The Deal: PIK Interest Mounts at Pulse Electronics
One hedge fund investor that once held shares sees problems ahead for the computer and telecom components company, whose revenues are languishing as it engages in debt talks with Oaktree Capital Partners LP.
" Pulse CEO Ralph Faison pitched the offer as wildly undervalued," the hedgie said. More than a year and a half after Bel Fuse's offer, looming debt maturities forced Pulse to take action, and Oaktree Capital recapitalized the firm with a $102.7 million debt and equity offer that gave the Los Angeles investment firm a 49% stake. Oaktree gave Pulse a $75 million senior secured term A loan with a 12% annual interest rate, and exchanged $28.5 million of principal and unpaid interest on its 7% senior convertible notes for a new $28.5 million secured term B loan. Pulse started out with $50 million of 7% notes. The term loans mature on Nov. 20, 2017. "Nothing has played out the way management promised for years," the former investor said. "When we bought in, Pulse had relatively low debt compared to earnings." Moyer didn't respond to requests for a comment on Pulse's debt service strategy and its potential exchange offer. The company reported $23.2 million in cash and cash equivalents at June 28, and $88.3 million of net sales for the second quarter. According to data from Bloomberg Financial, Pulse has Ebitda of $7.4 million and a debt-to-assets ratio of 51.3%. The earnings call touted a cost-cutting program that is designed to cut $6 million annually. Colin Dunn, the vice president of finance at Jersey City, N.J.-based Bel Fuse, was wistful about a missed opportunity for greater synergies between the two electronic components makers in an Aug. 7 phone interview. "We would have created more value, there's no doubt about that," he said. "There's overcapacity in this industry, and no one was really making money at the time of the takeover offer ." Pulse's rejection of the offer "just seemed illogical to us," Dunn said, explaining that a combination would have cut overhead costs by eliminating duplication in areas such as corporate staff and sales staff. "There were a lot of low-hanging overheads that could have been squeezed out. It becomes a volume proposition -- you've got to manage fixed overheads." Although Bel Fuse is currently looking for acquisitions -- the commercial aerospace sector, particularly fibers, is of interest -- Pulse is not on its wishlist any more.