Friday, May 13, 2016

Bought WaferGen Bio-systems

I picked up some WaferGen Bio-systems (Ticker: WGBS) today at $0.90 (~ 1.8% position). This company is being acquired by Takara Bio. I’ve never seen this type of deal before in which the final price paid will be based on WaferGen Bio-system’s 2016 revenue. I did a quick back of the envelope calculation and I think the final price can be $1.50+ based on the companies projected 2016 revenue guidance of $12-13 million. Am I missing something? This deal will close in February / March 2017.


At May 16, 2016, Blogger lamano said...

Looks interesting.

I am not experienced in these type of deals, but obviously their are some risks:
- Shareholder vote: Didn't look into major owners, but looking at how the stockprice has developed, owners might be reluctant to accept given share prices of 3-4$ less than a year ago. Perhaps they rather take their chances. APOL was in a similar situation, but the vote eventually passed.
- Missing revenue guidance: If they would do ~8-9M in revenue, the merger consideration would not be much more than the current price I believe. Given that they only achieved half of the low-end of the 2015 growth guidance last year, its not a sure thing at all they will meet revenue guidance.
- Clause 7.2.f ' No material adverse effect - all sorts of risks in there right?
- Upside above 1.44 is quite capped due to the 18M warrants outstanding.

Still, I think I like the risk reward here.


At May 17, 2016, Blogger Money Turtle said...

I believe the company guidance of $12-13 million is doable. I'm continuing to add to my position...

At May 18, 2016, Blogger lamano said...

I have trouble understanding the effect of the company warrants on the 'Per share Aggregate Common Consideration'(= what we get as shareholders).

In section 2.11 of the agreement it is stated that the Per share aggregate common consideration consists of:
1)The aggregate Residual Consideration Amount, divided by
2)The fully diluted share amount

1) furthermore consists of:
1.1) The Aggregate Consideration
1.2) The aggregate exercise price of all ITM options
1.3) The difference of the aggregate maximum exercise price of all company warrants that are ITM, minus the aggregate of any amounts potentially payable by the Surviving Corporation in respect of the BSV Warrants.

From section 2.7 of the merger agreement i understand that the holder of a warrant is entitled to the following in case the merger is completed:
A) # Warrants *( Per share aggregate common consideration - Exercise price) OR
B) at the holder’s option, exercisable at any time concurrently with, or within thirty (30) days following, the Effective Time, an amount in cash equal to the “Black Scholes Value” of such BSV warrants

I guess that warrant holders will always opt for B? Because B>A because B includes the timevalue of the 'call option' embedded in the warrant. This value is quite significant due to the fact that these warrants are years away from expiration.

This leads to confusion on my part on the meaning of 1.3.
- In case the warrants end up Out of the money: Can 1.3 be a large negative number? In that case the aggregated maximum Exercise Price of ITM warrants is 0 while these OTM warrants still have a huge theoretical Black-Scholes value.
- I must be misinterpreting, but: in case the value of 1.3 is influenced by whether or not the warrants end up ITM, and whether or not these warrants end up ITM is in term dependent on the ultimate 'Per share aggregate common Consideration', does that not lead to a circular reference given that 1.3 influences this Per share Aggregate Common Consideration?

Perhaps this is what we are missing?

At May 18, 2016, Blogger Money Turtle said...

I found this to be very useful:

At May 18, 2016, Blogger lamano said...

This comment has been removed by the author.

At May 19, 2016, Blogger lamano said...

Thanks for sharing, combined with the new filing, all cleared up now.

At May 19, 2016, Anonymous Anonymous said...

On the website, they say the following:
"This is a complex deal with many conditions that make it challenging to determine the actual value of this deal on a per share basis. Using their full year 2015 revenue and applying a multiple of 2.5, we get a rough estimate of $0.95/share and are going to use this price as a placeholder in our database."

He is using the 2015 revenue, which I believe was $7.95M
You are using the 2016 estimate which Yahoo Finance has as $11.8M (You use company guidance of $12-13M.)

If we use the multiple of 2.5 this results in total pay out of approximately $12M x 2.5 = $30M. There are 18.75 Mil shares outstanding which results in $1.6 per share. This does not take into account the effect of any warrants. I am also unsure if 2.5 is proper multiple.

Do you know how accurate the revenue projections usually are for these types of companies?

At May 19, 2016, Blogger Money Turtle said...

The company is guiding $12-13 million for 2016. Based on that revenue projection, the multiple should be 3.5X.

The multiple is based on the following revenue:

Multiple of 1X < $3 million
Multiple of 2X $3 > or = $6 million
Multiple of 2.5X > $6 million and <$9 million
Multiple of 3.5X > $9 million

Check out the recent SEC filing for additional info on this deal. The company provided a good Q&A about this deal in the filing.

At May 25, 2016, Blogger lamano said...

This comment has been removed by the author.

At May 25, 2016, Blogger Money Turtle said...

Hi lamano,

Check your gmail email...

At August 01, 2016, Anonymous Anonymous said...

Has anyone been watching WGBS lately? Up 25% today on high volume. Any news?


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