Speaker 1
2021, 2022, they start developing this big government business of housing migrants who come over the border, particularly unaccompanied minors and particularly unaccompanied minors. So they've got a big migrant business and this grows incredibly because of border crisis, all the stuff you see in the news, right? It grows like crazy. So those are important backgrounds because in 2023, this was an event dressed investors dream stock. I can't tell you how many people were pitching this to me and it was a very good thesis. I almost had several of them on the podcast where they said, hey, injured the stock is at 15, the stock is at 16, there's a migrant crisis. They're gonna win the government's out looking for a new temporary facilities to host all these migrants. They're gonna win several bids. And it was only trading at like five, six times EBITDA at 16. Exactly, absolutely exact. So they said, hey, your downside is low because this is low multiple. They're generating tons of cash because the customers basically pay for the catbacks, generate tons of cash, low multiple with this huge upside if they went a big. Fast forward to the end of 2023, the government from memory is bidding three different contracts. And the bull case was they're gonna win all three or maybe two, but even if they just win one, that's gonna be great. They win one contract, but then they reveal the terms and the terms are not what anyone expects it, right? Lower margin, there was a little issue with previously, they'd gotten paid for catbacks. Now that the catbacks installed, they're knocking it. Stock sells off like crazy, goes from 15 to eight. Now, every event investor is out, right? And I think that's pretty much the basic background of, hey, the stock gets killed, EBITDA kinda resets, and then your 65% owner says, hey, this company looks really cheap. There's a lot of call options we can talk about. Let's try and take them out. I don't know, I miss anything. How do you think I did? No, that's exactly what happens. There's some very interesting, this is such a weird situation. I don't know, you and I have never talked about this, but this probably equity firm is European based. And if you go to their portfolio holdings, they don't have a single company that's in America, except this one. Every single position is European based. And this is like an inherited position from Arrow, because they acquired Arrow and investment management firm a few years ago. And this legacy position goes back for them to 2012. So this is a stale fund that clearly needs a kind of a secondary transaction or complete sale. So there's an impetus for them to do something with this position, mostly because they don't do America. I mean, it doesn't make any sense about even have this. Well, that is, one of the other interesting things is you're the one who jumped on this much more than me, but if you compare their 2020 letter, they offered to buy this thing for a song during COVID. I have it right now. They said, why don't you go through it? You know where I'm going. It's just really interesting. They have, it's very rare that you'd be able to have a compare two letters, right? Usually these things, a majority bids for a company, if it's an MLP, forget it, there's no provisions. We can talk about the differences between this and that. And it's all very relevant. But to see, to be able to look at the letter from 2020, and the letter from 2024, and see what's there and what's not, when it's the same exact firm trying to buy the same company, is totally riveting because there's parts in it that are emitted in the 2024 letter that were in the 2020 letter. And you could really only come up with bullish reasons for the omission. So I'm going to read you three paragraphs from the 2020 letter. And the spoiler alert is all three of these paragraphs were deleted from the 2024 letter. So focus on that. This is not there in this letter, OK? It is our expectation that certain key members of management will roll over their equity connection with the transaction. Given the error groups existing controlling stake in history with the company, we will need to perform only very limited due diligence prior to executing definitive documentation. That last sentence, they have something kind of like that. But the other one, they don't. There's no management rollover. These are the two important ones. Our proposal should not be construed as an interest in participating in any alternative change of control transaction involving the company. The error group has no interest in selling the control of the company at this time. We emphasize that neither the failure of a special committee to recommend a transaction nor the failure of the company's public stockholders to approve a transaction would adversely affect the error group's ongoing relationship with the company. The error group intends to remain as long-term stockholders of the company if the transaction cannot be completed under our proposal. They've deleted all of that. The right. Just remind listeners that was language from the 2020 letter when they tried to take the company private on the cheap. All of that was deleted from the 2024 letter, which they're trying to take the company private now. Please continue, Matt. So many fascinating things about this, OK? The reason why you put the first thing, which is that you're not willing to sell anybody else, is you don't want a competitive bidding process because you don't want to pay it against other people because if you have, as Andrew said, if you own 25% of a company, well, even if you tell them that you're not going to sell your 25% stake, you don't have a blocking stake. Yes, it's hard probably to get around that 25% stake. But if the price is high enough, you probably can get 51% of the 75% to vote for a deal. Closer you get the 50%, the less likely it's ever going to happen, right? So you almost always put that in there. You say, I love this company. I'm not selling this to anybody. Take my crappy bid, maybe a little bit of a bump. We'll talk about the dynamics, how these things usually work. But take my bid or take nothing, OK? That's gone. The second thing that is almost always in there is we're not going to be mad at you if you don't agree to our terms. We're not going to have the special committee. We're not going to be mad at the public shareholders. We love this company and we're long-term shareholders. They deleted that from the letter. Why? They only 65% of the company. Clearly, if they don't agree to their terms, they're going to be long-term shareholders unless they sell the companies who are third party at a much higher price. Now, that dynamic is weird because they could have just brought a private process. I mean, they control the board. So if they really weren't interested in bidding, this isn't like a stalking horse bid. I think they generally do want to buy the company. But something is going on here. And I noticed in the proxy that came out last week that last year, there was a special committee form. They won't tell you what it was for. But it says that board members were paid a premium to be on this special committee from July through October of last year. Now, that's also around the time they were doing the bidding for this very important project. And it's possible that the board was involved in that bidding process. But that's really a management thing, not a board-level decision. So my gut tells me that they either ran a process then or this private equity firm was interested in bidding then. And they could not come to an agreement on terms and they dropped it. Just to be clear, there's no real set way a majority firm has to go through the way to acquire the minority. So there's a lot of different ways to look at this. You could look at Silver Lake, for instance, just bought Endeavour. They only owned, which was a big position of an unionized. They only owned a third of it, but they controlled it. They had 65 or 70% of the vote, okay? They put a 13-D out back in October and they said they want to bid for it, no price. And they're not gonna sell to anybody else, okay? They also didn't say that the bid would be subject to a majority of a minority vote. I should describe what that is. That means exactly what it sounds like, which is anybody that's involved in buying the company cannot vote. And if you are being taken out, you do get a vote. So in this case, 65% of holders can't vote, but the other 35%, they have to get the 51% of that 35%. I don't know if it's a simple majority or a voting majority. I don't know which one it is, but. I believe it's simple majority of the votes. And just to be clear, this is something that they put in, it's a fairness thing, right? They can't jam it through and say, forget the 65%. Let's go back to EDR. I own 35%. I get a deal over the finish line with 51% of the votes. And I say, look, we're heroes. And then everybody says, well, 20% of the minority shares voted yes, 80% voted no. You only got it over because of 35%. Open yourself to lawsuits. It doesn't look good, all this sort of stuff. You include the majority of the minority. So you could go to anyone and say, hey, look, all the unaffected minority shareholders, they voted yes for this. 51% of them did. The majority wanted the majority of the minority wanted this. EDR was at 35. They have a 70% vote. So they didn't even have it. They own 30%. EDR had all, I mean, you and I just figuring out the share count. They're always kind of tough. And you know, on a side note, we could do a whole podcast in EDR. I think they're gonna have to use lawsuits. I'm gonna get to that in a second. So the reason why, so in this letter, in the 2020 letter and the 2024 letter, they explicitly have a power grant that says they will only go through with the transaction if an independent special committee approves it and a majority of minority vote approves it. It says that's non-wavable, okay? The reason why companies do this is you're almost certain to get lawsuits after the deal closes. Best Delaware has a huge history in precedence with fairness for takeouts involving majority shareholders, whether it's 51%, or 40%, or whatever it is. If they don't do those two things, there's an acronym for it, MFW or something like that. You wouldn't know that. I would, you know that. I actually don't know that acronym. It's based on a famous court case that Delaware Law said, if you don't do those two things, you're subject to litigation. So it's always super interesting, and there's another podcast for this. It's always super interesting when they don't do that. And in fact, two of the 12 examples that Andrew had on that list of majority minority squeeze outs that were private equity firms did not agree to a majority minority vote. They were huge premiums, one was like a 120%, one was like 80 or 90%. Guess what? One already settled the lawsuit for $20 million, and the flow they took out was only $250 million. So that's an 8% bump, minus law fees, but then not do. Law fees are a big asterisk, right? But to them, it's an 8% bump. Yeah. Yeah. 8% bump of what the company had to pay. Exactly. That's their money out of it. Okay. The other one, law suits are pending. Okay. Two out of two. Okay. So you always do that, but it's subject to two, maybe not getting the vote. And that's where this, I actually, I think I'm going a little bit off-culture, but it's very important to this story. So this one is great because this one has two 5% shareholders, both I think pretty savvy firms, they're not kind of not to be disrespectful, but they're not kind of sleepy long only, you know, index funds or mutual funds, sopidelity that's owned this for 25 years, that is, you know, act, we're not act, not active managers. These are active managers and they own 5% and 6% of the company. And I can assure you, and I'll give you an example why, that they are very interested in this being acquired at the right price. Can I, can I want you to give the example why? But I do just want to add one thing. We mentioned that TDR owns 65% of these, you know, normally if you've got a 5% shareholder, they carry some weight, but here you have two 5% shareholders. So at about 10%, right? Only 35% of this company floats. So these two with 10% them alone are almost a blocking stake for the majority of minority consideration. They're going to carry enormous weight, enormous weight, if and when a final deal comes, like this, and I'm just kind of pointing out again, 5% normally say, oh, that's a nice sorting, but here it is enormous because of how small the free float is. And it's not 10, it's 11%. And I think it might be more by now, by the way, I'll get to why I think that. But and also be clear that 35% can vote, but usually in a proxy 50, 60, 70% will vote if it's kind of even a Harry proxy. So you're probably looking at 20 to 25% of the shares voting. 11 is pretty much a block. You know, you add and you own like millions of shares, and I'm just kidding. But you know, if you add all the weight all between the two of us, you know, we have them. We have them. We have Matt. Matt is 100% joking. No one listens to anything he just said there. Andrew's disclaimer at the beginning should have been, none of this is advice if you're going to sue anybody, sue Matt. That's what you're saying. You said it not me. You said it not me. So the bid, the share, sorry, excuse me, the majority shareholder bid on March 25th, on March 26th, the second biggest shareholder who we knew owned 4.7% as of December 31st because they filed quarterly reports like all major investors do. They filed a 13G, not a 13G, a 13G. A D is when you're active, a G is when you're passive. Now, there's so many interesting dynamics about this. Usually you have to file a 13G. It's like 10 business days after you cross the 5% threshold, okay? And no one ever rushes to do this, okay? They did it the next day. So on March 26th, they filed a 13G. They say the date of filing that they needed to notify you was as of March 25th. So they definitely bought stock on March 25th. Now we don't know how much they bought from January 1st to March 25th, because the last firing update was December 31st. It's only up to 100,000 shares. It got them to 5%. They had 4.7 million. Now they have 5.1 million or something, right? So I didn't even notice this at first, but my first thought was, okay, they did this for, just for one main reason. Once you file the 13G, they can now go up to 9.9%. And they never have to file again, okay? They have to file quarterlies. So on March 31st, we'll find out what they own, but we won't know what they own again. I mean, we'll find out in May 15th, but they own March 31st. But we won't know again until middle August, what they bought in March, I'm sorry, what April, what they bought in May, whatever. So I thought they were like, hey, let's get the 5%. So we can notify the public we're there. And then we can be kind of stealth and keep buying more stock around the bid at price. We haven't even talked about where the stock's trading and all that stuff. That's obviously the most important part of this thesis. But that way they keep accumulating every day and they're more likely to go, but finally talk about make your own catalyst. They know without, they're not legally allowed to communicate or form a group with the other 6% holder, but I can assure you they've spoken. And it's totally legal to speak. They're not trying to acquire the company or anything. But they could definitely talk to each other and say, we think this is where X, this is how we're thinking. And I'm sure, I don't even know these people. I never met them, never spoke to them, never emailed them. So this is just me, hypothetical hypothesizing. They're speaking to each other and or have spoken to each other. And it definitely behooves both of those groups to buy as much stock as they can to have more of a block and more of a saying what this is worth. Okay, so yesterday, this, I didn't find this Andrew. Somebody else told me this yesterday. It was in the 13G, went under purpose of transaction. It's usually only, and you're not a shock. But usually in the 13G, you're not an activist. So usually this says, this is for investment purposes. Have a nice day. Like that's all, everything's gonna be other than that. I saw the 13G as the Jew and I know some of the people at some of the firms that have filed these 13Gs and respect them. I know people who know of them, respect them. But as you said, my thing is, if you filed a 13G, I don't even look at 13Gs because 13Gs never have information in them. They're passive investments. You never get anything interesting in a 13G. And without reading it verbatim, it says we were aware of the bid by the private equity firm and we are going to be very focused and concerned that, oh, we've been long-term shareholders for two years. Look, it says, don't steal the company from us. It says, we are on you. This has been this ridiculous. I'm paraphrasing. And it says, we are gonna be monitoring this situation, which is basically saying we were gonna vote no if you accept this 1080 bid or anything near it. I mean, that's what they're telling you. So when they bid 1080, the stock was nine. It was around $9 for 30 days before. And a lot of times these deals, any deal, they use 30-day VWAPs. They do 60-day VWAPs. They used the day before a Reuters article came out that said they were looking to sell themselves. In this case, the most likely price you would use is the unaffected before they made the 1080 bid, the day before, which was nine, okay? And it traded in a range of 840 to nine, call it 50, nine 30 in the 30 to 60 days before, okay? And they bid this 1080. And this is a good segue into how these things usually work. So if you look at the comp table, which Andrew had, I keep talking about this, so I wish I could share it with you guys. We got the next question. I'll include a link to the, it'll be nice listeners, and I'll include a link to the HRT comp table in the show notes for people who wanna go look at it. Which of this thing that Andrew found, which I'm embarrassed said and no existed, was HRT was another majority minority squeeze out there. No reason to get super into it. We're already gonna get into it a little bit actually, because we're gonna talk about the dynamics of how these squeeze outs work. HRT is a perfect example, and it just happened a few weeks ago. But Andrew found, it was not a seat-filing, but it just didn't know that they posted these things. That center view, which is the preeminent firm that advises special committees for these squeeze outs. In fact, I didn't find a single squeeze out that they didn't advise. They were in Endeavour and Silver Lake. They were in all the other ones that I researched. People must just hire them automatically to represent the special committee. They prepared a 20-25 page deck for the special committee that explains everything we're kind of talking about, how these squeeze outs work, what historical premiums are paid, how long they take. You know, remember, the special committee's not, they're not professionals in squeeze outs. In fact, this special committee isn't even specialist in the stock market. Almost everyone on this board, remember these are all hand-picked by the private equity firm. They're like ex-government officials, and there's some entrepreneurs and stuff, but there's no stock market people. Now that's good and bad, right? They're not savvy when it comes to stock market. They're not. Literally not one of them has experience in the stock market or in financial services industry. So they have to rely on the special committee. So anyway, in that complex, you can see that, you know, a lot of these private equity firms, it's only two comms in the whole one, Weber and, and, and, keep it in the name wrong, do you know what the Convey Health, I think it is? Does that sound right? I think that's right. I'm looking right now. It was Convey Health with TPG. Yeah, so those two are the only real comms on there. You'll see the rest of them are all a strategic, which is a whole nother ballgame, a whole nother animal. And they've been higher than 18, 20% for their initial bid. They bid 35, 40, 45, 50% for their initial bid. And then their final bid was another 50% higher, 15 or 25% higher, whatever, like big, big initial bids, 13 DIT, a few months of negotiation, and then you wake up to a take-off price. And remember, both of those examples did not give you majority minority. So there was no provision to protect you from the special committee screwing this up. We have that provision here. They have made it unwavable. So we are definitely gonna go here. So the odds of a steal are almost zero with 11% holders on this thing that have owned it for years. Okay? So that's very important. Our protection here at 1080 is, it's not happening at 1080, okay? Just not happening, okay? So where did the stock, to the bid 18%, they've been 18% higher than the nine bucks. The stock traded to like 11, 11, 10, 11, oh five, whatever. It dripped it down. Right now it's 10, 90. So it's 10 cents above the bid, okay? Now historically that clumpsheet that Angela will show you in the link, the bids, and we looked at this a lot, Andrew and I, the bids, you tend to get an average of 15% buck. But again, it's not comparable to this. It includes all the strategic transactions and it includes initial bids that were much higher. Brett Coughran, founder and lead trainer of Fundamental Edge barely remembers his first year as a hedge fund analyst. Most of that year was spent in a blind panic. Was his research getting good? Was he learning fast enough? What did his PM really want from him? Training on the buy side was non-existent 15 years ago when Brett was a new analyst at Maverick. Then he actually got to mode it. Then he worked harder, found mentors and asked for uncomfortable feedback.