EXFO Inc. merger arbitrage

An interesting special situation is reaching its conclusion in EXFO (NASDAQ:EXFO). The chairman is trying to take the company private. Initially he was bidding $6.00/share, but Viavi (NASDAQ:VIAV) threw a wrench in the works with an unsolicited $7.50/share binding proposal that was upped to $8.00/share a month later. The chairman is not interested in these alternative proposals, and with an ownership of 61.5% of the shares and 93.5% of all votes he can block any alternative transaction with ease. Nevertheless, it put a bit of pressure on him to improve his bid, and he increased it by a token amount to $6.25/share.

The going private transaction is expected to be completed this month, but the stock is currently trading at $6.05/share for a 3.3% spread. Obviously, the market is a bit skeptical that the transaction will be completed, and the main hurdle is minority shareholder approval at the upcoming shareholding meeting on Friday, August 13. To get approval 50%+1 votes cast need to be in favor of the merger, and the shares of the chairman are excluded from voting. After the price bump to $6.25 the company locked in the support of some of the biggest minority shareholders owning 14.75% of the minority shares.

I think this should be enough to bring the deal over the finish line. There are always some people who will not vote at all, effectively increasing the weight of the locked in votes. While I’m sure everybody would have preferred $8/share above $6.25/share it is clear that that deal cannot happen without support of the chairman, and the $6.25/share deal is not a terrible one if you look at where the stock was trading before the going private transaction was announced. The $6.25 offer represents a 68% premium, and presumably plenty of shareholders will be okay with that. Additionally, the deal is supported by ISS while Glass Lewis advices to reject it (but 86% of robovoting investors use ISS). So I think this is not a deal that will get overwhelmingly rejected, and that’s all that is needed to get it approved. The 14.75% votes that the company managed to lock in are not an insurmountable lead, but it is a tough hurdle. If you assume that approximately 90% of people will vote you will need 60% of the remaining votes to be against the deal to block it. That sounds like a lot to me.

And even if the deal fails, how terrible is that? If people just massively voted that the stock is worth more than $6.25/share and you bought it for less? I surely expect the stock to drop when the deal breaks, but at the same time, it is hard to see the logic in that. So all in all, I think this is a decent spot to try to pick up some pennies in front of the famous steamroller.


Author is long EXFO

2 thoughts on “EXFO Inc. merger arbitrage

  1. Frank

    How can that be legal? The chairman is effectively forcing minority shareholders to sell out at a price dramatically below what the company is worth, TO HIMSELF.

    1. Alpha Vulture Post author

      Well, there are some checks and balances. That’s why he does need approval from the majority of the minority shareholders, and court approval as well. But yeah, as a minority shareholder you are not always in the best position. That’s part of the reason why a minority stake is usually considered to be less valuable than a controlling stake. So from that perspective both offers could be fair. Viavi is bidding $8/share for a controlling stake, while the chairman is bidding $6.25/share for a non-controlling stake.


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