Description

This is a PA idea given market cap and liquidity. The thesis is straight forward. HSON is a slow liquidation play near completion. Upon closing of recent transactions expected by end of March, the company should have $1.50+ in cash/share, and one last business that could fetch another $1-1.50+ in a sale. With the stock trading at $2, risk/reward is quite favorable. The market may be concerned that mgmt could reverse course and use proceeds to do acquisitions, but that is mitigated by activists on the board likely looking for a quick/safe exit, and a filing last week giving CFO extra payout in change of control also sends a clear signal.    

Background: HSON was written up by Kruger last year, which provides excellent background. https://www.valueinvestorsclub.com/idea/HUDSON_GLOBAL_INC/140218

The short story is HSON is a collection of subpar HR businesses acquired by Monster.com that were never properly integrated and produced poor financial results. Activist fund Lone Star won a proxy fight and took control in late 2014. The company had since sold/exited a variety of divisions, and returned some cash via dividends and buybacks. The effort culminated in a sale last December that effectively exited most of the legacy businesses save for the RPO division. The proceeds/multiple were somewhat disappointing (just over 0.1x sales), which is a testament of how poor the underlying businesses were, but it did simplify the corporate structure tremendously. My guess is that there were interested parties for the RPO business (more below), but they had zero interest in HSON’s legacy business (mostly sold to current regional management), and mgmt decided that they could fetch a much higher multiple for the stand-alone RPO business. The proxy gave a good summary of the process, and there were two buyers willing to buy the whole company for $2. There will be a shareholder meeting on March 20 and mgmt expects the sale to close by month/quarter end. Buyer financing is in place per recent 8k.

Pro-forma Numbers: Adjusting for expected sale proceeds and debt assumption, HSON ended Q4 with $1.90 net cash/share. However, the proxy filed before Q4 report gave projection that HSON would have only $1.50 cash/share, likely accounting for some cash as part of WC that go with the sold businesses and modest cash burn in Q1. I am hopeful that cash will be somewhat higher than $1.50, but will use $1.50 to be conservative. What remains is a business called Recruitment Process Outsourcing (RPO) that did around $60m sales, $42m gross profit and $5M in EBITDA in 2017. HSON mgmt talk up the RPO business as a relatively high margin/recurring revenue/asset light business that’s growing modestly, but I have no illusion about the quality of the business. It is probably just a slightly above average business, and the remain co would still lose about $3m (10c/share) annually after corporate overhead. 

Scenarios: Given that HSON on a stand-alone basis will still be unprofitable, I think status quo is unlikely. The most likely scenario is a sale of the RPO business/whole company. The good news is there should be interested acquirers. I will use True Blue (TBI) as an example. TBI acquired Aon Hewitt’s RPO unit in early 2016 for slightly over 1x sales, and had consistently mentioned on conference calls that the acquisition had performed better than expectation. The RPO division had been growing just under 10% and generated 19-20% EBITDA margin last 2 years. TBI mgmt is not shy about intention to further beef up RPO through acquisitions, particularly targets that could give them footholds internationally as their existing business is mostly domestic. HSON’s RPO (70% of sales overseas) would seem like a great fit, both in terms of geographic exposure and size. Assuming TBI pays for a similar 1x sales multiple, eliminate corporate G&A and improve margin to run-rate level, the deal would be done at 5x EBITDA and highly accretive. Some select quotes from TBI’s most recent earning calls.

“Second is our focus on the RPO space. With an industry growth rate of approximately 15% expected over the next 5 years and adjusted EBITDA margin at PeopleScout of approximately 20%, we like our positioning. We are the market leader in North America, which is the main focus of our organic growth plan. International acquisitions would complement our growth strategy and accelerate organic growth increasing our ability to compete on multi-continent deals”.

“Acquisitions have played a prominent role in our growth strategy. For example, the Aon RPO acquisition added scale and efficiency to our core business. We believe RPO clients will increasingly seek providers that can deliver multi-continent service, which is why we are pursuing international deals in the space. They do not need to be large deals, just enough to create a physical presence and provide client references”.     

At current stock price of $1.97, HSON’s RPO business trades at 0.25x EV/sales and 3x segment EBITDA. If the business gets sold for 0.5x/0.8x/1.0x sales, stock is worth $2.43, $2.99 and $3.39 respectively, meaningful upside (25%-75%) from current level.

Of course, another scenario is that HSON turns around and acquires RPO business to gain scale and corporate level profitability. Partially supporting this strategy is that HSON had accumulated significant amount of NOLs. This is a legit risk, but I take comfort that 1) Lone Star has control of the board and the strategy had always been sale and return of capital, and it’s hard to imagine they would turn 180 after all the heavy lifting – The proxy shows HSON had engaged advisors to try to sell the whole since 2016, 2) CEO is from auditing/finance background and not exactly young, 3) the press release/proxy after the recent sale trumpeting the attractiveness of the RPO business and the recent 8K increasing bonus for the CFO in change of control might as well be a “For Sale” sign. https://www.sec.gov/Archives/edgar/data/1210708/000161577418001771/s109294_8k.htm

In summary, HSON has a clear path to monetization with motivated seller/buyer dynamic and good upside based on recent comps. Downside is protected by cash and activist controlled board. The real downside case may be that HSON and potential buyers cannot agree upon a price, and stock languishes with modest cash burns and turns into a value trap. All else equal, the faster they could find a buyer, the higher time adjusted returns.

Catalyst

Sale of whole co.