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.

Disclosure

Author is technically still long COMX

Thanks to a blogpost of NoNameStocks I was alerted to the fact that Comtrex Systems (OTCMKTS:COMX) is being acquired by Zonal Hospitality Systems in an all-cash transaction for approximately GBP 7.46/share (~US$9.88 at the time of writing). With the stock trading at $9.43 there is a spread of 4.8% remaining which seems pretty high considering that this sounds like a low-risk deal that should close pretty fast.

1. 1. There are no regulatory hurdles to take.
   2. More than 50% of Comtrex shareholders have already entered in voting agreements, so stockholder approval is a formality.
   3. There shouldn’t be financing issues since Comtrex is a tiny company (~US$16 million market cap) with a significant cash balance.
   4. Comtrex is being acquired at a ~60% premium, so no crazy downside risk if the deal fails.
   5. And to top it all off: it’s a deal that at first glance seems to make sense for both companies since they are in the same business (point-of-sale stuff for the hospitality sector).

The only question mark is that the merger consideration is subject to certain adjustments, but without a merger agreement publicly available it remains a guess what those are. My guess is, and I think this is the most likely scenario, some kind of adjustment based on net working capital and net cash balance at the time of the merger. This is very common, and usually this adjustment is just as likely to result in a higher price as in a lower price. Especially since Comtrex is a solidly profitable business this is unlikely to be a large risk. It’s not some kind of melting ice cube that gets smaller and smaller while waiting for the merger to be completed. But we will have to wait for the proxy statement, which is expected to be send to shareholders in a couple of weeks, to be sure what the deal exactly is.

Disclaimer

Long COMX