Tuesday, 24 October 2017

VISI: M&A Deal Implies A Total Company Valuation Of More Than A Billion Dollars

Earlier today, we issued a value trade alert on Volt Information Sciences, Inc (VISI). The stock ended the day up 61% at $3.55 after it made the following announcement:

"Volt Information Sciences, Inc. (“Volt” or the “Company”) (VISI), an international provider of staffing services and managed service programs, today announced that it has entered into a definitive agreement to sell its quality assurance testing business (the “Business”), a part of its Technology Outsourcing Services and Solutions segment. The buyer, Keywords International Limited (“Keywords”), is a leading international technical services provider to the global video games industry. The Business, known in the industry as VMC, provides production development, QA testing and customer support to companies primarily in the video gaming and mobile industries. The sale will not include the call center services unit of the Company’s Technology Outsourcing Services and Solutions segment, which Volt will continue to own and operate.

Under the terms of the Stock Purchase Agreement, Volt will receive $66.4 million in cash at closing, subject to customary working capital adjustments. The sale is conditioned upon Keywords’ satisfaction of a financing contingency to fund the purchase price.

The disposition of these non-core assets, which represent approximately 5% of Volt’s global revenue, will allow Volt to become a pure-play staffing company. I am confident that the Business will continue to prosper under Keywords’ management,” said Michael Dean, Volt’s President and Chief Executive Officer. “The anticipated cash proceeds from the sale will significantly strengthen Volt’s balance sheet and notably bolster our liquidity position. Importantly, this transaction will help streamline our operational focus within our core staffing business, where we are best positioned to create long-term shareholder value.”

Upon the closing of the sale, which is anticipated shortly, Volt’s current financing agreement with PNC Bank will require a $25 million paydown of our outstanding debt. Volt’s board of directors and management continue to review a broad range of options to drive shareholder value and advance the Company’s plan for growth. We look forward to further communication with our shareholders regarding potential opportunities in the near future."

VISI closed the day at a $75 million market cap but will receive $66.4 million in cash for a division that represents 5% of the company's total revenue, which is approximately $60 million. The SEC filing provides a little more detail about the transaction. VMC Consulting Corporation and Volt Canada Inc. were the two subsidiaries involved in the sale, and are in the business of providing technical support services primarily to video game developers and publishers. VISI was a $5.00 stock as recently as June and is in far better shape now with this deal than back then. Looking at VISI's latest income statement tells you a lot about the company and the value opportunity.

VISI has a lot of revenue for a $75 million market cap company. $906 million for the nine month period ended July 2017. Still, with a negative bottom line and negative growth, one can see how this stock could get so cheap. But a revenue multiple of less than 0.1x is an unusually large discount for a company not in any imminent danger of insolvency. The deal will provide VISI with the cash infusion it needs to pay down some short-term debts.

There are no details surrounding the subsidiaries that were sold - if the revenues they earned have a higher margin or not - but the valuation of approximately 1.0x revenue multiple in this M&A deal bodes very well in determining a favorable valuation for VISI.

Instead of a 1.0x revenue multiple, let's assume that the rest of the company's revenue stream is worth a 0.5x multiple. That may be low as a pure-play staffing company. For instance. Robert Half International Inc. (RHI) has a revenue multiple of 1.2x. But a 0.5x revenue multiple on VISI's remaining business of about $1.1 billion revenue annually would be $550 million. That would lead to about a $25 stock price. While we don't suggest that everyone holds every share until $25, at $3.55 this company is far too cheap to overlook. A 1.0x revenue multiple, justified by this sale, would generate a market cap of over a billion dollars and a stock price of over $50. But at a minimum, VISI should go to $5 and readers can figure out for how long they wish to hold the stock.

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Disclosure: We are long VISI

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