Questionable Partnership Announced, Terms Unknown
Thursday (10-03-2019), RNG announced a partnership with AVYA, a leading global provider of on-premise communications platforms, including prepayment of sales incentives and an investment totaling $500MM in cash and stock. The news sent RNG shares soaring 30%+ on heavy volume.
The deal makes RNG the exclusive provider of UCaaS solutions to AVYA’s installed base of over 100MM customers in 180 countries. AVYA accumulated these relationships through decades of work as part of the former AT&T monopoly in the United States and global growth in the communications systems market post divestiture. It’s unclear if these are active accounts for AVYA or just the complete list of sales activities performed over the life of AVYA as an organization.
Since these customers are not new – they already exist and RNG was already targeting them through its own sales efforts generating strong double digit annual growth - the deal makes little sense. The “partnership” does not preclude RNG from continuing to sell directly to these customers while AVYA adds RNG’s UCaaS offering to its systems integration service set. The size of the deal casts doubt as to why RNG’s Board approved such a transfer of wealth from their own shareholders to AVYA for a white label deal that AVYA would likely have signed without such sizable upfront compensation in order to add RNG's UCaaS arrow to their dying quiver of PBX-based solutions. It casts a cloud over corporate governance at RNG and the decisions the Company’s Board is making for its shareholders for the long-term, in our opinion. To put it bluntly, RNG could have bought this customer list for pennies on the dollar and saved hundreds of millions of dollars for its shareholders while generating the same outcome.
Deal Terms Undisclosed and Transaction Not Closed
A slew of sell-side analysts rushed to upgrade RNG price targets to ranges of $180-$225 on the news, with one even claiming the deal will add $82/share to RNG's stock at 3%-5% penetration of AVYA's base. RNG was expected to capture this growth already before the event, as the global market was wide open for RNG's industry leading UCaaS offering. A quick listen to both companies’ investor calls and a view of RNG’s CEO last night on Mad Money with Jim Cramer leaves us with more questions than answers.
The terms of the deal have not been disclosed - pricing of RNG shares to be issued to Avaya; structure of Avaya Preferred stock to be sold to RNG at $16/share; revenue share and/or commission to Avaya, Avaya partners, RNG; timeline for integration and rollout; forecasts for conversions of AVYA customers to UCaaS and cloud voice services backed by RNG; customer management and salesforce management systems; billing systems; and many others. Management refused to answer any analyst questions except to say “they expect a lot of growth” and “it’s game-changing” and “this makes us truly global”.
In fact, the deal changes nothing for RNG but it does plug a hole in the dike for AVYA’s debt laden balance sheet by allowing that Company to send $250MM to creditors and approve a stock buyback which may or may not ever get done. It is reckless, irresponsible, and borderline a violation of FINRA and SEC rules for sell-side banking firms who have underwritten or stand to underwrite business with both Companies to be raising ratings and/or targets for RNG based on a deal whose terms have not been disclosed and/or finalized and that has not been financed or even closed, in our opinion. There is no appropriate foundation for such enthusiastic views to be put into print and onto the newswires.
|Summary Share Structure|
|Class A shares||71,760,269|
|Class B shares||11,209,473|
|Convertible debt||5,647,637||$460MM @ $81.45 subject to adjustments|
|Stock options||4,120,000||$10.84 strike price >> vested or expected to be vested as per 2018 10K|
|Total CSEs||92,737,379||Common stock equivalents|
|Diluted enterprise value||$11,567,000,000|
Ring the Register
We predict a substantial equity raise for RNG based on this event at prices far lower than current levels, which today value RNG at an enterprise value (EV) of $13.4BN, or about 17x annualized revenues and 13x 2020E sales. RNG’s CEO stammered his way past Jim Cramer’s direct questioning about an equity raise given the stock’s major move, which is an easy tell that dilution is incoming for RNG shareholders.
The icing on the cake were quick Form 4 filings as recently as last night by insiders who apparently are all too eager to unload RNG stock ahead of the deal and now during this event. We can’t really blame them, as investors in RNG today would have to have the Company pay them 100 cents of every dollar collected as revenues for 13 years before they even got their initial investment back. That’s why it’s time to ring the register on this stock.
Against this backdrop, we initiate RNG with a SELL recommendation. Based on diluted shares accounting for Class A/B stock, convertible debt and stock options, we peg fair value for the stock at $125.
RNG CEO Interview with Mad Money 10-07-2019
Insider Selling Wave at RNG
Disclosure: I am/we are short rng.
Additional disclosure: We intend to provide additional commentary in our ongoing coverage of RNG.