Fuel Systems’ Co-Founder Responds to ISS Recommendation to Fuel Systems Solutions, Inc. Stockholders
24 5월 2016 - 4:27AM
Business Wire
Beneficial Owner of Approximately 8.7% of
Outstanding FSS Shares Reiterates his Intent to Vote AGAINST the
Amended Merger Agreement
Pier Antonio Costamagna, a co-founder of Fuel Systems Solutions,
Inc. (“FSS”) (NASDAQ: FSYS) today reiterated his intent to vote
AGAINST the proposed merger of FSS and Westport Innovations, Inc.
(“Westport”) (TSX:WPT / NASDAQ:WPRT) and commented on the report
issued by Institutional Shareholder Services Inc. (“ISS”) regarding
the proposed merger.
Mr. Costamagna commented: “As we approach the shareholder
meeting, I feel it is important we objectively consider fundamental
facts regarding this flawed merger. First and foremost, the
analysis done by J.P. Morgan among other factors shows that the
downside risk of rejecting the merger is limited. It is also
important to note that FSS had an all-cash offer of $4.5 per share
from a Third Party - that was still conducting due diligence – when
FSS announced the amended merger agreement.”
“At the same time, the significant and clear risk that Westport
could quickly be insolvent severely impacts the future value of the
combined entity. Finally, FSS shareholders are not receiving any
acquisition premium. Instead the implied offer price is
substantially lower than FSS standalone value. For these reasons, I
intend to vote against the proposed merger.”
Mr. Costamagna also noted the following issues with the ISS
report:
LIMITED DOWNSIDE RISK OF REJECTING THE OFFER
- First, I believe the downside risk of
rejecting the merger is limited due to the standalone value, as
computed by J.P. Morgan in its fairness opinion, being higher than
the implied offer of $5.05.
J.P. Morgan Standalone Value Estimates for Fuel Systems
Solutions (mid-point of high and low)
Per Share
Discounted Cash flow $14.85 Selected Transaction Analysis $5.9
Equity Research Estimates $8
Source: SEC filings
- FSS shares have underperformed its
peers’ since the merger agreement was amended which suggests that
its share price might improve if the merger were rejected.
- It is critical to look at the two
companies (PSIX and LR) that comprise the peer set which ISS relied
upon to conclude: “the company's [FSYS] shares would have performed
more poorly without the new agreement than with it, and that there
may be significant downside risk in rejecting the merger.”
- My concern with ISS’ analysis and the
resulting conclusion is that it assumes FSS’ share price will
follow the peer median if the merger is voted down. I believe such
an assumption is misplaced as the peer median is disproportionately
impacted by PSIX performance. PSIX unlike FSS, has significantly
greater exposure to the Oil and Gas space and thereby has been
affected by the overall sentiment for the Oil and Gas sector.1
Additionally, PSIX has debt related concerns that FSS does not (see
table below). Given this important distinction, I believe it is
highly likely that FSS’ share price will not track its peers’ and
fall significantly, as suggested by ISS, if shareholders reject the
proposed merger.
ISS Peer
Group As of 31 March 2016
FSYS PSIX
LR US$mn
US$mn Euro mn Cash & ST
Investments 49.54 1.5 20.26 Total Debt
0.15 134.51
88.25
Given the above, I believe a better way to compute standalone
value or the downside risk is to look at the valuation multiple at
which FSS would likely trade if the merger is rejected. Regardless
of which multiple is used - EV/Sales or EV/EBITDA (as used by JP
Morgan in its fairness opinion), the stand alone value for FSS
comes out higher than the implied offer, suggesting limited
downside risk.
LIMITED UPSIDE POTENTIAL OF THE PROPOSED MERGER
Insolvency Risk
- Surprisingly, ISS analysis has no
discussion of potential insolvency risk pursuant to the merger.
If both the sitting CEO and a senior director (who resigned in
protest) did not vote for the
merger citing liquidity concerns, it is surprising that ISS did not
consider this as a material issue which warranted serious
discussion in their analysis.
- Importantly, even the directors who
voted for the merger considered insolvency to be a real risk, as
noted under the Reasons for the Merger section of the proxy: “That,
even with the proceeds of the First Tranche and the Second Tranche
of the Cartesian Financing Agreement, the
combined company may be unable to obtain additional needed
financing in light of the restrictions contained in the
Cartesian Financing Agreement and market conditions and that,
as a result, the combined company may
become insolvent. Accordingly,
the termination of the merger agreement, although with attendant
risks, might be more beneficial to Fuel System stockholders than
the merger agreement amendment and the Cartesian
Amendment.”
__________________________1 Management Comments from PSIX
1Q2016 earnings announcement “Our first
quarter revenues were in line with our expectations and reflected
the continued softness in the oil and gas end market;
We’ve made meaningful progress with our
balance sheet and gained financial flexibility with an amendment to
our debt.” - Gary Winemaster, Chief Executive Officer,
PSIX
FUTURE GROWTH HIGHLY UNCERTAIN
- Furthermore, I have serious doubts
about Westport’s ability to meet its financial projections, in
particular, with ISS’ assessment that “the growth over a more
substantial period – in some sense, the real future of the combined
company – is expected to come from Westport.”
- The Westport growth that ISS is relying
on would require $150 million of additional capital. It appears
unlikely that Westport will be able to raise capital at a
reasonable cost considering the first tranche of $17.5 million of
Cartesian Financing has an effective interest rate of 23% p.a,
despite a historically low interest rate environment.
- Even if the financing goal was met,
Westport projections suggest that its revenue will increase by
4.8x and Adjusted EBITDA by
1.6x over the next five years.
The fact that Westport’s revenue fell 14% yoy in 1Q2016 – 4th
consecutive quarter of negative growth – and that its share price
declined 46% since the merger
announcement suggests that the market does not believe in these
projections but instead deems Westport to be at a real solvency
risk.
STANDALONE ALTERNATIVE – CASH OFFER
- The ISS analysis of FSS’ standalone
options fails to account for the circumstances under which the $4.5
cash offer from a Third Party was received and rejected. The ISS
report states: “that proposal was $4.50 in cash per share, which is
lower than the current value of the merger consideration and does
not include any upside potential from a combination.”
- The $4.5 offer was received on January
27, 2016 – this offer represented a 14%
premium to FSS’ then-share price. More importantly, it
was believed that the Third Party who made the cash offer could
increase it. As the company’s proxy notes: “the Third Party was
continuing to do work with respect to the Third Party Proposal,
including whether it could increase the
proposed purchase price.” However, On March 6, 2016, FSS
announced the amended merger agreement and simultaneously
terminated discussions with the Third Party while rejecting its
$4.50 offer. The Third Party was yet to make its “best and final”
offer.
- Considering that the Third Party’s
initial cash offer represented a reasonable premium, and the fact
that it was actively involved in the negotiation process and was
yet to make its “best and final offer,” I believe, makes it
reasonable to assume that FSS may have received a premium cash
offer.
QUESTIONABLE GOVERNANCE
- ISS’ assessment of FSS’ questionable
governance-related behavior is in line with our concerns, which
raises the question of why ISS would continue to recommend this
transaction when it explicitly states in its report that the
Board’s actions are troubling: “Shareholders should be concerned by the board approval
process for the amended agreement: it is unusual for a
board to have such divergent views on a potential transaction that
require minutes of meetings to be amended to highlight the pressure
exerted on directors to change their vote, and to have a director
resign as a result. The exclusion of the
CEO from the final vote, moreover, is just as
concerning, since the rationale – that he was an
interested party who may not have been aligned with other
shareholders – did not appear to be a concern in any prior votes on
or discussions of the transaction, until he first voted against it”
(emphasis added).
*Permission was neither sought nor obtained to use excerpts from
the ISS report.
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version on businesswire.com: http://www.businesswire.com/news/home/20160523006387/en/
Abernathy MacGregorPat Tucker/Cia
Williams212-371-5999pct@abmac.com / cew@abmac.com
Fuel Systems Solutions, Inc. (NASDAQ:FSYS)
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