Description

QUMU (ticker: QUMU)

 SHORT SUMMARY:

 Pay $1.95 for one share of QUMU and one of the following things happens: 

1.            No deal: my share worth $3.282.      

2.            Sweetened deal:  shares worth “more”.

3.            Deal closes: my share is worth $2.70 or more

4.            Another buyer emerges for QUMU

*****

Qumu is a Minneapolis based enterprise video software company that spent years in the microcap penalty box, never meeting their guidance and trading at a seemingly permanent EV/Sales number of less than 1x.   If you want more background on the idea, please see my original write-up.  If you don’t want to read the original write-up here are two sentences to illustrate what QUMU does.

QUMU enables very large enterprises (partners like British Telecom, AT&T, customers like Pfizer, Bayer, Roche, Glaxo, MasterCard, Barclays, Visa, Citi, JPM, Credit Suisse, Fidelity, and Toyota, etc.) to communicate, archive, transcript, webcast, live train, conduct compliance activities and collaborate via VIDEO.

All of this was interesting and great.  Post Covid-19 it is even more critical.

Despite high recurring revenue of $25m-$30m and a combination of strategic asset sales and capital raises that left the company debt free and with $10m in cash, the company was never able to gain any real traction with investors.  Activist shareholders Dolphin and Harbert both obtained Board seats, a new CFO was brought in to professionalize the finance department, and an onerous Hale Capital financing was paid off.  None of it mattered and the stock languished for years between $1.50 - $3.00 per share.

Qumu Announces Merger

On Feb 11, 2020 QUMU announced a deal to merge with publicly listed Synacor:

https://bit.ly/2VsTBQL

As per the release, the combined company is expected to have over $120 million in annual revenue on a pro forma basis. This will include an estimated $70 million in software revenue, about 70% of which is recurring, and approximately $50 million in revenues from Synacor’s portal and advertising business. This is based upon the mid-point of Synacor’s current Full-Year 2019 guidance adjusted to exclude revenue related to ATT.net as previously disclosed and adding Qumu’s preliminary and unaudited Full-Year 2019 results.

The transaction is structured as an all-stock deal. Under the terms of the merger agreement, each share of Qumu common stock issued and outstanding as of the effective date of the merger will be converted into approximately 1.61 shares of Synacor common stock. After closing, Synacor common stock, including the shares issued in the merger, will trade on the Nasdaq under the ticker “SYNC”.

A copy of the Merger deck can be found here:

https://bit.ly/3efHQWh

 SO WHO CARES… WE WILL OWN A BUNCH OF SYNACOR IF WE BUY QUMU

Well – something called COVID-19 hit – and the Enterprise Video universe appears to be soaring..

QUMU’s Japan partner (V-cube) getting tons of customer inquiries:

 https://bit.ly/3a69Ng2

 “Video conferencing service provider V-cube Inc. is currently developing a service enabling livestreaming and voting during shareholders meetings, aiming to launch it in June. The company has received inquiries from 20 to 30 listed companies in just the past week or two, according to spokesman Kohei Takami.”

 QUMU competitor V-brick reports record breaking sales:

 Link:  https://bit.ly/2JZPuWO

 QUMU comp Pexip announces 50% year on year growth with 7x peak traffic growth

 Link:  https://bit.ly/2V2OSX0

 "A significant part of the growth comes from increased demand from existing customers."

***********************

Which leads us to QUMU…

On March 31, 2020 QUMU put out the following release:

Use of Qumu Cloud Spikes as Enterprises Transition to Video Communication in Response to COVID-19 Restrictions

Link:  https://bit.ly/2RzUpC4

“What we’re seeing at Qumu is global organizations hardening their video infrastructures on an unprecedented scale, as they massively increase their use of video conferencing technology,” said Vern Hanzlik, President and CEO of Qumu. “Enterprises from literally every industry are now requiring a combined solution that includes video conferencing, video streaming and content management. And we are seeing companies in health care, finance and pharmaceuticals specifically use video to make sweeping changes in the way they do business.”

*** SO WHAT IS HAPPENING HERE?  COULD QUMU GET OUT OF THIS DEAL AND GO UP IN VALUE? ***

POSSIBLE OUTCOMES:

1.       Deal with Synacor does not pass shareholder vote.  Qumu owes a $2m break fee + a bunch of legal expenses.

Valuation:

Sales:  $25m in 2019

Recurring portion: $17m

New Sales Multiple for a Covid-19 World: 2x = $34m in value

Sales Multiple on non-recurring sales: .5x ($8m) = $4m in value

Cash: $10m

Less Break, Burn and Legal ($3.5m)

Total Value: $44.5m

QUMU shares: 13.55

Value per share: $3.28 vs $1.95 today

  2.       Synacor realizes that the deal is not going to close and is forced to sweeten the offer.  I will not go through the mental exercise of figuring out what this will do to the value of QUMU, but it will be higher than where it trades now.

  3.       The deal goes through at the current terms.  We get 1.61 shares of Synacor for every share of QUMU.  What is the combined entity worth?

 Using the QUMU valuation above:

Qumu Value: $44.5m

Add back break fee: $2m

Total Qumu Value: $46.5m

Synacor Stand Alone Value based on March Guidance:

Sales: $100m

Multiple of sales:  0.5x

Synacor Value:  $50m

Synacor Cash:  $11m

Deal Fees: ($2m)

Total Synacor Value: $59m

Total Qumu + Synacor Value = $106m

Shares out:

Current Synacor: 41.3m shares

Current Qumu shares: 13.55m shares

New Synacor shares issued: 13.55 x 1.61 = 21.82m shares

Resulting total shares outstanding (41.3m + 21.82m):  63.12m shares

Total Qumu + Synacor Value Per Share ($106m / 63.12) = $1.67 per share

Shares of Synacor I receive if I buy one share of QUMU for $1.95 = 1.61

1.61 x $1.67 value for NewCo = $2.70 per share vs $1.95  I pay for one share of QUMU today.

To summarize… pay $1.95 for one share of QUMU and one of the following things happens:

1.       No deal: my share worth $3.28

2.       Sweetened deal:  shares worth “more”.

3.       Deal closes: my share is worth $2.70

4.       (Not detailed above) – deal closes and NewCo hits the $4m-$5m in synergies that have been publicly disclosed:  my share is worth “more” than $2.70

What are the odds that this deal does not close?

The deal requires 50% + 1 share to pass.  Here are the current shareholders of QUMU:

Both Harbert and Hanzlik (CEO) have signed support agreements.  Thus, 11.8% of the shares are voting for the deal.

Dolphin and Fondren are well known activists.  Their ownership also equates to around 11.9%.

 The stock of both issuers has traded DOWN since the merger was announced.  This is by no means a done deal.

1. Why would QUMU even bother putting out the release on their soaring revenue?
2. Why is there no date set for the Special Meeting?
3. What is the delay in getting the Proxy out on the Merger?
4. Better yet… could a third party come in and just buy QUMU?  The market cap is a mere $21m and there is $8m of cash less the breakup fee.

CONCLUSION

QUMU is undervalued no matter which way you slice it and no matter what ends up happening with the Synacor merger.

EVERY SINGLE COMPANY IN THE SPACE IS TALKING ABOUT INFLECTION POINTS IN THE BUSINESS.  WHY WOULDN’T EVERY MIDSIZED UC COMPANY NOT LOOK TO PICK UP QUMU TO FILL A MASSIVE HOLE IN THEIR STRATEGIC PLANS IN A WORLD OF WFH / COVID-19?

Catalyst

Deal Breaks

Deal is Sweetened

You end up with a cheap stock if the deal works out

Another buyer for QUMU emerges