Broad Thinking. Narrowcasting.
By: Ken Goldberg
Back in September, I took a shot at some annual predictions for the digital signage industry. I like the combination of getting the jump on tiresome year-end predictions and the opportunity to use a football theme. I’ll take a closer look at accuracy next September, but for now, it looks like parts of the first prediction are bearing fruit:
Over the course of the next twelve months, expect both the unexpected and the long overdue. At long last, the overcrowded software space will be boiled down through market forces, mergers and acquisitions and flight to niches… Eyebrows will be raised by strange bedfellows on the M&A side and surprise failures.
Since that was written, we have seen C-nario acquired by YCD, as well as some signs of some struggling vendors. Earlier today, my intrepid pen pal Adrian Cotterill of The DailyDOOH posted a story on an investment document making the rounds proposing a Wireless Ronin-Keyser Group merger that would result in a private company. That would cover the strange bedfellows meme. Some thoughts on the concept:
Why now? Wireless Ronin has raised around $70M since going public, and what is left is in the low single digits, and they remain unprofitable. Being public has exposed them to more scrutiny than perhaps any company in their peer group. Their ability to raise more capital in a secondary offering is likely to be near zero without major positive news and trends. So perhaps a combination with an established, very probably profitable company that is already a selling partner makes sense. It changes the story, the capital structure and the focus. And it takes the public company overhead off the table, which is probably a very good thing.
What’s the come-on? The initial announcement of the partnership between the two companies, which came as Ronin announced quarterly earnings, left little doubt what the goal of the partnership would be. McDonald’s is a longstanding and huge customer of Keyser’s, and the implication of the announcement and discussion in the earnings call was that Keyser would walk them into the McDonald’s digital menu board business. I have not seen the investment document, but I’d bet there are similar, carefully worded suggestions of glory therein. Ironically, on the web page of Keyer’s Florida Plastics division is a picture that shows the McDonald’s McCafe menu boards, which Ronin most definitely has nothing to do with. Those snickers you hear are coming from Dayton, Ohio. Makes one pause to wonder. A strategy to focus upon the menu board space is fundamentally sound, and might be accompanied by a sale of their web based and automotive businesses to help fund a deal. Identifying and securing a niche is certainly clear thinking. But that niche is going to be competitive, so putting all of the digital eggs in one basket introduces further risk.
What about RNIN shareholders? Current shareholders of Ronin shares would probably welcome a premium to the current valuation to cash out and wash their hands. That being said, the company is currently valued at about $18M, net of cash on hand, not adjusting for debt. That is roughly two times revenue for a company that is still losing money and not growing particularly rapidly. Some might argue that it is already overvalued. So for someone to pay a premium to take out RNIN’s public float would be a risky venture. Of course, if there was Special Sauce providing strong confidence in terms of future growth, there might be less risk. But there might be some angry shareholders if they got taken out and a McDonald’s deal suddenly materialized. And perhaps some disappointed new investors if it didn’t.
What does it all mean? These type of investment feelers are not unusual, and don’t always mean that a deal will get done. That being said, an investment bank has been engaged to figure out if the pitch will resonate. And given the deal structure of a merger into a private company, one might deduce that Keyser management is driving the bus. These are signs that a Board of Directors is seeking to optimize value in the short term, and that change is coming, in one guise or another. If Wireless Ronin’s ability to do a secondary offering is indeed limited, then the cost of being public exceeds the benefits. Exploring some kind of buyout and private financing should not surprise anyone. The Keyser partnership may offer the quickest path to that, along with the implied refocus on menu boards. This will be interesting to watch. In the mean time, keep an eye out for more surprises and strange bedfellows.
Today, Wireless Ronin filed an 8-K detailing a direct placement of 3.3 million shares priced at $1 per share. Their placement agent, Roth Capital Partners, will receive 7% of the proceeds, netting about $2.9 million to the company. The press release and related 8-K documents do not make it clear whether there was a single investor of multiple investors participating, or whether they were existing or new investors. But no matter: my statement above that their ability to raise capital thru a secondary was near zero has been proven incorrect, even though it required a 5% discount to the December 6th market price to pull it off. Additionally, the company’s CFO responded to an angry shareholder’s inquiry regarding the DailyDOOH post as well as this one, by classifying them as “rumors” (quotes were his) since they were not confirmed (or denied) by the company. Kudos to the company for raising the cash. The Clintonesque deflection of the matter at hand, not as deft.