Everyone seemed back to normal this week after wading through the typical muck of non-news and specious claims of dominance associated with an big events like ISE and the Digital Signage Expo. And then on Thursday, some real news came out that Wireless Ronin plans to merge with Broadcast International (BI), with Ronin being the surviving entity. Of course the actual news was accompanied by a claim of future dominance, but that has come to be expected. While most other commentary has provided the skepticism and cynicism that seems appropriate, a look at public filings provides the interesting prologue to this deal, yet still leaves one wondering “why?”.
It has been common knowledge for some time Broadcast International was looking for a new direction, especially after the recent loss of their largest digital signage customer, Bank of America. Their offering was not differentiated, and many observers were confused by what their true strategy was. Some sort of deal seemed inevitable, and it turns out that Ronin was not BI’s partner of first choice. Back in January of 2013, BI entered into a Merger Agreement with AllDigital Holdings, an OTC Bulletin Board-traded company focused on cloud-based broadcasting of digital media to a variety of endpoints, with focus on mobile devices and smart TVs. Digital signage media players are among potential target devices for the AllDigital infrastructure, so it all made some sense. Under the terms of the Agreement, AllDigital was to become a wholly-owned subsidiary of BI.
Then it got interesting and perhaps a bit ugly. AllDigital asserted that certain representations and warranties made by BI in the initial Agreement were “inaccurate”, and after some normal deal machinations, the parties inked an Amended Agreement. Eventually, the Agreement was terminated by BI, which AllDigital disputed its ability to do, and proceeded to terminate the Agreement themselves. AllDigital asserted that due to BI’s alleged breaches, it is entitled to a $100,000 termination fee as well as 4% of BI’s equity. There are no filings that I could find from either BI or AllDigital that indicate that AllDigital’s claims have been settled, and one might assume that it may impact the Ronin deal in some way. As a result, there may be a scenario in which AllDigital ends up holding about 1.5% of Ronin’s common stock, which would be ironic.
In looking at the proposed BI-AllDigital merger, it is easy to find some synergy between them. AllDigital’s cash position and ability to raise more capital was likely an attractor for BI. By their actions, it looks as though AllDigital wanted the deal to happen, presumably to have access to BI’s CodecSys Video System technology, which could fit with AllDigital’s infrastructure. Yet time and patience (and probably tempers) ran out at the end of the year, and the merger never happened. Both companies remained in deal mode to some extent: in January, AllDigital rejected an unsolicited takeover offer from a company called Abacast, and it did not take BI very long at all to go from buyer to seller. The speed from termination of one deal to announcement of another is an indicator of BI’s… motivation to do something.
As the disposition of the failed BI-AllDigital merger likely remains in the hands of attorneys, the question of “why?” regarding the BI-Ronin deal remains. While the technology bases of BI and AllDigital made some sense to combine, it may be a stretch to see the natural fit between BI and Ronin on that same basis. Instead, it is likely that Ronin believes it can sell its software into BI’s remaining customers, and perhaps leverage some of their Managed Media Services into its own installed base. My guess is that despite the pronouncements of the merger announcement, Ronin will do its best to sell off the CodecSys IP to raise much-needed capital, which might help in reducing the significant debt load it will inherit in the deal. Does this merger pass the test of being strategic, making Ronin a stronger company and competitor, or does it just kick the can down the road? It is probably too soon to tell, but it is easier for a financially strong company to acquire and leverage a distressed asset such as BI than it is for a company that itself is struggling to grow revenue and manage cash. Perhaps the logic of this deal will become more apparent as time goes on, but for the moment, the “why” escapes this observer. For Ronin, it may have been more of a case of “why not?”. For BI, another Stephen Stills classic comes to mind:
UPDATE: The Wireless Ronin 4Q earnings call with analysts was held after this post was written. After reading the transcript of the call, it appears that the merger deal with BI includes a covenant that BI will bring no more than $250,000 of their $5 million in debt to the closing table. Presumably, BI expects to convert debt holders to equity prior to closing. It makes sense that Ronin would not assume the huge debt on BI’s balance sheet. It is also a signal of the level of desperation on BI’s side that both their debt and equity holders were prepared to take a huge dilution hit as well as deal risk. Nevertheless, even $250,000 of additional debt on top of their own dilution might be cumbersome for Ronin.