I bought my first UTSI shares in the beginning of 2013 only to exit a year ago when they started to trade higher for no apparent reason. This proved to be a lucky move since the shares are down almost 40% since I sold, and that is after a small recovery the past two months. But the past is the past, what is more interesting, is what is currently happening with the stock.
More than a month ago the largest shareholder of UTStarcom filed with the SEC an amended form 13D in which they disclosed that they would sell their entire stake for $6.081/share to a strategic investor in China. This represented a premium of more than 200% compared to the previous market price. Today a Chinese news article notes that the transaction has closed, and more importantly: that the buyer intends to take the whole company private. The Chinese buyer bought a 31.6% stake for ~$72 million and the news article notes that the buyer expects to spend another $150 million to buy the whole company. This implies that they are going to offer the same $6.081/share deal to remaining shareholders (translation by Google Translate):
“Said is also more clever, UT headquarters in the United States just in our headquarters in the United States near future to integrate more convenient. Brand and personnel completely belong to us, there will be no changes, the only change is the CEO, it will initially expected by me served. “Gu Guoping said.
Gu Guoping absolute control of UT Starcom also being planned, it is expected to Fiji News about $ 150 million to that end expenditures.
Why the market has barely reacted to these events is mind-boggling. If there is a going private transaction in the near future UTStarcom shareholders stand to make a return of roughly 170%! Like I said, mind-boggling. Sure, we have the usual China risk, but UTStarcom isn’t some shady company with a fraud story. It’s not a great business, but they do have a solid balance sheet with a large amount of cash and tons of tax assets (thanks to a history of losing money…). For a strategic investor, that is active in the same industry, this is certainly a deal that could make sense. And even if no deal materializes the downside is most likely limited given UTStarcom’s cash balance. It could be a bit of a melting ice cube though…
For some more background on the latest developments, I would recommend these two articles by the GeoTeam on Seeking Alpha:
- UTStarcom – Mysterious 13D With Huge Premium Could Foreshadow Strategic Involvement Or Buyout
- China Media Reports Support Our Bull Case On UTStarcom
Author is long UTSI
Nice note – of course it’s worth noting that he may not take the company private – or if he does, may be a tender under $6. Nonetheless, despite the usual China risk, we are still long.
Best of luck,
Chris @ GeoInvesting
Of course speculative what will exactly happen, but seems to me that the plan is clear. And if he wants to take the co private he will have a hard time justifying less than $6/share since that is what he just paid for a 30% stake.
why is this guy paying 2x book for such a crappy business?
Say this guy is in cahoots and the insiders are just dumping their shares on us. What can the SEC do to them?
With 73.5mln in cash I wonder why the insiders would want to dump shares now. They’d want that cash out before dumping, wouldn’t they?
Shah Capital is a US based firm. I’m sure law enforcement can find them if this is part of some shady deal.
The only source that indicates they closed the deal is this Chinese article? How reputable is that source? The buyer and Shah Capital will have to make an official filing to the SEC to reflect the ownership changes. Perhaps that will act as a catalyst?
It could also be that some investors don’t like the fact that Shah Capital will now be out. With a large US based owner selling to a Chinese buyer, it makes the company “even more Chinese” than it already was.
Still, the difference between the current price and a potential $6.08 future offer is huge.
Yes, I think we should see a SEC filing from Shah Capital soon. Perhaps that will act as a catalyst.
Regarding the $231M in gross NOLs, how do you think about the fact that if Gu Guoping goes above 50% ownership of UTSI within 3 years of his first acquisition of the stock, he will incur a Section 382 limitation and severely reduce the value of the NOLs? I can confirm with a pretty high degree of certainty that the only way to structure a deal without incurring the 382 limitation is that he would have to wait to go above 50% ownership until 3 years after this stock purchase closes. If you’re trying to handicap timing for a takeover offer to minority shareholders, do you think it’s more likely that he doesn’t care about the NOLs and will thus make his offer sooner rather than later, or do you think he cares about the value of the NOLs enough that he waits 3 years before taking up his stake?
I don’t know if an acquisition would invalidate the US NOLs (Perhaps you could argue that there is no change of control in the US subsidiary that owns the NOLs? I don’t know what the rules exactly are). But they also have NOLs and other tax assets in other countries, so there is definitely some value in them.
the fact that the purchase from ShahCapital appear in Chinese paper in Chines and not in Sec filling to the shareholders in US is already violation? I think so
I doubt it.
Any updates on this name?
Given the Shah capital proposal (3/31/2017 – $2.15 / share) – do you have any updated thoughts?
As a merger arb I’m not that enthusiastic. Spread too small.