TORONTO, Feb. 2, 2016 /CNW/ - Today Torrent Capital Inc. released the attached open letter to the Board of Directors of Pivot Technology Solutions, Inc.
Torrent Capital is a Toronto-based investment company with the mandate to uncover and invest in companies that are trading at a discount to their intrinsic value. Where applicable, Torrent will actively work with company management to enhance shareholder value.
February 2, 2016
Pivot Technology Solutions
11988 El Camino Real Suite 150 San Diego, CA 92130
To the Board of Directors:
We are contacting you to expound upon our view that the Arrangement Agreement ("the Agreement") proposed by Pivot Technology Solutions Inc. ("Pivot" or the "Company") (TSX:PTG) is not in the best interests of the Company's common shareholders. We would like to bring to the board's attention some troubling elements embedded in the proposed transaction.
Torrent Capital Inc. ("Torrent") strongly disapproves of the proposed Agreement and has the following serious concerns:
The Agreement Undervalues Pivot
Torrent believes that the proposed non-cash Agreement vastly undervalues Pivot and its future growth prospects. This is highlighted by the following:
- Trailing 12 month revenue of US$1.45 billion (C$1.78 billion) and forecasted 2016 revenue of US$1.55 billion (C$2.21 billion).
- The company's commanding market share and fortune 500 customer base.
- Pivot's strong and drastically improved financial position.
- A well supported dividend of C$0.03 per share that represents an above market yield.
- A series of depressed trading multiples, on both an absolute basis and relative to sector peers.
- A proposed exchange share price that is at a significant discount to analyst 12 month price forecasts of C$1.50 per share.
- The reaction of the share price after the announcement of the proposed Agreement underscores our view that the transaction does not fairly value the business.
No Formal Independent Business Valuation and Review was Completed
The proposed Agreement is nothing more than an attempt by a group of Pivot insiders (the "Founder Group") to take control of the company at a very depressed valuation at the expense of its common shareholders. The proposed Agreement was put together without the benefit of a Rule 61-101 compliant independent business valuation and in the absence of a value maximization process utilizing an independent financial advisor, which is customary in these circumstances. Given the obvious conflict of interest and future financial benefits of the insider group, it is especially concerning that the board of Pivot chose to move forward with this acquisition proposal without an exhaustive strategic review and process. Currently, there is no rationale for the board of Pivot to claim that the proposed Agreement is in the best interest of common shareholders and is the best alternative for the company.
The Proposed Agreement Disproportionately Favours the Founder Group
The benefit of the proposed Agreement disproportionately favours the Founder Group at the expense of the common shareholders. The Founder Group, comprised of three individuals, will own 100% of the common shares of PTS Holdco post transaction, while currently owning only 17% of Pivot. Under the proposed Agreement, the Founder Group will assume full operational control of the company as well as a full claim on the Company's future earnings. If approved, this transaction will result in the Founder Group assuming full ownership of a company that has trailing 12 month revenue of US$1.5 billion for no monetary consideration to Pivot's common shareholders. Torrent is hard pressed to find a precedent transaction involving a management buyout that is remotely as advantageous to management as this one. The common shareholders are surrendering all of the upside of the business and are not being paid accordingly for doing so.
The Proposed Agreement Caps the Upside Available to Pivot's Common Shareholders
The proposed Agreement caps the upside currently available to Pivot's common shareholders while eliminating the voting rights and privileges in exchange for an uncertain future income stream. Moving forward, common shareholders will have to trust this Founder Group to operate the company in a manner which will preserve its ability to make the payments to preferred securityholders. The current common shareholders will have no say, and no ability to protect their financial interests moving forward. The proposed Agreement is based on the faulty logic that existing common shareholders would be willing to surrender their claim on Pivot's future growth prospects, in return for a highly speculative and uncertain preferred security position, while surrendering all of their rights and interests that are now available as common shareholders.
The Preferred Securities Offer Questionable Liquidity and are Callable
We are concerned about the potential liquidity of the preferred securities, given that there is no guarantee that the TSX Venture Exchange will approve their listing. Even if the securities are approved to trade on the TSXV, the degree of liquidity is highly uncertain and there is no guarantee whatsoever that they will trade close to their face value of C$10.00. Torrent is of the mindset that the existing TSXV listing has only served to undermine the value of the company's common shares given that the exchange is denominated in Canadian dollars, is comprised primarily of very small natural resources focused companies and is underfollowed. In light of this, it is a stretch to assume that the TSXV exchange will be an efficient pricing mechanism for a relatively obscure preferred security moving forward. And, importantly, the preferred securities are callable at any time at PTS Holdco's discretion, which means that in theory, the Founder Group could take full control of the company in the proposed transaction and then shortly thereafter call the preferred securities issued to Income Corp.
We also have a concern about what is planned here for disclosure going forward. We have a very serious objection if Pivot is thinking that going forward PTS Holding Corporation will be a private company, making no public disclosure of its financial statements, while only PTS Income Corp will be a public reporting company because of the outstanding preferred securities in the hands of public securityholders. That would mean the public securityholders would have no visibility as to the true credit worthiness of their investment. We expect this would not be acceptable to regulators of securities markets and it is certainly not acceptable to us.
The Proposed Consulting Agreement with Inflexionpoint Raises Troubling Questions about the Board's Motivation and John Sculley's Impartiality in the Transaction
The consulting agreement outlined in Schedule "D" of the proposal, between Pivot and Inflexionpoint Asia Pte. Ltd. ("Inflexionpoint") raises troubling questions about the true independence of the Company's board and the underlying motivation behind the proposed capital structure of the Agreement. Upon successful completion of the Exchange Offer, Pivot is due to enter into a consulting contract with Inflexionpoint, whereby Inflexionpoint and its Affiliates engage Pivot to assist them in rolling out their business outside of North America. For its services, Inflexionpoint has committed to pay Pivot an annual fee of US$1.5 million over a term of 10 years. In addition to the annual fee, Inflexionpoint will enter into a revenue sharing agreement with Pivot in connection with any direct new international business obtained by Inflexionpoint through the leveraging of key relationships introduced by Pivot. A reasonable person would conclude that this is a formal business relationship between the two entities meant to expand Pivot's operations globally. The fact that Pivot is introducing this relationship under the guise that it is merely a consulting agreement is alarming. It is a material development for Pivot and its future profitability as the relationship is in essence a business expansion by Pivot into high growth regions outside of North America. Of equal concern, is that the relationship highlights the conflicts of interest at play here, given the overlap in corporate structure between the two entities. Gord McMillan and Shane Maine, who are members of the Founder Group, are also founding members of Inflexionpoint. John Sculley, the Chair of Pivot's Board of Directors, is also a founder and the current Chairman of Inflexionpoint. This raises serious questions about his impartiality as he looks to exchange his 9,375,000 commons shares for preferred securities under the parameters of the proposed Arrangement Agreement. In our view, Mr. Sculley should be excluded from the "majority of the minority" vote on this transaction given his role on the board of Pivot, his participation in the negotiation of this proposed transaction and the fact that he does not have identical interests to other Pivot shareholders given his interest in Inflexionpoint.
In light of these comments, Torrent Capital demands that the board initiate a full and fair independent business valuation and strategic review to be completed by a nationally recognised financial advisor. Additionally, we request that the board immediately pull this inadequate offer that clearly benefits a select few individuals at the expense of the common shareholders. Lastly, we demand that those individuals who are clearly conflicted in the proposed Agreement have absolutely no input or influence over the Special Committee from this point forward.
We look forward to the board's timely response to our concerns and recommendations. On behalf of Torrent Capital Inc.,
Scott Gardner, CFA Vice President
Torrent Capital Inc.
SOURCE Torrent Capital, Inc.
For further information: Scott Gardner, Torrent Capital, Scott.firstname.lastname@example.org, (902) 334-2574