Westport Fuel Systems Inc (USA) (NASDAQ: WPRT), the developer of alternative fuel, low-emission technologies, is doing what should be done. The company communicated on February 18, 2017 that it had reached an agreement to sell the assets of its Auxiliary Power Unit business for $70 million. The market reacted and pushed up the price more than 20% on the same day. The announcement seems to be the result of the work of the activist investor, Peter Yu, who holds 7.33% of the total outstanding shares of the company and is holding conversations with the Board of Directors to enhance shareholder value. Look at the share price jump and note the volume created by the company’s announcement:
Business – A Business Combination
Westport Fuel Systems, headquartered in Vancouver, British Columbia, develops alternative fuel, and low-emission technologies. The developed clean-burning fuels are compressed natural gas, liquefied natural gas (LNG), hydrogen and biofuels. From cars to trucks to locomotives, and marine applications to stationary power, all can use these clean fuels. Additionally, the company owns different brands to market its products among different industries and applications.
The company is the result of a business combination between Fuel Systems Solutions, Inc. and Westport Innovations Inc. The merger became effective on June 1, 2016. You can obtain more information on this site. The fact that the company is the result of a merger confirms our initial thesis that the company is involved in a process of restructuring. The last sale is obviously part of it. The resulting business will become more competitive and shareholders will be able to benefit from it.
Balance Sheet – Why are there activist investors?
The most recent financial figures disclosed showed that the company had the following amount of cash and liabilities:
- Total cash: $60.91 million
- Total debt: $79.03 million
- Shares outstanding: 110.11 million
Since the sale of the unit was not yet registered in the accounts, we need to do it on our own. The total amount of cash will be $130 million. If we deduct the debt, we will obtain that the company will have $0.46 cash per share, which is almost half the current share price. On the top of it, the book value per share before the sale of the unit was $0.78 per share. Thus, the company is trading close to liquidation value. That is the reason that we have the activists buying the firm and talking to the company to reduce the debt, sell units and make ultimately the share price move up.
Peter Yu – The activist
Peter Yu holds right now 7.33% of the company. Let’s see how much money he has made. He bought his stake in February-March, when the share price was close to $1.05. Thus, so far he should have made about 7% return in about a month; not bad. However, we believe that he will keep buying and keep talking to the Board to create value for shareholders. These kind of campaigns last from six months to a few years. Check, for example, the case of Arconic and activist investor Elliot Management. This is mainly the same situation, but for a smaller company.
Westport Fuels seems to be working for the shareholders. The company opted for a merger. Thus it is changing the way the company is structured to become more competitive. Additionally, the sale of its Auxiliary Power Unit is a sign that the company is strengthening its balance sheet, since this transaction will bring a lot of cash to pay down the debt load. Finally, this company has a very interesting catalyst, activist investor Peter Yu, who is holding talks with the Board of Directors and who may be the one responsible for the latest sale. We believe that he will keep pushing for more from the company, thus WPRT looks to still be a buy.
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Disclosure: We have no position in WPRT and have not been compensated for this article.