Strategic deals at premiums but no-one cares
"If a strategic investor buys new shares in a microcap at a premium and no one cares, does the deal impact on value?" That's the variation on the old "If a tree falls in a forest..." thought experiment that came to mind following a couple of recent deals.
Scout Security (ASX code: SCT) is a microcap that we had been interested in but cautious of up until it announced such a deal earlier this month. The Chicago-based company sells a self-install, wireless home security system that integrates with Amazon Alexa, Google's Nest and Samsung SmartThings. The business model consists of an upfront hardware sale then recurring monthly fees for security monitoring.
Scout already counted the Amazon Alexa Fund as a shareholder but earlier this month announced that Spain-based global security company Prosegur has become a shareholder as well. Prosegur, which has a market cap of 2.7 billion euros, agreed to buy just over 10.8 million Scout shares at a price of $0.275 a share, a significant premium to the price prior to that announcement of $0.195. And it received an option to buy another 16 million shares at $0.28 each, exercisable before the end of calendar 2019.
Despite the pricing Prosegur agreed was fair, Scout shares have subsequently fallen as low as $0.15.
Prosegur and Scout are negotiating a formal arrangement to provide Prosegur with exclusive distribution rights in Spain, Portugal, Argentina, Peru and Chile.
The reason we mentioned we had been cautious on Scout was because the company looked like it would require a new equity injection before it achieved positive operating cash flow. The Prosegur deal has raised $2.9 million upfront with the potential for another $4.5 million to follow.
It is a similar story with Swift Networks (ASX code: SW1), a video-on-demand and telecom services provider servicing mining camps, aged care facilities and hospitality.
Swift last week announced it would buy Medical Media, the operator of 2,300 screens in medical practices, and the vendors agreed to be paid in shares priced at $0.301, a 20% premium to the market price (to be precise to the volume weighted average price of the previous 30 days).
Ahead of the announcement, Swift shares were priced at $0.265 and since then they have dipped as low as $0.245.
While we believe, as shareholders in both Scout and Swift, that the shrug of the shoulders given by the market to these deals represents an opportunity amid the recent market sell-off, it is not the first time the market has failed to warm to the validation of strategic deals.
Back in October 2017, medication management tech company MedAdvisor (ASX code: MDR) raised $9.5m by placing shares to pharmaceutical distribution group EBOS (ASX code: EBO) at a price of $0.0575 a share, which was trading at $0.036 a share ahead of that deal. Despite some initial market optimism on the back of the deal, for most of calendar 2018 MDR has traded well below the price EBO agreed to pay and, in recent months, below the pre-EBO market price. Equitable Investors has been opportunistically adding to its holding.
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Martin established Equitable Investors and the Dragonfly Fund in 2017 after serving as an investment manager with Thorney Investment Group. Equitable seeks out unique opportunities with intensive research and constructive corporate engagement