

180 Connect Inc. has over 85 operating locations in 31 states plus
Canada and performs approximately three million service calls to
residential homes per year. The Company is the second largest member
of DIRECTV's managed Home Services Provider network with operations
primarily in the western US. 180 Connect has a growing customer base
and is also a trusted partner for major cable operators focused
primarily in the eastern US and Canada. 180 Connect's extensive
network offers a platform for expansion into complimentary residential
and commercial service offerings.

 

About AVPA.

 

Ad.Venture Partners is a SPAC. Has 11.3M shrs, trading at $5.74, and 18M wrts struck at $5 and about $50M in cash. If more than 20% of the s/h’s vote down the proposal and want their money back, then the deal fails, they get their money back the the warrants expire worthless.

 

Now, the math on the deal. AVPA at $5.74, times 0.627 implies a value of $3.59 for NCT/U. (I’ll use this symbol for simplicity’s sake.). NCT/U is trading for $2.17. If the deal goes thru and NewCo trades at $5.74 (a reasonable assumption or else the AVPA s/h’s would not vote the deal thru), then you have a $1.42, or 65%, profit.

 

"Now, waaaaaaait a minute, Sparky. I bot some Ginzu knives one time and they were not the “special limited time offer” that the man said. This deal seems too good to be true." And, I’ll admit it looks that way. So, let’s look more closely.

 

First, assuming the deal goes thru, and NewCo trades at $5.74, what kind of valuation is that? NewCo will have 31.3M shares out, and mgmt has guided us to $0-10M net debt. Using a $5.74 price and $5M in debt, NewCo EV = $185M. NCT/U mgmt has guided, and reconfirmed in their 4/24/07 presentation on their website, fiscal 2007 EBITDA of $24-26M. Using $25M in EBITDA, this is an EV/EBITDA of 7.4, which is pretty reasonable for a company that has built up a great business, the scale of which is an effective barrier to entry. Additionally, by AVPA injecting capital into the balance sheet, a lot of large customers, like Rogers and a lot of municipalities that want a certain financial gravitas, will give them dramatically more business, so the nice annual ramping in EBITDA should continue and, indeed, escalate. Thus, a 7.4 multiple for such a grower is arguably low, but in any event, the equity component of the EV will grow dramatically with the escalating EBITDA the recapitalization will engender.

 

OK, if this is such a slam dunk, then why the huge arb?? Good question. There has been a huge seller of stock (like 1.7M shares-tho he’s sold about 1.3M, leaving 400K-ish, likely bot <$1), and, for whatever reason wants to take his profit. Am told he cannot short AVPA to “pre-sell” his stock, so he’s sat on the stock here. Wish I knew more about him, but I don’t.

 

I do have some other color tho. I have some friends at a small boutique IB in Toronto who have been long this stock for quite some time. (NCT/U IPO’d at $8 a few years ago.).  The lynchpin of valuation for the deal, and for NCT/U going forward should the deal fail, is the $25M EBITDA number. The color I get back from them is that this is eminently doable; This also addresses the other concern I had if the deal failed, namely NCT/U’s balance sheet. But, with $25M, and growing, EBITDA, the company will grow out of it’s balance sheet straitjacket in pretty quick order.

 

The gist is that AVPA is buying a company that has turned the corner. Adding the rocket fuel of a capital infusion will just accelerate the trajectory. Further rocket fuel will be the Nasdaq listing that they’ve already gotten approval for. No more of this pink sheets or buying a Canadian company denominated in US$ stuff. Thus, even tho it looks like a huge premium for AVPA s/h’s to be paying, the deal makes tperfect sense for them.

 

OK, but, only 20% of AVPA holders need to vote no, and I see a few large shareholders in there. If 2 or 3 of them vote no, then that’s all you need for it to bust. AVPA mgmt has committed to buy in the open market (and obviously vote) $7M worth of stock. This effectively takes out the largest shareholder, plus some, should they decide they want out. Additionally, mgmt has been doing a roadshow gathering buy-side support for the deal. They are going to approach the large shareholders and, since AVPA is trading quite near it’s buy-out value, offer to match any interested sellers with buyers who believe in the longer term story here. Mgmt has said interest in selling so far has “been minimal”.

 

The canary in the coal mine tho, are the warrants, which die if the deal fails. They traded down to 31cts after deal was announced, but are now 42cts bid.