Description

REMEC: REMCD (Until Jun20th, then back to REMC)

Despite "competing" with a marvelous FS writeup, and at the risk of losing my reputation as a one-trick energy investor, I’d like to introduce a non-energy—gaack, even a tech!-- name to VIC members. REMEC, Inc, was relative dot-com high-flyer. The company designs/ed and manufactures/ed microwave multi-function modules and subsystem for wireless, microwave, broadband, and satellite communication systems. Yada yada, since that’s not the thesis for the investment here. Like me, I believe that REMEC is totally misunderstood (and undervalued, I might add…). Unlike me, I believe that REMEC is going to liquidate itself, fairly quickly, and that the value per share is significantly greater than the current market value. More importantly, most of your money will be returned to you fairly quickly.

The reason REMEC is misunderstood, I believe, is because its current activities are rather complex and because they haven’t yet declared for liquidation. On May 20th, shareholders approved and the company closed on the sale of its REMEC Defense & Space to Chelton Microwave. Concurrently, the company returned $177M to shareholders via a simultaneous Reclassification and Redemption, such that each previous share of REMC was converted into .446 shares of NewCo (REMCD) and 1 share of Redemption stock to be involuntarily redeemed by the company at $2.80. This rather complicated structure was done for three reasons, I believe: tax efficiency for corporate shareholders; keeping the stock price above $5, and it’s attendant favorable treatments; keeping option holders even, since each outstanding option was changed to exercise into one share of NewCo from one share of REMC.

As of yesterday, reorg’d retail shares hit accounts. Since a lot of retail does not understand what has happened and is likely to happen, they are selling.

Additionally, I think there is massive confusion (perhaps on my part) as to the actual share count. The co’s 14A states:

"For purposes of illustration only, assuming that (i) our Board determines that we will distribute an aggregate of $150,000,000 (the minimum aggregate amount of the proposed distribution) to our shareholders in the Redemption, (ii) our Market Valuation is $346,068,461 (based on an assumed stock price of $5.384 per share) and (iii) there are 64,277,203 shares of our common stock outstanding immediately prior to the Reclassification as set forth on our stock ledger, our shareholders will be entitled as a result of the Reclassification and the Redemption to receive in exchange for each one (1) share of common stock they hold immediately prior to the Reclassification approximately 0.5666 of a share of new common stock and approximately $2.33 in cash."

REMC closed at $5.30 on 5-20, so I think a lot of shareholders assumed these numbers would be close to reality. .556 times 64.277M shares equals 36.4M NewCo shares. In reality, the final newco reclassification ratio was .446. Adjusting for some in the money options, the final new share count is 29.347M shrs, or 80% of the 36.4M number.

Further, the company has signed an agreement with Powerwave (PWAV) to sell the co’s Wireless Assets to PWAV for 10M shrs of PWAV and $40M cash. The recent s/h mtg did not vote on this deal, for tax reasons, I am told. The company plans to hold another s/h vote, likely within 60days, to ratify both this deal and “our Board will also request our shareholders to approve a plan of liquidation, under which we would dissolve REMEC as a legal entity, complete the liquidation of our remaining assets, and satisfy (or make provisions to satisfy) our remaining obligations. Prior to adopting a plan of liquidation, we will continue to explore opportunities to sell the remainder of our company or to sell our remaining business assets.”

The company was generous enough to provide ProForma numbers for the company post-PWAV transaction. They believe they can sell the remaining business (actually two closely related ones) for $25-35M. The one fly in the ointment is that the PWAV deal as currently structured may expose the firm to a tax liability of as much as $25M, and they are currently in double-secret-probation negotiations to “restructure” the PWAV deal. REMC mgmt is extremely close-lipped about details, which is probably another reason for the discount. I am currently trying to ascertain the details of just what can be “restructured” and its likelihood and cost, but doubt I will get anywhere with them. I am a little perturbed that a deal must be “restructured” for taxes; seems like a botch on someone’s part in my mind, but I don’t know. They are trying to juggle all these balls to keep taxes to a minimum. Playing around with the Pro-Forma numbers from the recent Form 8-K/A, I come up with a range of values from $7.33 to $8.34. With the former I zeroed out certain assets like Accts Recvble, Inventories, and PP&E (about $35M) and used $30M as the biz asset sale price, and figured they took a full $25M tax hit on the PWAV. For the latter, I used their net numbers, used PWAV stock at $9 (it’s $9.65 today) and assumed that whatever value there is for the last biz is in the BS and that they successfully avoid the $25M tax hit. These scenarios seem reasonable to me since they won’t sell the last biz for less than the sum of the parts, ie, negative on-going business premium, and that none of the $65M in accrued liabilities goes with the last biz. If they sell the biz at a nice premium to BS value and some of these liabilities go with and they avoid the $25M in taxes, the $8.34 number is low. But, the key driver here is that I believe that immediately upon the consummation of the PWAV transaction and adoption of Plan of Liquidation, the company will distribute as much as $4.60 to shareholders. So, now you are looking at making between $1.25 and $2.25 on a $1.45 stub. Upon approval of the PWAV deal and Plan of Liquidation, the company will issue BS numbers in Liquidation Accounting format, which should really clear up the value here. I could clearly be wrong in my assessment of the assets; but, my judgment of management, tho tight-lipped and curt (listen to their CC’s….) is that they are competent and trustworthy. I don’t think they’d put these numbers and guidance out if they didn’t think they could hit it. I think there is an opportunity now while the waters are muddied and the reorg’d shares are hitting the market. Market liquidity is pretty good too.

Catalyst

Catalysts:
Realization that true share count is 29.6M not 36.4M.
Cessation of retail selling
Approval of Plan of Liquidation and concomitant Liquidation Acctg of BS
Return of PWAV deal proceeds to shareholders