AG&E Holdings

Buy Price
Holding Type
Investment Theme
Trade Date
July 27, 2016

AG&E Holdings (WGA)… (July 27, 2016)

I am buying this stock at $0.265 per share. WGA is a negative EV company with 11.65m shares out ($3m market cap) and $3.87m in net cash ($0.33/share) and $4.65m in TBV ($0.40/share). The company has been slowly liquidating but has recently announced a merger with a private company to increase scale in their remaining parts and distribution business.

If the merger does not go through, the company should liquidate. With a bit of cash burn this could easily be worth the current share price (20% discount to net cash per share).

If the merger does go through, 5.3m WGA shares and a $1m note will be issued to the private company (AGA). AGA generated $6.7m in sales during 2015 with 28% gross margins and $0.4m in free cash flow. There are earnouts to AGA of 4.25m in additional shares (over 2 years) and $2m in additional notes (over 2 years) tied to new product revenues and service revenues, respectively.

So what does the pro-forma merged company look like?

There will be 17m shares outstanding at close for a $4.5m market cap. A special dividend of $0.05-0.11/share will be issued to WGA holders prior to close so call it $0.6m less cash. That means pro-forma cash of ~$3m and debt of $1m, or an EV of $2.5m. (Under max earnouts: shares of 21.5m, net debt of $0m = $5.7m.)

The combined companies are projecting the following performance over the next three years:


At $1m in EBITDA the stock trades at 2.5x EBITDA with a ~19% special dividend. The new CEO (coming from AGA) will receive $385k in base salary and a bonus of 2% of EBITDA over $600k in the first 12 months following closing. EBITDA of $600k would put the stock at 4x + a 19% special dividend.

Duff & Phelps opined on the fairness of the transaction and called for a $0.32/share value on the standalone WGA under no merger (liquidation value) and $0.41-0.50 for the merged companies and the special dividend.

Not a bad proposition despite the so-so nature of the business. Keep an eye on cash burn until the merger closes and monitor performance of the business thereafter. Upside could be 50-100% here with good incentives for management.

Update 12/1/16: The company continued to burn a significant amount of cash. Totaling $1.4m (nearly 50% of market cap at time of purchase); cash burn was significantly higher than expected. With the negative EV off the table, the company announced the completion of the merger and pulled the special dividend ($0.05-0.11 per share). This sent the stock down significantly. I ultimately sold around $0.20 per share for a ~20% loss. The lesson is to be cognizant of cash burn and time horizon (i.e. catalysts) in these negative EV plays.