LifeVantage Corp. (NASDAQ:LFVN), has commenced a modified Dutch tender auction for $40M of shares outstanding. The tender offer, which began September 24, is set to expire on October 25 at 5 P.M. EST. The company has set the offer range at $2.45 to $2.80 per share. The company's strong price movement and ability to close a credit facility to finance the tender auction will move the stock's price higher than its current trading price range of $2.35-$2.40 at the close of the tender auction. The buyback represents 14% of shares outstanding, or about 16.8M shares.
Protandim®, True Science® and LifeVantage® Canine Health
LifeVantage sells diet supplements that provide benefits and protection from the effects of chronic disease. The company offers anti-aging products Protandim®, True Science® Anti-Aging Cream and LifeVantage® Canine Health, which is designed specifically for dogs. The company's products provide stress reduction through the activation of the Nrf2 protein that resides in the cell's cytoplasm (see Figure 1). The protein when activated is known to release over 200 genes that, among other things, provide protection against oxidative stress and inflammation that lead to aging.
LifeVantage, formerly known as Lifeline Therapeutics Inc., was formed in 2004. The company is located in Sandy, Utah, and its current president and chief executive officer is Douglas C. Robinson, 49, who has held those positions since March 2011. Mr. Robinson, as member of the LifeVantage board of directors, holds 0.003% of the company's shares outstanding (320,000). The company is the second-fastest growing business in Utah, according to Utah Business Fast 50 magazine.
The company employs a multilevel marketing distribution channel for its Nrf2 protein activation products in its primary markets (i.e. United States, Australia, Japan and Mexico) and direct-to-consumer sales in Canada.
Dutch Tender Auction
The company's choice of a modified Dutch tender auction provides investors the opportunity for a higher share price over its current market price, with the potential upside gain ranging from 2% to 18%. The company reserves the right at the end of the subscription period to offer a lower price than the stated range if the subscription amount is not met.
The success of the tender offer depends on the action of investors before the close of the subscription period. A modified Dutch tender auction allows investors to consider the submission of bids up to the maximum, which has been set at $2.80. This sets the upside return, based on the September 25 closing price ($2.36), at 18%. Given a relatively low beta (β) or volatility for the stock (1.46) and the historic nature of these types of auctions, investors will take the higher amount in anticipation of a temporary price drop in the stock after the buyback.
Market Outlook for LFVN
The company, which has traded within a 52-week price range of $1.60 to $3.55, is currently trading 44% higher than its December 12, 2012, intraday trading low (see Figure 2). The fundamentals for the company appear to be strong, with a quick ratio measure of 1.47, debt-to-equity ratio of 0.63 and debt ratio of 0.39. These calculations are based on the company's most recent 10-K filing with the U.S. Securities and Exchange Commission, dated September 12, 2013.
Figure 2. (June 2012 - September 13)
The company continues to show profit as its revenue growth increased 15% Y/Y in the period ending in June (total revenue of $51.51M versus $44.6M).
The Availability of Returns for LFVN
The company's tender auction to buy back $40M of the 177M shares outstanding represents a buyback of 14%, just below the average median tender auction of 17.1%. A tender of $2.71, which is 25% below the anticipated price range spread of the tender auction, has a 70% chance of being accepted, resulting in a better than average probability of the higher upside being realized at the end of the tender auction subscription period.
Reasons for a Successful Outlook
The belief in the success of great upside for the stock is based on the historical results of these types of tender auctions and the probability of a good return predicated on a few assumptions. The first two assumptions are: 1) the tender auction will conclude fully subscribed, and 2) the company will pay a premium of up to $0.37 per share to a maximum of $2.71. This will result in an upside return of 18%.
To conclude, a purchase of LFVN at its current trading price of $2.35-$2.40 per share prior to the close of the Dutch tender auction will result in an upside gain potential in the range of $0.31-$0.36 per share. This translates to a realized gain of 13% to 14% with larger potential upside to follow. The low volatility of the company predicts high upside variability in returns against low-risk potential.
Disclosure: I am long LFVN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.