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Jul
8
Offer to buy Galvanic Applied Sciences pockets shareholders cash
Posted by: Gerry Wimmer
7/8/2013
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TOP IDEAS: Buyer admits low-ball offer of $1.70 is priced at significant discount to Galvanic Applied Sciences (TSXV: GAV) stock’s true worth.

In March of this year we wrote a blog post about one of our Top Ideas - Radiant Communications Corp. concerning an ugly takeover offer forced upon its minority shareholders (See: Radiant Communications shares are a steal - Too bad they are getting stolen). Fortunately with the help of this blog and several articles in the Financial Post (See: Radiant’s plan to go private not good enough for minority) the injustice of the Radiant privatization offer for minority shareholders was exposed and did not materialize.

It is four months later and here we go again. This time: Galvanic Applied Sciences Inc. (TSXV: GAV - $1.68)

Fiscal 2013 was turning out to be another good year for Galvanic. For the first nine months which ended on January 31st, the Company reported it earned $0.17 per share in earnings. Consistent over the past two years was Galvanic’s 12-month run rate of $16-17 million in revenues and earnings of about $0.22 per share.

Headquartered in Calgary, Galvanic has two major operating segments: one in Canada, the other in the USA. Galvanic Canada develops analyzers for the natural gas processing market and electronic flow and pressure measurement products sold into the gas distribution market. Galvanic Lowell, the Company’s US-based unit, markets liquid process analytics instrumentation for an array of industries. Both operating units sell their products within their domestic markets and internationally.

On June 28, 2013 the good news story for Galvanic’s shareholders took a wrong turn. The Company disclosed it had received a tender offer to be acquired for $1.70 per share (C$26.7 million) from a trio of opportunistic US private equity investment firms (the "buyers”) acting jointly. Still worse was the news in the offer that the buyers had somehow locked up the shares of a majority group comprising of Galvanic’s largest individual and insider shareholders (holding 66% of the Company’s stock) at $1.70. 

Simply said, I am minority shareholder of Galvanic and the $1.70 share offer is extremely inferior. More disturbing is that the buyers of Galvanic’s shares agree with my assessment in their Offer to Purchase document filed with the regulators. In the Offer to Purchase filing, the buyers recommend Galvanic shareholders to accept $1.70 share offer as it is priced at a slight premium to the Company’s Enterprise Value if you exclude cash holdings. Last reported Galvanic had cash and marketable securities of $10.5 million or $0.65 per share. 

A Company’s true Enterprise Value (EV) includes cash holdings net of any debt. Galvanic has no debt. Therefore, its the buyers’ own admission that suggests when you include cash holdings, that the true EV of Galvanic equates to their offer of $1.70 per share plus the $0.65 per share in cash held or, otherwise, $2.35. Therefore the premium offer "to accept” implies a 28% discount for the buying group. In other words, the buyers intend to pocket the shareholders’ cash.

We may have stated the obvious but it is the responsibility of the independent board members of Galvanic to do the same and formally reject this inferior offer. Any opinion to the contrary will be met with scrutiny and maybe further media attention for the perceived lack of independence.

Galvanic share price has traded up 15% since the initial posting date on Investorfile's Top Ideas list for small cap value stocks (See: Galvanic Applied Sciences: Not a sexy stock but the fundamentals make it very attractive).

Galvanic Applied Sciences has approximately 15.7 million shares outstanding.

Galvanic Applied Sciences website www.galvanic.com

Author Ownership Disclosure: TSXV: GAV - YES


Read Disclaimer: 

This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock. 

Investorfile.com is not engaged in an investor relations agreement with Galvanic Applied Sciences Inc. nor has it received any compensation from Galvanic Applied Sciences Inc. for the preparation or distribution of this article.

The author of this article has acquired and may trade shares of Galvanic Applied Sciences Inc. through open market transactions and for investment purposes only.

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Comments:
Posted by: Roger
Let''s hope for a better bid for Galvanic. But if there isn''t one we need to prepare. We need to get 10% of shareholders to refrain from tendering in. We are well on our way to getting it. Then the buyer cannot do the compulsory squeeze out of the minority at $1.70. We can opt for dissent rights when they ultimately try to get the minority out. This may take time and patience but I think we have a decent shot at prevailing here. Interested parties can message me at gavdissent@outlook.com. 
Posted by: Rick
Looks like the Galvanic board is recommending that shareholders tender to the offer. So much for the board looking out for the best interest of the shareholders.
Posted by: NMilton
Gerry I think I have been invested in GAV longer than you and I am very bitter about yet another hosing of minority shareholders. The capital markets are entirely dependent on trust, and without trust the cost of capital for everyone rises dramatically. Us secondary market investors in micro caps trust that the work we put into finding undervalued companies (and the risk we assume) will be rewarded. The takeover of GAV, as with Radiant, seriously erodes that trust.
Posted by: Bernita
Yes the $1.70/share bid is inferior. However, 66% of the shares are locked up in favor of it. Even if the board rejects the bid, the buyer still gets control of the company. A condition of the offer is that the cash balance is at least 9M$. If the company could reduce the cash balance below this level through a special distribution or acquisition, the offer would be withdrawn or changed. Without this, those shareholders not accepting the bid will have less liquid shares in a company
Posted by: Craig
Nice blog. I was thinking the exact same thing about Galvanic. Let''s keep the heat turned up on these predators!

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Gerry: Thanks for small cap stock suggestions over the past 5-years. Your record is very impressive and your analysis has been excellent over the years. I think small investors (and fund managers) should pay much more attention to your work. I look forward reading your blog over the next 5-years!