TORONTO, Feb. 9, 2016 /CNW/ - Torrent Capital Inc. ("Torrent") has reached out to the board of Pivot Technology Solutions, Inc. ("Pivot" or the "Company") both proceeding and subsequent to the recently proposed Arrangement Agreement (the "Agreement"). Torrent has done so in an effort to provide alternatives to the Company that would maximize value for the common shareholders of Pivot (the "Shareholders").
Despite our efforts, it appears the board is intent on pushing forward with the proposed Agreement even though it blatantly shortchanges Pivot Shareholders to the benefit of a select few insiders.
Torrent Capital is proposing an alternative course of action that is in the best interest of all Pivot Shareholders:
1. Maintain the Existing Capital Structure which is Favorable to all Shareholders
At present, investors have rights and privileges as Shareholders. Shareholders currently benefit from a favorable mix of dividend related income and the potential for capital appreciation. The proposal is based on a faulty assumption that Pivot Shareholders would be willing to forgo these advantages and surrender their upside for an uncertain stream of preferred dividends and no monetary consideration.
2. Increase the Common Dividend by 80% to the Benefit of all Shareholders
Immediately increase the dividend per share by 80% to C$0.054 per annum (from C$0.03 per annum). An increased payout is consistent with Pivot's financial performance, relatively stable business model, modest forecasted payout ratio and future growth prospects. The increased dividend would represent an appropriate balance for Shareholders as they would obtain an enhanced yield, while also maintaining their interests in the Company's future growth. An increased dividend payment would also enable the Company to fulfill its stated desire to distribute additional cash flow to Shareholders.
3. Conduct a Formal Business Valuation and Strategic Review to Unlock the True Value of the Company
Initiate a full and fair business valuation and strategic review by an independent and nationally recognized financial advisor. A formal review process by an independent and experienced financial advisor will help determine the true value of the Company while properly exploring all strategic alternatives available to Pivot moving forward. The board would oversee this thorough process, within which, it would consider the option of maintaining Pivot as an independent publicly traded entity or the potential sale of the Company in an arm's length transaction.
4. Align Executive Compensation with that of the Common Shareholders
Carry out a comprehensive review of executive level compensation, including the compensation structure of the CEO and business heads of Pivot's four underlying divisions. This review should be completed to ensure that executive compensation is properly aligned with certain performance metrics such as revenue growth, margin expansion and increased profitability. Stock based compensation, via an option program or a share purchase plan, should be appropriately incorporated within the executive compensation package to ensure the interests of insiders are properly aligned with those of Shareholders.
5. Provide Shareholders with Further Clarity on Pivot's International Expansion Plans
The Company should immediately provide Shareholders with a detailed overview of Pivot's international expansion plans and present guidance on how the proposed contract with Inflexionpoint Asia Pte. Ltd. ("Inflexionpoint") will impact the Company's profitability and growth prospects moving forward. The board of Pivot has indicated the relationship with Inflexionpoint is material given that Inflexionpoint will pay Pivot an annual fee of US$1.5 million over a 10 year term, along with a revenue and cost sharing agreement. Shareholders of the Company would potentially benefit from international growth and expansion, but in light of the many conflicts of interest, greater transparency and disclosure is required.
6. Move the Company to a Senior Exchange in Canada and Explore a US Listing
Immediately take steps to upgrade Pivot's public listing to the TSX in Canada. A TSX listing is clearly more appropriate for Pivot given the scale and nature of its business; the Company would immediately benefit from increased liquidity, a larger audience of institutional and retail investors and potential inclusion in exchange traded funds. In addition to taking steps to move to the TSX, the board should take steps to pursue a listing on a US stock exchange. A US listing could be highly beneficial for Pivot given the Company's scale and US focused business model. Pivot's industry peers trading in the US have enjoyed superior trading multiples, increased institutional ownership, superior liquidity, in-depth and broad analyst coverage and better access to capital. In conjunction with a graduated listing in Canada, the Company should commence an investor awareness campaign in an effort to boost institutional share ownership and increase analyst coverage.
In addition to our six point alternative action plan, Torrent is compelled, on behalf of the Shareholders, to address some of the misconceptions associated with the proposed Agreement and our ongoing concerns with the irresponsible assumptions made by Pivot's board.
Pivot's board indicated that the strength in Pivot's share price subsequent to the announcement of a dividend on March 2, 2015, justifies their view that Pivot Shareholders are motivated by yield. Torrent would like to point out that share price strength in early 2015 can be attributed to a culmination of factors. The announcement of the dividend took place concurrently with the initiation of a share buyback program. Both the dividend announcement and the share buyback program signaled that the Company was on solid financial footing. Furthermore, at roughly the same time, Cantor Fitzgerald initiated coverage on the Company with a price target of C$1.25 per share, which greatly enhanced the Company's audience and confidence in the story. This chain of events, balanced against Pivot's improved operational performance in 2014 and a strong technology market in general, worked in concert to drive the share price higher. Cherry picking any one of these factors and suggesting that it was the primary driver of stock price performance is grossly misleading.
Pivot has suggested that it has exhausted all possible options in an effort to explore strategic alternatives. Torrent believes that its actions indicate otherwise. The Company has stated that "no formal process" was initiated to canvass potential suitors; rather it had spoken to some private equity groups "during the normal course of business." Statements of this nature lend no confidence to its claim that a reasonable effort was made to enhance the value of the Company for the benefit of its Shareholders. The lackluster effort has been compounded by the fact that there has been limited investor relations activity, no effort to graduate to a more suitable stock exchange, and a lack of effort to attract additional analyst coverage and new institutional owners in Canada or the US.
Given the fact that the Pivot insiders have put forth a proposal that is radically slanted towards their own interests, while in possession of asymmetric information, the board must rise to a higher standard duty of care when evaluating the current proposal. The board has made many assumptions on behalf of Pivot shareholders that are highly questionable. The board assumed that no alternative offer would be available to Pivot Shareholders, despite the fact that Pivot now acknowledges that no formal process was undertaken to engage potential suitors or attract alternative offers. Furthermore, the special committee claims the offer fairly values the Company, which is a hefty assumption given that no formal business valuation was completed, as is customary in similar situations. Lastly, and of utmost concern, it appears the board has failed to properly weigh and evaluate the rank conflict of interest in the proposed transaction. The Inflexionpoint contract, which curiously was not previously disclosed by Pivot and its board, is a material development for the Company. The relationship is of such importance, that Douglas Stuve, Chairman of the special committee, was recently quoted in the National Post indicating the Inflexionpoint contract was material enough to disclose within proposed Agreement because "with the Inflexionpoint contract, Pivot's revenues will be boosted even further." Given the obvious importance of the Inflexionpoint contract for Pivot's future growth, and overlap in corporate structure between the Founder Group and Inflexionpoint, in our view the board has failed to oversee and protect the interests of Shareholders appropriately.
Share price weakness subsequent to the announcement of the proposed Agreement has been attributed to uncertainty that the proposed transaction will close. Torrent is confident share price activity has been weak because the vast majority of Shareholders believe that the proposed Agreement is a very bad deal. Additionally, Torrent believes that confidence in the Company and its board has been shaken considerably given the questionable assumptions made by the board and their inability to govern the conflict of interests embedded in the proposed transaction to the satisfaction of the Shareholders. The Shareholders are rightfully questioning the competency of Pivot's board and whether or not Shareholder interests are being properly protected.
As at January 22, 2016, Torrent represents the interest of 20,727,000 common shares, or 12.20% of the shares outstanding. Since the announcement of the proposed Agreement, we have been contacted by numerous retail and larger institutional investors who share our concerns about the proposed transaction and we sincerely appreciate the support and feedback we have received thus far. Torrent will continue to take necessary actions in an effort to unlock the true value of Pivot for the benefit of all Shareholders.
Torrent is a Toronto based investment company with a 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 in an effort to enhance shareholder value.
SOURCE Torrent Capital, Inc.
For further information: Scott Gardner, Managing Director, Torrent Capital Inc., firstname.lastname@example.org, 902-334-2574