June 11, 2013 - 7:03pm EST by
2013 2014
Price: 10.08 EPS $0.00 $0.00
Shares Out. (in M): 8 P/E 0.0x 0.0x
Market Cap (in $M): 79 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Special Purpose Acquisition Company (SPAC)
  • Activists involved
  • Seismic
  • Oil Price Exposure
  • Subject to Shareholder Vote


Buy shares of the TRIO Merger Corporation because the ratio of reward to risk is better than 2.5x (35% up and 13% down). Or, if you are willing to take more risk, buy the binary style 2016 warrant (TMRGW) and invest 65c to make $2.35 (+263.5% up). The warrants go to zero in the event of an unfavorable shareholder vote (explained below), but they have traded up in recent weeks in expectation of a successful outcome. After the deal is completed, warrant holders will have the opportunity to exchange warrants for stock at a ratio of 10 warrants per share.

TRIO went public in June of 2011 solely for the purpose of gathering cash to acquire a business, and in December 2012 the company signed a merger agreement to buy a private company called SAExploration.  In connection with the prospective success of the deal, Trio will change its name to SAE Exploration Holdings and remain listed on the NASDAQ.  If you buy the stock today and the deal is approved then you will own shares in the pro-forma company.  If the deal is voted down, and/or too many shareholders redeem their shares for cash, you get the dollar value of what is held in the company trust, equivalent to $10.08/share ($62mm total). Not surprisingly, the stock trades in line with this value today, $10.08/share.

Below please find the links to the (1) deal announcement and (2) road show presentation: (be sure to read this all the way to the bottom)

Eric Rosenfeld, founder of Crescendo Partners, heads TRIO.  Crescendo is a New York based investment firm that has created two prior successful SPAC transactions: (1) Arpeggio Acquisition Corp which became Hill International and (2) Rhapsody Acquisition Corp which became Primoris Services.

SAExploration Holdings, Inc. (SAE) performs seismic data surveys in hard to reach geographies on behalf of giant oil companies (Shell, ConocoPhillips, Total, Petrobras, etc).  Think underground 3D radar that detects oil and rock formations through the use of paint can-sized wireless devices and high-speed computers.

Peer companies tend to capitalize speculative underground mapping expense and thereby overstate their respective levels of EBITDA.  100% of SAE’s revenue is earned on a contract basis – no speculative spending, and no overstated EBITDA. For this reason, SAE should probably trade on a higher multiple than the 4.5x EBITDA typical of the peer group; but we’re not banking on that. If we get multiple expansion – then great, but it’s worth noting that there are other seismic companies that maintain no libraries and yet still trade in the 4x range. What we care more about is that EBITDA is going to grow $8-$10mm (+56%) in 2013E off a base of $30.8mm 2012A, and will likely increase another 10-12% in 2014E if the guidance and the backlog are correct.  The company has $528mm of total contract bids outstanding today and through 2014 has $227mm of backlog. Contracts longer that a few months in duration roll into the backlog.

TRIO also has warrants (TMRGW) struck at $12 and callable at $15.  As mentioned earlier, the warrants go to zero in the absence of a deal. Today they trade for 65c and may be worth as much as $3.00 (i.e. $15-$12) before expiry in 2016.  The max profit available today would be $3.00 – $0.65 = $2.35 (+261.5%). A warrant exchange offer will take place a month or two after the close of the transaction; ten warrants will then be exchangeable for one share of stock. So, while the initial cap on the profit from the warrant would be $3.00 less purchase cost, the upside and lifespan are otherwise unlimited if one participates in the exchange.

The Business:

SAE is a private firm headquartered in Calgary and domiciled in Delaware.  The company runs 10-12 survey crews globally, employs 600 persons (60 in HQ) on a full time basis, and hires as many as 7,000 local seasonal workers depending on demand.  Though roughly half of revenues are generated overseas, 70% of sales are denominated in USD and 10% in CAD.   A little over half of revenues come from their top three customers, but because of the project based nature of their relationships, key customers may differ from one year to the next.  Working capital needs are minimal, and although growth capex will be high the next two years, maintenance capex is approximately $5mm/year (under 2% of sales).

The company began in 2006 in Lima Peru as South American Exploration LLC. Over eight years the business has grown organically and diversified geographically.  They are well regarded for the ability to work in environmentally sensitive and highly regulated environments.  An SAE team will travel into the middle of a jungle, build a field camp to service their seismic measurement activity, and then demolish the camp and replant all the trees at the end of the project. By way of example, SAE teams operate in some of the most remote regions of Alaska, Peru and Papau New Guinea.   The CEO has 30+ years of experience in the seismic data business, as does the chairman. The average member of the management team has ten or more years of experience.

Demand for seismic data in North America is primarily driven by natural gas prices, and international demand is primarily driven by oil prices.  When oil and/or gas prices fall and E&P spending slows in a given region, SAE has a better chance of offsetting this decline because some of its contracts are tied to international development concessions.  Oil companies that operate under a concession agreement with a foreign government are generally required to spend on seismic and drilling as a condition to their being permitted to ultimately produce oil and gas.  The penalty for not spending sometimes exceeds the cost of doing the work as agreed.  A company under a concession may sometimes gear back drilling to instead spend on lower cost seismic surveying if the price of oil/gas declines.

The table below shows revenue by geography.  Many of the heavy rain periods in South America occur during the high season for Canada and Alaska. By operating in both hemispheres and moving equipment among regions, the company (1) reduces seasonality and (2) maximizes equipment utilization.

Geography                USA*      Peru      Bolivia     Canada     SE Asia    Columbia    Total

Revenue ‘12A            89.6       37.9      27.5        32.5         16.7         53.2          257.4

% Revenue               34.8%    14.7%   10.7%     12.6%      6.5%       20.7%       100%

*Exclusively from the state of Alaska as of 2012A

For the next three years the State of Alaska is offering tax credits of 40-60c on the dollar spent on exploration in-state. The tax credit incentive has led to an increase in activity in the region, and in mid-2011 SAE began a three year contract with Apache Oil and Gas on the Cook Inlet (Alaska). This contract makes up the vast majority of US revenue today.

Earnings Power:

                       Revenue (MM USD)           EBITDA (MM USD)           EBITDA % Margin           Rev. Growth

2010A:                      140.5                               16.4                               11.7%                           N/A

2011A:                      178.2                               15.4                                8.6%                        26.8%

2012A:                      257.4                               30.9                               12.0%                       44.4%

2013E:                      355.6                              48.0 (46-50)                    13.5% (12-15%)        38.1%

2014E:                      400.0                              54.0 (52-56)                    13.5% (12-15%)        12.5%

As referenced earlier, management is targeting EBITDA of $46-$50mm in 2013E and $52-$56mm for 2014E. I divided EBITDA by the midpoint of the EBITDA margin target in each year to arrive at the implied revenue. In a press release dated 6/10/13, SAE announced $61 million of new contract wins, garnered in the past two weeks. Of these awards, $47 million are for new projects in North America and $14 million are for new projects in Southeast Asia. The company also affirmed a preliminary report from May 22nd of  1Q13 revenues and EBITDA. Revenues were $84.8mm (+37% y/y) and EBTIDA was $14.1mm (+14% y/y); EBITDA is annualizing at $57.6mm, $1.6mm above the $56mm high end of even the 2014E guidance range. Q2 tends to be weaker than Q1 because gear is moved from Canada and Alaska and to Latin America and Southeast Asia, but the business is still well on pace for 2013E.

Return on Capital:

From inception through 2010 the company rented 90% of its equipment, but then in 2011 and 2012 SAE boosted its capital spending to $33mm and $41mm, respectively. This year SAE plans to spend another $18-$28mm on new equipment and roughly $2mm on maintenance capex.  Today their equipment employed is evenly split between rent/own.  The mix shift toward owned equipment should benefit EBITDA margins, because the company will have lower rental expense and because the new PP&E will generate depreciation that will be added back to EBTIDA. The company told me that to rent is twice as expensive as to own, and that they will purchase a piece of gear when they believe they can run it at 60% utilization. So, as they approach a target PP&E level in relation to sales, the free cash flow characteristics of the business improve as well. When possible, SAE buys lighter and less cumbersome wireless survey gear that requires less equipment in the field and fewer personnel to operate versus older wired systems.

If we divide EBIT by PP&E + non-cash and non-interest bearing working capital, then on a 2012 basis we get a crude return on capital number north of 23%. And we know that most of the capital base was recently built, so that return on capital figure should be a reasonable estimate of the incremental return on capital – in the absence of any major industry or company specific changes.  For those of you who would like to pencil out the math yourselves, I used $18,439 of EBIT, $9,101 of adjusted working capital and $70,456 of net PP&E. Everything you need is on page FS-34 and p. 162 of the proxy:

The market may see SAE’s elevated investment level and incorrectly conclude that the company is capitalizing speculative library expense.  But, anyone who reads the MD&A section of their filings will know better. In any case maintenance levels of capex is approx. $2-$5mm/yr.

 The Market:

Global E&P capex is roughly $600bn and the seismic industry is $16-$19bn of that, or 3%. Within the $16-$19bn seismic industry, the land acquisition services segment represents $4.4-$5.3bn annually. SAE operates in this $4.4bn-$5.3bn sub-segment.


Most growth at SAE has been organic; something under $10mm constitutes acquired revenue to date. In 2011, SAE acquired Datum Exploration in Canada and Northern Exploration Services in Alaska. Datum and Northern Exploration each have over twenty years of experience in their respective markets.  Datum was a small, tuck-in, acquisition and Northern Exploration was a lift out of a management team from CGG Veritas.

The Balance Sheet:

SAE currently has a 13.5% $80mm term loan, callable in 2014 and a 10% $17.5mm seller financing note, for a total debt balance of $97.5mm. According to the company, this is the expected level of pro-forma total debt. SAE has $20mm of cash on the balance sheet.  So, net debt before the deal is $77.5mm.

The pro-forma capital structure of the company will vary depending upon the number of shareholders who vote in favor of the deal.  That said we can start with the minimum number of shareholders required to vote ‘Yes’ and then work backward.

TRIO must have $30mm of cash in the trust at the time the deal closes for SAE management to be satisfied, and $6mm are required to meet transaction related expenses. For the deal to work, 3.6mm shares must vote yes, corresponding to $36mm of cash in the trust. The company will then spend $5mm to take out the preferred shareholders of SAE, and another $7.5mm for the existing private common shareholders of SAE. That leaves a balance of $17.5mm of cash, from our original $36mm figure. From here, the original SAE shareholders (i.e. management) will take a $6.1mm dividend, leaving $11.4mm of cash to be subtracted from the net debt balance of $77.5mm, for a new pro-forma net debt of $66.1mm.

If 100% of shareholders voted in favor of the deal, we would have of $62mm cash in hand - $36mm min required cash = $26mm excess cash.  That would lower net debt $40.1mm from $66.1mm. If we wound up mid-way between minimum and maximum approval, then net debt would be $13mm lower, or $53.1mm.  To be conservative, let’s assume the maximum level of net debt, $66mm.

Comparable companies trade on 4-5x EBITDA. Again, to be conservative, I am going to assume in every case below that net debt is at the max, $66mm.

SAE Pro-Forma              Low                Mid                 High

‘13E EBITDA                 $46mm           $48mm           $50mm

TEV/EBITDA                  4.0x               4.5x                5.0x

Implied TEV                  $184mm        $216mm          $250mm

Less: Net Debt              $66mm          $66mm            $66mm

=Equity Value               $118mm        $150mm           $184mm

S/O                              13.5mm        13.5mm            13.5mm

Share Price                    $8.74           $11.11              $13.63

% Up/Dn ($10.08)          -13.3%       +10.2%            +35.2%

So, out of the gate, the upside is better than twice the downside, and because SAE does not overstate its EBITDA, and has a business less sensitive to the oil/gas price, there is good reason to believe that it should trade at 5x or above. Recall that because rental expense will be capitalized two good things happen  (1) the cash economics of the business will improve because owning costs half of renting and (2) EBITDA rises as rental expense comes off the books.

As an aside, in 2014, when the term loan becomes callable – SAE’s Net Debt to EBITDA should be well under 1.5x.  So, if they refinanced their debt at 8% instead of 13.5% interest cost would decline to $6.4mm/yr from $12mm/yr, a savings of $5.6mm (or say $3.6mm cash on a tax adjusted basis).


From the pro-forma table above, it should be apparent that this SPAC management team has overcome any issues around dilution because it paid a compelling price for an excellent business. Below are the mechanics

The pro-forma company will have 15.9mm fully diluted shares outstanding. If management delivers on the high end of its EBITDA target in each of the next two years, the team may earn just shy of 1mm additional shares – taking the total share count to 16.8mm. However, we are indifferent because the increase in the equity value we would experience, assuming the multiple stays constant, well overcomes any dilution.  That is to say, the management incentive program is an accretive program, all else equal.

6.45mm shares will be paid to the private owners of SAE, 1.725mm will be allocated to the SPAC founders and 6.1mm shares belong to the public already. The SPAC can withstand 2.5mm no votes, consistent with the earlier observation that TRIO needs 3.6mm shares to vote yes – corresponding to $36mm cash (3.6mm+ 2.5mm = 6.1mm).

After the deal completes, SAE will offer one share of stock for every ten warrants outstanding (as mentioned earlier). There are 14.1mm warrants currently outstanding with a 2016 expiry, a $12.00 strike price and a $15.00 redemption price. The warrants trade today at roughly 65c, and the stock is $10, so if the share price is greater than say $6.50 (which is a very good bet) it’s worthwhile to cash in your three year warrant with $3.00 max value (i.e. $15-$12) for an indefinite lived stock with no cap on the upside. In fact, with the stock at ten and the warrant at 65c, you would immediately capture $3.50/share ($0.35/warrant) by participating in the exchange. Not surprisingly, all the insiders have agreed to convert their warrants into the exchange offer, and those insiders account for 7.1mm warrants (50% of total). Earlybird Capital has agreed to convert its 1mm incentive warrants to 100k shares of stock, and Eric Rosenfeld (Chairman and CEO of TRIO) will receive 1mm warrants and convert them into 100k of stock in consideration for $500k+ of personal loans extended to TRIO. As an aside, last month Mr. Rosenfeld personally paid $1mm cash out of pocket to buy 100k TRIO shares. That brings the 14.1mm warrants to 1.4mm shares, plus 100K from Earlybird and 100k from Mr. Rosenfeld, for a total of 1.6mm.

Holder                  Shares

SAE Owners:        6.45mm

TRIO Founders:    1.73mm

Public:                 3.6mm (6.1mm total from IPO – 2.1mm max no votes)

Warrants:            1.6mm (assuming full conversion at 10:1, 50% already agreed)

Total FD S/O:      13.5mm

Because the warrants have a $12.00 strike price they are presently anti-dilutive.  However, I have included their adjusted affect because we reliably know that over half (if not all) will be exchanged and converted into shares a month or two after the deal closes.


TRIO is aptly named because it promises to be the third SPAC success story for Crescendo, after Rhapsody Acquisition Corp and Arpeggio Acquisition Corp. Buy the stock today because it has better than 2.5x reward/risk and limited downside (35% up and 13% down).  If you are willing to take more risk, buy the binary style 2016 warrant (TMRGW) and invest 65c to make $2.35 (263.5%) or more over time through the mechanism of the warrant exchange offer. SAE is a top quality business with seasoned management – purchased at a highly attractive price, and the related warrant has traded up in recent weeks in expectation of the deal succeeding on June 21st.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


The vote is June 21st, the time to act is now.
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