Description

Let’s start with the punchline: On May 31, 2024, Gentex Corp. (GNTX) submitted a proposal to the Board of Voxx International Corp. (VOXX) to acquire all of the shares of the company not currently owned by Gentex for $5.50/share (~50% premium to the closing price of $3.69/share on May 31st). News of Gentex’s offer was not made public until August 23, 2024, when Gentex filed a 13D that disclosed the $5.50 offer for the entire company offer and:

1. The acquisition of an additional 3,152,000 shares at $5/share(>$70% premium) from a Selling Director on August 23, 2024.

2. A  term sheet with the same Director to acquire a 50% interest in EyeLock, a majority-owned subsidiary of VOXX, for a $15mm earn-out based upon the profitability of the JV  and a 3% royalty. 

Steve Downing, the CEO  of Gentex,  joined VOXX’s board in May of 2023, and Gentex now owns 27% of the shares outstanding (6.2mm/23mm A+B Shares).  Gentex has a $ 7 billion market cap and dominates the market for dimmable devices and vision systems for cars. Most likely, Gentex is interested in Eyelock’s Iris-based biometric technology (supported by hundreds of patents), which could be incorporated into rearview mirrors (Gentex has 90% market share). There are other synergies given VOXX’s long history in Automotive Electronics  ($140mm in Revenues in 2023) and strong presence in Premium Audio (Klipsch has 25% market share in premium speakers for the home and has design wins on the Infiniti QX80 and Dodge RAM Truck).

Given the sequence of events, it appears likely that VOXX will reject Genetx’s initial offer and Gentex will have to come back with a higher offer. As an investing policy, we usually don’t bet on M&A, but the setup for a higher offer here can’t be ignored, especially since the 91-year-old founder of VOXX recently stepped down as the Chairman of the Board in August and gave over control to his son who is involved primarily in real estate ventures outside of VOXX. It appears that the Shalem family is ready to sell and they have an interested buyer.

In the event a sale doesn’t happen, there’s still a decent margin of safety at these levels. VOXX is in the midst of a turnaround, and the combination of asset sales, deleveraging, and a return to profitability this year make the equity interesting as an investment in its own right.

Background

VOXX got its start in 1965 selling OEM and aftermarket automotive electronics and grew organically and through M&A which culminated with the  $166mm purchase of Klipsch in 2011. Today, there are four primary Assets: 

1)Automotive;2)Consumer/Premium Audio; 3)ASA Electronics (50/50 JV which sells aftermarket content for marine, agricultural, and ATVs); 4) BioCenturion JV (EyeLock)

The business is somewhat cyclical: Premium Audio went crazy during Covid as consumers rushed to upgrade their home theatres and is now recovering from its hangover. 

Automotive Electronics,  which is 60% Aftermarket and 40% OEM,  has been struggling given dislocations among Automotive OEMs, but actually has a nice setup given 1)They are under contract to sell their manufacturing facility in Orlando for $20mm net of the mortgage and have moved operations to Mexico which will improve performance; 2) They secured a design win with Oshkosh Defense worth up to $150mm to provide vehicle camera systems for the new Postal Delivery Fleet which should come online next year.   It’s been volatile, but they are seeing green shoots:

For the purpose of understanding Gentex’s offer, it’s important to focus on the EyeLock subsidiary and highlight some key events that transpired over the last several years:

1. In 2018-2019, a private Investor named Beat Khali/Avalon purchased 27% of VOXX  in the open market.

2. In 2021, Beat Kahli formed a company called GalvanEyes LLC to distribute EyeLock technologies in certain markets.

3. In March of 2024,  EyeLock entered into a joint venture agreement with GalvanEyes to engage in a newly formed entity, BioCenturion LLC, to operate its biometrics business. This move effectively took EyeLock off the balance sheet of VOXX in order to shield VOXX from further losses. 

4. In August of 2024, Beat Khali entered into a term sheet to sell GalvanEyes to Gentex for the following Consideration:

From the outside, it’s hard to make heads or tails of all the back and forth with the different entities and  EyeLock,  but only one fact really matters: Gentex is interested in this technology and is potentially willing to buy all of VOXX to get control of it. Gentex highlights its focus on biometric authentication in its most recent Investor Deck:

It’s hard to know what EyeLock is worth to Gentex, but at a minimum, Gentex would probably need to pay the $70mm Note that EyeLock owes VOXX as consideration for the years of investment and fair value for the rest of the assets. 

Valuation and Concluding Thoughts

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There is a lot of guesswork involved in trying to value VOXX. Here are two theories for how VOXX management might be looking at this as a counter to Gentex’s initial offer of $5.50/share:

1. In October of 2023 and January of 2024, Beat Kahli sold his initial 3.1mm shares of stock to Gentex at $10/share. Based on pure fairness, it’s hard to imagine VOXX management would accept anything less, given an entire purchase of the company would include the Shalem family’s 2.2mm super-voting B Shares.

2. On September 5th, 2024, VOXX disclosed that they sold two noncore Assets for $28.2mm, which represented  $49mm in FY24 Revenue or ~.5x Price to Sales. Applying the same multiple to FY24 Revenue of $468m/23mm shares = ~$10/share.

Bottom Line: With $5.50/share as a floor versus the current trading price of ~$5.80,  VOXX equity has asymmetry to the upside. In the unlikely scenario in which Gentex drops out, VOXX can still work as a stock as the business deleverages and moves to profitability this year.  

Catalyst

-Gentex increases its offer VOXX

-Further Asset Sales and Deleveraging

-Return to Profitability in FY24