Fuel Systems Solutions, Inc. (NASDAQ:FSYS)
Historical Stock Chart
From May 2019 to May 2024
Beneficial Owner of Approximately 8.7% of Outstanding FSS Shares
Reiterates his Intent to Vote AGAINST the Amended Merger Agreement
Pier Antonio Costamagna, a co-founder of Fuel Systems Solutions, Inc.
(“FSS”) (NASDAQ: FSYS) today reiterated his intent to vote AGAINST the
proposed merger of FSS and Westport Innovations, Inc. (“Westport”)
(TSX:WPT / NASDAQ:WPRT) and commented on the report issued by
Institutional Shareholder Services Inc. (“ISS”) regarding the proposed
merger.
Mr. Costamagna commented: “As we approach the shareholder meeting, I
feel it is important we objectively consider fundamental facts regarding
this flawed merger. First and foremost, the analysis done by J.P. Morgan
among other factors shows that the downside risk of rejecting the merger
is limited. It is also important to note that FSS had an all-cash offer
of $4.5 per share from a Third Party - that was still conducting due
diligence – when FSS announced the amended merger agreement.”
“At the same time, the significant and clear risk that Westport could
quickly be insolvent severely impacts the future value of the combined
entity. Finally, FSS shareholders are not receiving any acquisition
premium. Instead the implied offer price is substantially lower than FSS
standalone value. For these reasons, I intend to vote against the
proposed merger.”
Mr. Costamagna also noted the following issues with the ISS report:
LIMITED DOWNSIDE RISK OF REJECTING THE OFFER
-
First, I believe the downside risk of rejecting the merger is limited
due to the standalone value, as computed by J.P. Morgan in its
fairness opinion, being higher than the implied offer of $5.05.
J.P. Morgan Standalone Value Estimates for Fuel Systems Solutions
(mid-point of high and low)
Per Share
Discounted Cash flow
$14.85
Selected Transaction Analysis
$5.9
Equity Research Estimates
$8
Source: SEC filings
-
FSS shares have underperformed its peers’ since the merger agreement
was amended which suggests that its share price might improve if the
merger were rejected.
-
It is critical to look at the two companies (PSIX and LR) that
comprise the peer set which ISS relied upon to conclude: “the
company's [FSYS] shares would have performed more poorly without the
new agreement than with it, and that there may be significant downside
risk in rejecting the merger.”
-
My concern with ISS’ analysis and the resulting conclusion is that it
assumes FSS’ share price will follow the peer median if the merger is
voted down. I believe such an assumption is misplaced as the peer
median is disproportionately impacted by PSIX performance. PSIX unlike
FSS, has significantly greater exposure to the Oil and Gas space and
thereby has been affected by the overall sentiment for the Oil and Gas
sector.1 Additionally, PSIX has debt related concerns that
FSS does not (see table below). Given this important distinction, I
believe it is highly likely that FSS’ share price will not track its
peers’ and fall significantly, as suggested by ISS, if shareholders
reject the proposed merger.
ISS Peer Group
As of 31 March 2016
FSYS
PSIX
LR
US$mn
US$mn
Euro mn
Cash & ST Investments
49.54
1.5
20.26
Total Debt
0.15
134.51
88.25
Given the above, I believe a better way to compute standalone value or
the downside risk is to look at the valuation multiple at which FSS
would likely trade if the merger is rejected. Regardless of which
multiple is used - EV/Sales or EV/EBITDA (as used by JP Morgan in its
fairness opinion), the stand alone value for FSS comes out higher than
the implied offer, suggesting limited downside risk.
LIMITED UPSIDE POTENTIAL OF THE PROPOSED MERGER
Insolvency Risk
-
Surprisingly, ISS analysis has no discussion of potential
insolvency risk pursuant to the merger. If both the sitting CEO
and a senior director (who resigned in protest) did
not vote for the merger citing liquidity concerns, it is
surprising that ISS did not consider this as a material issue which
warranted serious discussion in their analysis.
-
Importantly, even the directors who voted for the merger considered
insolvency to be a real risk, as noted under the Reasons for the
Merger section of the proxy: “That, even with the proceeds of the
First Tranche and the Second Tranche of the Cartesian Financing
Agreement, the combined company may be unable
to obtain additional needed financing in light of the
restrictions contained in the Cartesian Financing Agreement and market
conditions and that, as a result, the
combined company may become insolvent. Accordingly,
the termination of the merger agreement, although with attendant
risks, might be more beneficial to Fuel System stockholders than the
merger agreement amendment and the Cartesian Amendment.”
__________________________1 Management Comments from
PSIX 1Q2016 earnings announcement “Our first
quarter revenues were in line with our expectations and reflected the
continued softness in the oil and gas end market; We’ve
made meaningful progress with our balance sheet and gained financial
flexibility with an amendment to our debt.” - Gary Winemaster,
Chief Executive Officer, PSIX
FUTURE GROWTH HIGHLY UNCERTAIN
-
Furthermore, I have serious doubts about Westport’s ability to meet
its financial projections, in particular, with ISS’ assessment that
“the growth over a more substantial period – in some sense, the real
future of the combined company – is expected to come from Westport.”
-
The Westport growth that ISS is relying on would require $150 million
of additional capital. It appears unlikely that Westport will be able
to raise capital at a reasonable cost considering the first tranche of
$17.5 million of Cartesian Financing has an effective interest rate of
23% p.a, despite a historically low interest rate environment.
-
Even if the financing goal was met, Westport projections suggest that
its revenue will increase by 4.8x
and Adjusted EBITDA by 1.6x over
the next five years. The fact that Westport’s revenue fell 14% yoy in
1Q2016 – 4th consecutive quarter of negative growth – and that its
share price declined 46% since the
merger announcement suggests that the market does not believe in these
projections but instead deems Westport to be at a real solvency risk.
STANDALONE ALTERNATIVE – CASH OFFER
-
The ISS analysis of FSS’ standalone options fails to account for the
circumstances under which the $4.5 cash offer from a Third Party was
received and rejected. The ISS report states: “that proposal was $4.50
in cash per share, which is lower than the current value of the merger
consideration and does not include any upside potential from a
combination.”
-
The $4.5 offer was received on January 27, 2016 – this offer represented
a 14% premium to FSS’ then-share price. More importantly,
it was believed that the Third Party who made the cash offer could
increase it. As the company’s proxy notes: “the Third Party was
continuing to do work with respect to the Third Party Proposal, including
whether it could increase the proposed purchase price.”
However, On March 6, 2016, FSS announced the amended merger agreement
and simultaneously terminated discussions with the Third Party while
rejecting its $4.50 offer. The Third Party was yet to make its “best
and final” offer.
-
Considering that the Third Party’s initial cash offer represented a
reasonable premium, and the fact that it was actively involved in the
negotiation process and was yet to make its “best and final offer,” I
believe, makes it reasonable to assume that FSS may have received a
premium cash offer.
QUESTIONABLE GOVERNANCE
-
ISS’ assessment of FSS’ questionable governance-related behavior is in
line with our concerns, which raises the question of why ISS would
continue to recommend this transaction when it explicitly states in
its report that the Board’s actions are troubling: “Shareholders
should be concerned by the board approval process for the amended
agreement: it is unusual for a board to have such divergent
views on a potential transaction that require minutes of meetings to
be amended to highlight the pressure exerted on directors to change
their vote, and to have a director resign as a result. The
exclusion of the CEO from the final vote, moreover, is just as
concerning, since the rationale – that he was an interested
party who may not have been aligned with other shareholders – did not
appear to be a concern in any prior votes on or discussions of the
transaction, until he first voted against it” (emphasis added).
*Permission was neither sought nor obtained to use excerpts from the ISS
report.
View source version on businesswire.com: http://www.businesswire.com/news/home/20160523006387/en/
Abernathy MacGregorPat Tucker/Cia Williams212-371-5999pct@abmac.com
/ cew@abmac.com