IDEAS: The reputation of the Board of Directors for Redline Communications
Group (TSX: RDL) is in question by not living up to its duty for all
Let’s call a spade a spade.
this juncture, given the recent financial results and business outlook, there
is absolutely no reason that Redline Communications Group needs to be sold,
especially for a low-ball price. The probable rationale for the pending sale is
that it serves a special agenda -- but, at the expense of the smaller
shareholders in this Company.
We have always said that Investorfile
takes pride in discovering small cap value stock investment opportunities,
which comprises our elite list of Top Ideas. This holds true for Redline Communications Group (TSX: RDL -
C$0.89), a company we recognized just two months ago as having undeniable value
with a stock trading around C$0.70. (See: As
revenues grow, Redline Communications Group is a small cap stock worth owning
while it is still under-the-radar).
But, that said, full value for this stock
pick may not be realized if the Company’s
Board of Directors is not acting in the best interest of all of its
shareholders to maximize value.
Redline Communications Group Inc.
(Redline) develops industrial-grade
wireless communications products and solutions. For over a decade, Redline has
demonstrated that its products are best-of-breed technology by being some of
the most powerful, versatile, reliable and secure wireless systems in the
industry. Today, in critical industries such as
public utilities, oil & gas, mining, logistics and transportation, there is
a digital transformation journey occurring, integrating information and
communications technology with the current infrastructure. This integration
transforms the current industrial infrastructure into a "Smart” infrastructure
of operational technology. But, to ensure the successful integration of
wireless communications systems into industrial infrastructure, the wireless
communications systems need to be "industrial-grade,” which are
purposely built to be safe, 100% reliable (especially for very remote
communities or hard-to-reach areas), secure and cost-effective.
The Company’s core customer base is in
the Oil & Gas industry and, therefore, Redline is seeing a strong
resurgence in its business activity, which is just beginning to be reflected in
its financial results.
In the most recent investor communications, Redline’s
CEO said, "The fourth quarter of 2021 was another strong and busy quarter for
the Company. We are pleased to report quarter-over-quarter and year-over-year
improvements in revenues, gross profit, and backlog, coupled with our highest
quarterly bookings in three years. We also strengthened our balance sheet
through a new term loan financing in the fourth quarter, ensuring we have the
liquidity to execute on our continued development of new 5G products to bring
"We are seeing strong evidence in
customers ramping up their digital transformation plans, which we expect to be
a key driver of product demand in coming quarters,” said Redline’s CEO. "We are
uniquely positioned to capture the demand for digital transformation of oil and
gas operations everywhere.”
Last month Redline reported revenues
were up US$1.2 million or 25 percent over Q4 2020, marking the third sequential
quarter that its revenues have increased as market demand products continues to
grow. Quarterly bookings were at the highest level in three years, at US$7.5
million, and Q4 2021 backlog was US $13.6 million.
In 2022, Redline’s financial
prospects should be even better for its shareholders, or maybe not.
On April 13, 2022, the Company’s Board
of Directors accepted an offer from Aviat Networks (NASDAQ: AVNW) to acquire all outstanding shares of Redline
for 90 cents per common share (approximately 71 U.S. cents per share), in an
all-cash transaction valued at approximately $16.2-million (approximately
At Investorfile we ask what the motivation
is to sell this company now. Given
Redline’s current financial position, trends and outlook, is the timing of the
Company’s sale to the benefit of all shareholders?
The answer is NO.
Next we ask, is the price offered to buy
Redline by Aviat Networks attractive to shareholders?
The offer of US$12.9-million is about equal to the
Company’s working capital as
of December 31, 2021, which includes US$10 million in cash holdings and is at a
significant discount to 12-month trailing revenues. Is this valuation
The answer is clearly NO.
Therefore, why is Redline’s Board of
Directors recommending to shareholders to sell the Company and further, accept
a low-ball offer from Aviat Networks?
The only plausible conclusion is that it serves a
special agenda, which may be to the benefit of Redline’s largest shareholder.
Last reported funds managed by PenderFund Capital Management show it owning
19.2% of the Company. This same fund manager also lists Aviat Networks as one of
its top-10 holdings.
What does this potential transaction
accomplish for Pender? It off-loads a long-standing losing investment in Redline
(acquired at high prices) for a bargain-basement price to Aviat Networks which,
in turn, leverages up the valuation of its ownership position it already has in
that company. Poor optics for this sweetheart of a deal.
We have often said that the Investorfile
blog is a platform for investors to become more informed about the good, the
bad and the sometimes ugly practices in the small cap market that can impact
We classify the proposed offer to buy
Redline as ugly for the several reasons above.
Interestingly, it was some years back when
Investorfile wrote about our stock pick Radiant Communications Corp., when a
controlling shareholder group attempted to steal the Company (with the help of
its own directors) from minority shareholders at $0.85 per share (See: Radiant
Communications shares are a steal: Too bad they are getting stolen).
Lo and behold, Pender Fund Capital Management was also
involved on both sides of the initial buyout attempt
of Radiant Communications Corp.
Fortunately, for minority shareholders of Radiant
Communications (with the help of media pressure), the highway robbery was
thwarted and about six months later, a 68% higher offer ($1.43 per share) was
served and big gain for minority shareholders of Radiant Communications.)
Hopefully, too, we will see a better
outcome for the minority shareholders in Redline.
But, as it stands today, the optics and
the offer price of C$0.90 to buy Redline Communications Group is not in the
best interest of all shareholders. In our opinion, the offer, as it stands,
taints the reputation of the Company’s independent board members who accepted
this, plain and simple.
The offer to buy Redline Communications
Group is subject to shareholder approval, requiring 66.67% of the vote for. Significant shareholders of Redline have already voted in favour. No surprise.
For now and, if approved, the high-point return will be capped at
around 29%, since Investorfile first recommended the purchase of Redline stock
as a small cap value investment idea earlier this year.
Company website: www.rdlcom.com
Author Ownership Disclosure: TSX: RDL -
This article is for informational purposes only. This article is based on the
author's independent analysis and judgment and does not guarantee the
information's accuracy or completeness. The information contained in this
article is subject to change without notice, and the author assumes no
responsibility to update the information contained in this article. The
information contained within this article should not be construed as offering
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Investorfile.com is not engaged in an investor relations agreement with Redline
Communications Group Inc. nor has it
received any compensation from Redline Communications Group Inc. for the preparation or distribution of this
The author of this article has acquired and may trade shares of Redline
Communications Group Inc. through open market transactions and for investment