Allen-Vanguard deal could hit headwind

Published on the front page of the Ottawa Business Journal and on its website.
Feb. 2, 2009

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Defence company’s future rests in hands of Tailwind shareholders

Defence company Allen-Vanguard could see some of its debt woes eased with a proposed $40-million takeover by a U.S. buyout firm, but analysts say the transaction is far from a done deal.

Allen-Vanguard announced last week it had agreed to merge with Delaware-based special purpose acquisition firm Tailwind Financial Inc., a deal which would allow the bomb-jammer and blast suit maker to recapitalize. Tailwind said it will offer 0.046493 of a common share for every Allen-Vanguard share, pricing the latter at almost double their current market value. At the same time, Allen-Vanguard will carry out a shareholder rights offering that could raise as much as $100 million.

The new company is to be known as Allen Vanguard Corp.

But Neil Linsdell, an analyst with Montreal-based Versant Partners, said the deal rests in the precarious hands of Tailwind’s shareholders.

The buyout company was set up two years ago for the express purpose of completing an acquisition deal, and management has about three months to find a transaction before it must dissolve the company. In that case, shareholders would receive $8.17 per share.

The question, said Mr. Linsdell, is whether stakeholders are interested in tying up a long-term investment in Allen-Vanguard, or just getting their money back in the face of what’s become an increasingly fragile market.

He added it’s unlikely a better plan will crop up for Allen-Vanguard, but noted there are “many moving parts” making the current offering difficult to assess.

“There’s two situations here, one being the investor who put money in when Tailwind was initially formed, at better times for the stock market, who are now just waiting to get their cash back through the end of the process,” explained Mr. Linsdell. “The other is that they bought the shares in the interim over the open market, over the last two years.”

Tailwind’s shares have ranged from as low as $7.50 to around $8, meaning the second group would make an instant profit from cashing out.

Along with this, shareholders of companies such as Tailwind aren’t typically long-term investors and are predominantly backed by hedge funds and the like, added Doug Cooper of Paradigm Capital. He has a 60-cent target price and a ‘buy’ rating on Allen-Vanguard’s stock.

“The company and Tailwind management will have to show the merits of the deal to either Tailwind’s current shareholder base or convince other (more long-term) investors to buy Tailwind’s stock,” said Mr. Cooper.

Tailwind’s shareholders have already passed on two other transactions, and the acquisition firm has little time left to find another purchase.

Dilution is another concern, as the concurrent rights offering allows shareholders to acquire subscription receipts on a pro-rata basis at 28.5 cents each, allowing holders to receive one additional common share per receipt.

“But given the fact that the shares are currently trading at well below the rights offering, it’s looking doubtful Allen-Vanguard is going to get any subscription to that. Why exercise when you can buy on the open market at 21.5 cents?” said Mr. Linsdell.

On the plus side, if they green-light the deal, Tailwind shareholders would own roughly 80 per cent of a company “with a strong portfolio of products, strong partnerships and improving fundamentals,” wrote Mr. Cooper in a research note, with the assumption that none of the Allen-Vanguard shareholders participate in the rights offering.

Allen-Vanguard must pay a $5-million break fee if the deal falls through, although the company has said it is permitted to recommend a more favourable transaction ahead of its shareholder meeting in March – if it finds one.

The funds raised by the Tailwind deal could make a significant dent in the company’s debts, which include $44 million in overdue quarterly principal payments deferred to May 2011.

However, if the deal is voted down, the company will still have to somehow raise roughly $50 million to repay the banks by April 30, or face giving up an additional 10 per cent of its shares to its lenders, diluting the existing shareholders further.

“As far as Allen-Vanguard shareholders go, the consummation of the deal would certainly be a good thing considering the overhang of the concern of the company’s debt. The bank has had them up against a wall recently, putting incredible weight on their share price,” said Mr. Linsdell.

“This comes with so much cash, it gives them a significant amount of breathing room to be able to go and execute their business plan.”

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