TOP 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 shareholders.

Let’s call a spade a spade.

At 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 to market.

"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.

Why?

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 $12.9-million (U.S.).

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 attractive?

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 share value.

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 consummated (See:Justice 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 - Yes

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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 of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

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 article.

The author of this article has acquired and may trade shares of Redline Communications Group Inc. through open market transactions and for investment purposes only.