MiX Telematics (MIXT) – Merger Arbitrage – 22% Upside
Current Price: $5.65
Target Price: $6.92
Upside: 22%
Expected Timeline: Q1 2024
This is a pretty strange merger arb setup with a 20%+ spread and I am still mulling over it. I think the transaction is likely to close and the spread is far too wide. Would love to hear any pushback.
MiX Telematics, an automotive telematics company, is getting acquired by its smaller peer PowerFleet. Each MIXT share will convert into 3.19056 PWFL shares. The spread currently stands at 22% and there is plenty of cheap borrow for hedging. Management expects to have shareholder meeting in mid Q1’24 and the merger should close promptly afterwards. Merger rationale is mostly centered on revenue synergies expected to be achieved from cross-selling of complimentary products/services and different customer segments/geographies. Higher scale also plays a role.
There are a few things that stand out for this setup vs the ‘more usual’ merger cases:
- The transaction was announced earlier this week and on the first day of post-announcement trading buyer’s stock shot up by 25% (and even +50% intraday) on a very high volume whereas target’s stock remained flat. The stocks ended the day with a 45% arb spread. This is a rather unusual trading pattern and I am guessing this might be at least partially responsible for the spread.
- The buyer, PWFL, is a smaller company and its shareholders will own only 35% of the combined enterprise. Despite this ownership split, the combined company will retain PWFL’s management or at least the roles of chairman, CEO and CFO.
- MIXT founder and CEO for 27 years has chosen this merger to announce his retirement. An analyst even congratulated him on the call ‘on your pending retirement’. So not clear if MIXT shareholders will have someone to lead the company if this merger breaks.
- Assuming the merger breaks and share prices revert to pre-announcement levels, there would be no downside for the hedged trade. Such a turn of events would actually result in 10% gain.
The merger is conditioned on approvals from shareholders of both companies as well as regulatory consent. On the M&A call management sounded very optimistic on meeting these conditions:
So the expectation is, this gets through regulatory approval successfully. We think it’s great for both sets of shareholders. So we don’t see or foresee any issues on that front.
On a less optimistic note, there might be some risk in MIXT shareholders derailing this transaction due to appraisal rights for minority shareholders in South Africa (where MIXT is domiciled) and I will elaborate more on this below. The borrow, while currently cheap and plentiful, might disappear or get more expensive during the upcoming 3 months till the expected closing. Trading liquidity on both stocks has been significantly elevated over the last two days providing good position entry opportunities, however liquidity might decrease going forward and exiting the position if the merger fails might prove to be more difficult (these are microcaps we are talking about).
Side-note: both companies have an additional non-US listing: MiX Telematics on the Johannesburg Stock Exchange (MIX.JO) and PowerFleet on the Tel Aviv Stock Exchange (PWFL.TA). Both of these non-US listings are very illiquid.
Strategic rationale
This merger will immediately result in improved scale, which both companies lack. It will also offer significant revenue synergies from cross-selling and upselling of complementary offerings. Most of the M&A call was centered specifically on the revenue synergies topic. I am not in a position to confirm or disprove the statements made by management but their explanations for cross-selling opportunities made sense. PWFL’s CEO even went as far as to suggest how well the sales personnel will do in the combined enterprise:
So we are going to have, by far, the most comprehensive set of solutions. I would love to be a sales guy in this combined organization with the kick back that I’ve got to go sell, having spent a long time in this industry, trying to convince customers of taking solutions. So we’re super excited by what that’s going to bring.
Both companies run telematics businesses, i.e. sell hardware and proprietary software for comprehensive vehicle/asset monitoring, data collection, and analysis. However, MIXT focuses more on the logistics segment (i.e. high end cameras for large truck fleets of oil and gas customers), whereas PWFL is stronger in the industrial segment (on-premise, in-facility monitoring and monitoring of various industrial equipment/trucks). There’s very little customer and geographical overlap with MIXT focusing mostly on South Africa, Europe, Americas and middle East/Australia and PWFL on US and Israel. From M&A call:
I think MiX has some really super high-end logistics solutions that PowerFleet — we have a lot of logistics customers but we were unable to provide that high-end logistics solutions to, comprehensively. I think the AI, the camera solutions that MiX have again will be complementary and they’re driving great growth in their business through the advancement of those solutions. And then as David alluded to you, the whole industrial piece, is something that MiX don’t have the ability to sell to their customers today. So we’re talking about that one-stop shop about all asset types, again, super upside there.
Management also sees significant cost synergies down the road, equal to $25m vs combined G&A of $120m. The combination is expected to boost revenue growth and especially earnings with management projecting combined adj. EBITDA ($39m) to double in 2 years.
The companies will be hosting a joint Investor Day on November 16 to shed more light on the strategic rationale / further growth plans and to convince shareholders to approve the transaction.
For more background on both parties refer to VIC write-ups on MIXT and PWFL.
MIXT shareholder approval
The pending approval by MIXT shareholders might be the core risk for this setup, but if my understanding of how mergers in South Africa work is correct, then it should not be a risk factor that drives 20%+ spread. There are 3 conditions related to this matter:
- Merger approval from 75% of votes cast. The meeting must be attended by shareholders holding at least 25% of outstanding shares. This is a standard condition for South African companies;
- If more than 15% of shareholders oppose the transaction, then court must approve the implementation of this merger. It is another standard condition in SA;
- Not more than 3% of shareholders exercising their appraisal rights – legal process in which objecting shareholders demand to be compensated a fair value of their shares. Again, standard rights and rather standard clause in mergers, just the threshold might differ case by case.
I think the last one, the 3% appraisal rights, looks to be the scariest. But the company can easily waive this one and close the merger with any number of shareholders exercising their appraisal rights as long as the 75% approval condition is met. It will just need to deal with all of those dissenting shareholders at later stage.
South African companies often see minority shareholders opportunistically exercising their appraisal rights just to try and beat out a sweetened offer. Any dissenting shareholder exercising rights asks the company to be fairly compensated for his shares. The board must then make a ‘fair value’ offer to these investors. This ‘fair value’ can easily be equivalent to the merger proposal. At this point dissenting shareholders have an option either to accept company’s offer or go to court and try to prove that the received offer is unfair. Proving that an all-stock merger is unfair is pretty difficult. In PWFL/MIXT case this might be nearly impossible given that MIXT shareholders will retain 65% ownership of the combined company while contributing similar level of revenues and that the founder/CEO with 3.7% stake thinks it is a good deal that will preserve his 27-year legacy. As for the second condition, the court can only block the merger if the consideration is ‘manifestly unfair’ or other issues were found to be involved, e.g. conflicts of interest, inadequate disclosure, etc. That does not seem likely. Thus, if management really wants this transaction to move forward, both of these conditions are unlikely to impede the merger in any way, other than just slightly prolonging the timeline.
Getting approval from 75% of shareholders participating in the meeting should not pose any issues either due to the low 25% quorum requirement and 12.4% ownership by management. The pending retirement of founder/CEO, Stephan Joselowitz and his willingness to sell to PWFL will likely incentivize approval by other shareholders. Stephan has built MIXT from the ground up and led it for 27 years. So this company should be like a child to him and this is where he probably has spent most of his waking hours over the last 3 decades. Even though negative share price performance since IPO ($16/share in 2013) does not inspire confidence in his capital allocation skills, I do not think MIXT shareholders have much choice, but to follow his decision to merge with PWFL. Would he sell MIXT if he did not think this is a good deal for MIXT shareholders (including himself with a 3.7% stake) and employees? Do no think so.
Other major MIXT shareholders are – ex. chairman Robin Frew with 14.2% stake, Disciplined Growth Investors with 11.1% and Edenbrook Capital with 9.8%. There’s limited information available on the ex-chair Robin Frew. The company’s filings and his LinkedIn say he founded Masalini Capital. Frew resigned from MiX Telematics last November as part of his “long-term strategy for asset diversification and estate planning” – he wanted to trim his MIXT stake down by 15%, but certain South African regulations did allow him to do that while staying on the company’s board. Interestingly, at the time, he also noted willingness to re-join the board once his asset diversification plan was completed. It’s pretty unlikely that MIXT management would proceeded with this merger without consulting with their ex-Chair beforehand. Support from Frew would put votes in favor already at 26.6%.
There are a few more nuances worth noting with regards to MIXT shareholder approval risk:
- Just looking at the high level financial performance this merger might not seem particularly attractive for MIXT shareholders. While both companies are very similar in terms of EV and revenue size, PWFL is significantly more levered (net debt of $63m vs MIXT’s net cash of $15m) and operates at lower margins.
- In terms of revenue multiples, MIXT is getting acquired at a discounted valuation of 0.9x EV/TTM sales vs 1.1x for PWFL. Both companies have been growing topline at a very similar pace during the recent years.
- PWFL also generates 33% of revenues in Israel, where the war has just started. PWFL’s annual report indicates that many of its employees are obligated to perform military reserve duty and can be called to action if needed. It’s not clear yet whether and how this situation will affect PWFL.
- Termination fee for the merger was set at just the lower of $1.5m or 1% of the deal value. This is pretty low compared to the usual 3-4% we see in merger arbitrage situations and could indicate that management sees elevated risk the merger could fall through.
PWFL shareholder approval
I do not expect any issues with the buyer’s shareholder approval. PWFL seems to be getting a good deal and the merger will finally allow it to get rid of the nasty $59m convertible preferred stock overhang, which the company had since 2019. Aside from the large size of this liability, preferred holders will have an option to ask to be redeemed at 1.5x of par. Current dividend rate on the preferred is 7.5%, but from Mar’25 the rate will go up by 100 bps each month until the limit of 17.5%. Concurrent with the merger, the combined company expects to raise $75m to cover these preferred stock liabilities. The new debt will be mostly senior secured and have a blended interest of around 9.7%.
The removal of preferred overhang might also be the reason behind the optimistic PWFL’s stock price reaction upon merger announcement.
PWFL management owns only 3.8% of the company, however 5 major shareholders (asset managers/hedge funds) have a combined stake of 38%.
If the buyer rallies like crazy on deal announcement and the target does not, one explanation is that people expect a third party to bid for the bidder which would derail the deal (and absolutely destroy the P&L on this trade). Does anyone know anything about the peers to assess the risk of this? It’s probably just an idiosyncratic trade / wide on Israel fears but this is what would worry me when I used to do proper merger arb.
Isn’t this deal contingent on financing? PWFL has to raise money to take out the preferred. That’s a condition to the deal.
Isn’t that a key risk?
Yes, this financing (to repay the preferreds) is listed among the transaction conditions, but in practical terms I think the financing is conditioned on merger closing not the other way round. The combined company should have no issue in replacing the debt ($60m) given MIXT’s stronger balance sheet and higher EBITDA margins (2023 adjusted EBITDA at $29m).
Also it seems the financing discussions are already in advanced stages. This is what management said on the call:
“In connection with the transaction, PowerFleet and MiX are positioned to secure approximately $75 million in incremental debt, inclusive of $60 million in senior secured debt, which the companies anticipate will be fully executed at or before closing.”
and
“From a debt standpoint, as I said in my prepared remarks, a significant portion of the debt will be senior bank debt — so senior secured debt, a significant portion will be in South African rand, a significant portion in shekel. On a blended basis, we see the debt being about 9.7% but obviously, that is inclusive of wonderful currency hedging in terms of the source of the cash that we generate today. So we think it is a very elegant solution.”
So I do not think this financing is a risk that drives 20% spread.
It is an important risk. However, with PWFL significantly up post-announcement and MIXT unchanged, it would probably be a positive for the long/short spread if the deal breaks down based on that.
That’s what is so mystifying to me about this deal. Not only is the spread huge, it seems to me that the spread will collapse if the deal closes but ALSO if the deal collapses (famous last words, I know). Usually a deal break means one or both legs of the trade move against you. That still could happen here, but seems somewhat unlikely.
For the L/S trade (not for the deal itself) I see three main risks here: either the borrow rate skyrockets (but IB still shows over 1m shares available at a very low rate) or the daytrading crowd will do something funny with PWFL. These two are probably correlated. The other one is, as mentioned before, something funky like another bidder for PWFL emerging.
MIXT released quite positive fiscal Q2 results (ending Sep 30) with total revenue up 12% YoY and adj. EBITDA up 41% YoY. Management has again praised the merger with PWFL, reiterating the previously communicated positive points on strategic rationale/increased scale. Nothing really new was disclosed. More color on the transaction is expected at the joint investor day on November 16.
The spread currently stands at 24% with plenty of borrow at 4% annual fee.
By the way, MIXT also announced a quarterly dividend of ZAR 1.125 (around US$0.06/ADS) payable to shareholders of record December 1. We might get another one in February if the merger doesn’t close until then. Meanwhile, PWFL pays no dividends.
PR – https://www.bamsec.com/filing/162828023037525?cik=1576914
Call – https://app.tikr.com/stock/transcript?cid=38011339&tid=244017969&e=1860064452&ts=2941956&ref=3no6ed
In your analysis, you write:
Assuming the merger breaks and share prices revert to pre-announcement levels, there would be no downside for the hedged trade. Such a turn of events would actually result in 10% gain.
How would this hedge work?
The point I was trying to make was that the buyer’s share price moved up significantly upon the announcement of the merger, while the target’s share price remained relatively unchanged. So if the merger failed and both stocks simply returned to pre-announcement levels, you’d be left with a profit due to the gains on the short position.
However, given high volatily in both stocks over the last month, I am not sure if pre-announcement trading levels are of any relevance. Both stocks seem to be moving up/down 20% without any news whatsoever. So I have no idea where this lands if the merger breaks.
MIXT released the investor day presentation. There seem to be no major updates to the merger, looks like management only went through some benefits on the deal and noted that MIXT/PWFL trades at a discount to peers based on a sales multiple. Spread stands at 35%.
https://www.bamsec.com/filing/149315223041721?cik=1576914
Combined adj. EBITDA projection seems quite aggressive, set to grow from $40m in 2023 to $60m in 2024 and $100m in 2025. Meanwhile, revenue growth is projected at 5% and 13% respectively. Management is really pushing hard the idea of margin expansion. Don’t know much about this industry, so it’s difficult to understand how realistic these projections are.
Has anybody listened to the call or has an access to the transcript (I haven’t been able to find one). Would be interested to see if they’ve said anything more specific on the cross-selling opportunity and PWFL’s Israel business and its potential risk to the transaction/approval.
What spread would you exit at? It’s now 13.5%.
I would like to see the spread under 10% for this setup. So the current spread is quite close to what I would consider to be a fair reflection of the remaining risks.
Were you going to put a sell on this since it’s past your target price?
The spread on MIXT/PWFL merger has widened again to 20%+. This was mainly driven by PWFL stock spiking +50% since mid-December and MIXT shares failing to catch up.
The perplexing aspect of this upward PWFL move is that there was no news regarding the merger or the company’s operations. The only conceivable driver of PWFL price appears to be the new targets set by several sell-side analysts, including Lake Street Capital, which has assigned a $4/share price target to PWFL.
With no news on the merger/companies, I think the situation is again as interesting as it was when I wrote this up in mid-October.
Lake Street: https://www.americanbankingnews.com/2023/12/30/lake-street-capital-reiterates-buy-rating-for-powerfleet-nasdaqpwfl.html
Other analysts: https://www.barchart.com/story/news/22957062/wall-street-sees-133-upside-for-this-penny-stock
Seems strange that proxy and circular are still not out. From MIX JSE announcement on Nov 22nd: “the Scheme Circular in respect of the Scheme and the PowerFleet Prospectus in respect of the PowerFleet Listing, were expected to be issued on or about 5 December 2023”
As per MIXT’s filing from November, this seems to have been driven by delays in securing regulatory approvals from the JSE, Takeover Regulation Panel, and the SEC. The reason for these delays is unclear, but they seem to be rather customary closing conditions, and PWFL’s management previously expressed high confidence in obtaining all regulatory approvals.
https://www.bamsec.com/filing/162828023039832/1?cik=1576914
The shareholder votes are now scheduled for February 28th as per their recent SEC filings
Why is the spread for the shares listed on the South African exchange so much higher compared to the ADRs? Exchange rates seem to be relatively stable over a few months
Thanks for the update. I actually get a much smaller spread on the South African listing, not higher. Pretty strange given that the South African listing is much less liquid and there’s some FX impact/hedging aspect involved. It feels like the spread should actually be higher than the one on the US listing. BTW, have you taken into account the ADR ratio?
1 ADR = 25 shares.
Therefore, with the US listing, it goes like this:
3.19056 shares of Powerfleet Common Stock for each MiX ADS -> 20% upside
With the South African listing, it goes like this:
0.12762 shares of Powerfleet Common Stock for each MiX Ordinary Share -> $0.4185936 per each MiX share or 7.88 ZAR per each MiX share (13% upside).
There are no fees being charged on the ADS right?
ADS fees will be applied as per usual. See page 7 of the proxy doc here: https://www.sec.gov/Archives/edgar/data/1576914/000149315224003660/formdefm14a.htm
No.
“In connection with the scheme, MiX Telematics will pay any applicable fees, charges and expenses of the depositary and government charges due to or incurred by the depositary in connection with the cancellation of the MiX ADSs surrendered (and the underlying MiX ordinary shares), including applicable MiX ADS cash distribution fees, MiX ADS cancellation fees and depositary servicing fees (each up to $0.05 per MiX ADS pursuant to the terms of the deposit agreement).”
Seems to be due to low liquidity – since I last updated my spreadsheet prices moved wildly on the JSE
Greater arb spread now on the ADRs at 21% vs. 16.4%
Proxy is finally out, parties still expect the deal to close in Q1. Spread stands at 18%.
https://www.bamsec.com/filing/149315224003660?cik=1576914
The key takeaway from the proxy is that the financing condition, which was one of the more material risks here, has finally been satisfied. The proxy revealed that in mid-December PWFL has secured two senior secured loans, which will be used to eliminate PWFL’s preferred stock overhang. The spread has now narrowed from around 20% to 11%.
Shareholder meetings are scheduled for February 28, and the companies expect that the merger will be finalized within this quarter.
Nothing material was unveiled in the proxy’s merger background section, except that both companies held preliminary merger discussions with several other parties in late 2022 and 2023, though no bids emerged.
All regulatory conditions have been met. The only remaining hurdle is getting shareholder approvals on February 28. The parties expect to close the transaction at the beginning of April. The remaining spread is at 9%.
https://www.bamsec.com/filing/149315224004225?cik=1774170
MIXT reported Q3’FY24 results. Nothing out of the ordinary. The business continues to grow, with a 6% YoY increase in revenues and a 13% growth in EBITDA. Operating margin (6% this quarter vs 11% in Q3’FY23) was pressured by costs related to the pending merger as well as higher in-vehicle device depreciation. I would expect management to shed more light on the operating margin dynamics during the upcoming conference call. However, I do not think this has any implications for the ongoing merger.
Other than that, MIXT’s management reiterated the progress made on the pending combination with PWFL, highlighting the fact that the companies have “crossed a number of important regulatory hurdles including receiving most of the pre-requisite approvals to proceed.”
The spread has narrowed to 9% and I think we have two months till closing. The spread will likely narrow further to minimal levels after shareholder approval at the end of February.
High share price volatility in both stocks yesterday (+10%) is concerning. This happened before MIXT earnings release.
MIXT and PWFL shareholders have approved the merger and the transaction is set to close in the first week of April “subject to the satisfaction of remaining customary conditions”.
At yesterday’s closing prices, a 4.5% spread remains.
Dont you think 4.5% spread is too high for a 1 month carry trade ?
Probably. Thing is, both stocks are so illiquid that it probably neither makes sense to open or close a position right now, unless you get very good fills.
As writser says, just a bit more detailed.
The bid-ask spreads eats about 1.5% of your upside for each side of the trade (16c/9.7ish for MIXT and 5c/3.2ish for PWFL when I last checked).
So of the roughly 5-6% spread, assuming passive execution on both sides, about 2-3% remains when you cross the spread on both sides.
Then the borrow fee eats a bit of that as well.
That looks, at least to me, more efficiently priced.
It really depends on your execution.
Is it possible that the 3% limit on appraisal rights is keeping this wide? If we assume the 4.8 million shares that voted against the merger will seek appraisal then a huge chunk of the unvoted shares, ~11.7 million, would have to seek appraisal as well to get over the 3%. I’m by no means familiar with South African history of holders participating in something like this.
These are only rough estimates based on the voting results, and it might be a faulty assumption about the opposed voters
I think this condition can be waived. The main condition of 75% votes cast in approval has been satisfied already, so the merger would still close and management would then handle the dissenting shareholders in court at a later stage.
The last hurdle seems to be cleared in this merger. As anticipated, MIXT entered into a Facilities Agreement providing them with $85m in capital, enough to retire convertible preferreds fully. With the financing complete, everything is in place to consummate the transaction and clear the convertible preferred overhang on April 2nd. The spread narrowed to 3.5% (wide bid/ask remains, so probably we will need to wait for closing of the merger).
The spread widened today quite a lot….. Any explanation beside both stock prices going up in the past days ?
I think it’s now back down to just below 5%.
Thanks ! Still, 5% for approximatively one month of carry with cheap borrow seems pretty good
The merger is set to be completed on April 2. However, taking into account the bid/ask the spread has pretty much disappeared.
https://www.bamsec.com/filing/162828024011310?cik=1576914
so all the MIXT shares will become 3.19056 PWFL shares without additional ADS fees on April 2nd, right?
No need to ask our broker to elect the shares to the exchange?
Thanks
I think you are correct, the proxy document states that MIXT will cover “any applicable fees, charges and expenses of the depositary and government charges due to or incurred by the depositary in connection with the cancellation of the MiX ADSs surrendered”.
Regarding the broker question, I think most do this action automatically.
https://www.sec.gov/Archives/edgar/data/1576914/000149315224003660/formdefm14a.htm
does anyone understand the reasonaning in soaring PWFL? From my understanding MIXT always follow PWFL price to catch up and keep spread narrow, but I don’t understand why PWFL is going up without any news? if merge complete will not mean that PWFL shareholders will be diluted so it should have kept some pressure on stock price but obviously it doesn’t?
several analysts have increased their price target of PWFL, pushing the price much higher. merger is expected to complete early april, let’s cross fingers
MIXT is no longer tradable (since March 26). The merger closing date (April 2) has been confirmed.
https://www.sec.gov/Archives/edgar/data/876661/000087666124000227/ruleprovisionnotice.htm
… and shares were received yesterday at IB
MIXT/PWFL arbitrage has closed – this setup generated a return of 20% in half a year with hedging costs consuming c. 1.5%.
It took a bit longer than I initially expected and the volatility in both stocks as well as the spread was pretty wild.
For anyone interested in PWFL as an investment after the merger – Andrew from YAVB just published a pod with Lake Cornelia Research on merger MIXT /PWFL.
https://www.yetanothervalueblog.com/p/lake-cornelia-researchs-judd-arnold
And summary + full thesis here: https://twitter.com/CorneliaLake/status/1767949469511799152
It was a very good result. It returned about 15% in 1.5 months from mid-November and then another 10% in 3 months this year.
It used up a lot of capital also. How much capital, as a percentage of the long position was utilized for you as part of the hedged trade? What are your thoughts on the denominator in calculating returns in situations like this when you have two small caps and shorting?
I also wonder why this big spread arose.
Think it was pretty illiquid spread, with PWFL on a strong upward trajectory to complicate things, I used a PAIRS algo to put some size on in the last week and was still able to get 5% 1 week before closing and 3%+ two days before closing. I don’t think there was particular institutional interest given the size and hence why the spread persisted.
Did you use the Pair tab of IB’s ScaleTrader?