Last Friday, the merger between Comtrex Systems (OTCMKTS:COMX) and Zonal Hospitality Systems closed. When I wrote about the company the stock was trading at $9.40/share while the merger consideration, according the press release, was GBP 7.46/share (after a bit of a negative FX movements currently worth ~US$9.70/share), but subject to certain adjustments. My guess was that these adjustments were most likely some kind of price adjustment based on the net working capital balance at the time of the merger closing. While that proved to be true, the specific implementation in this case was not very favorable for shareholders.
When the proxy statement was released it became clear that the adjustment could only be made downwards, not upwards, and a large part of the consideration will be held in escrow for two years. Of the total payment of GBP 12,300,000 a hefty sum of GBP 2,000,000 will be held in escrow for two years while GBP 150,000 is earmarked to fund costs of the stockholder representative. The initial payment is going to be $8.02/share while another $1.58 might be coming in two years time, and it’s probably going to be a safe bet that the money earmarked for the stockholder representative will never be paid out. We will have to wait a long time before knowing how this deal will work out exactly, but we can unfortunately be pretty sure that it’s not going to be great. Even if the full escrow is released, and that is a pretty big if, we would be looking at a mediocre internal rate of return because of the long escrow period.
Author is technically still long COMX
You might like Maplewood Investment REIT, they will pay $0.83 distribution after selling their only property in the Netherlands and trades at low $0.70’s. Will probably be completed within 6-8 months? It is illiquid though. Disclosure, I got a position at lower prices 🙂 .
Thanks for the idea. Don’t think it will work for me though, probably have to pay a 15% or 30% withholding tax on that distribution…
are you sure you have to pay the wittholding tax on the distribution if it is Return of Capital?
Certainly not sure, but have had unpleasant surprises before in Canada. And according to the management circular at least a part of the distribution will be a capital gain (so pretty sure that will have withholding taxes for international investors).
I appreciate that you write up ideas that did not work out as expected. Sorry things didn’t go better.
It’s not that bad. Deal failure, that’s the real risk…
Thanks for sharing. Any idea when the iniial payment $8.02/share will be released?
That payment was made a long time ago, just a few days after I wrote this blog post.
Any news about this merger? Has the escrow been paid out yet?