Fidelity National Information Services, Inc (FIS) is a financial services company with over $3.7 billion in annual sales, focused on credit card and mortgage processing.

Background

On May 6, 2010, the Wall Street Journal reported that FIS was in talks with the Blackstone Group and THL Partners, two private equity firms, about a leveraged buyout in the $10-11 billion range.

The stock jumped on the announcement, and moved even higher after rumors surfaced that another private equity firm wanted in on the deal as well. News organizations increased their estimates to more than $15 billion, making it potentially the largest leveraged buyout since the start of the credit crisis.

However, on May 18, the deal fell through and the Company decided to pursue a leveraged recapitalization plan and substantial share repurchase instead.

Announcement

On May 25, the Company released a statement outlining the terms of the recapitalization plan:

As stated in the news release, our Board of Directors has authorized a plan under which our Company will repurchase up to $2.5 billion of its common stock at a price range of between $29.00 – $31.00 per share through a modified “Dutch auction” tender offer. In order to effect the proposed recapitalization, we intend to borrow approximately $2.5 billion of incremental debt. FIS is in a strong financial position and generates significant free cash flow, so we are very comfortable with the proposed debt levels that we will incur in repurchasing the company stock.

Odd-Lot Provision

Although the final price level and number of shares purchased will be determined by the dutch auction, the tender offer provides priority to ‘odd lot’ shareholders of less than 100 shares.

Even if the offering is oversubscribed, this provision ensures small shareholders will receive a full cash-out without any proration, a great opportunity for the average investor.

Timeline

May 25: FIS announces details about the proposed recapitalization plan and self-tender offer.

July 6:  The Company sells $1.1 billion in Notes to qualified institutional buyers, the main condition for the share repurchase

July 6: FIS commences the tender offer.

July 16: Proposed closing of $1.1 billion Note offering

August 3: Conclusion of the tender offer

Late August: Shareholders who validly tender their shares will be cashed out at the final auction price, with priority for the ‘odd lot’ shareholders defined above.

Return Scenarios

As of July 9, I’m adding FIS to my ValueUncovered portfolio using the latest closing price of $27.70.

Final Tender Price

TBD

Conclusion

The deal offers attractive annualized returns for a month long trade.  Although there is always risks with such a large transaction, FIS is very well capitalized and I don’t forsee any problems with the offer going through.

I think Frank Martire, the Company’s President & CEO, says it best:

The recapitalization plan is consistent with our commitment to doing what is in the best interests of our company, our clients and our shareholders. Our strong financial position, combined with appropriate market conditions and our excellent relationships with lenders, make this the right move at the right time.

Supporting Documents

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Disclosure

Long FIS

June was a rough month for the stock market overall, with the S&P dropping 5.25%.   The ValueUncovered portfolio was hit hard as well, with several stocks dropping over 10% in the month.

This volatility is expected, as many of the stocks I invest in are micro-cap stocks with prices that vary significantly from day-to-day or even month-to-month.

Special Situations

One bright spot for the month was the completion of my first two special situations investments.  The UBET/CHDN merger wrapped up on June 4th, with returns of over 12% for a month long investment.  The VR tender offer also wrapped up in a few short weeks, with a 4.17% gain.

Pending special situations investments include the AHOM re-incorporation & merger and the EMMS going private transaction.

Portfolio Return

Despite the drop, the model portfolio is still positive and substantially outperforming the S&P.

Techprecision, Corp (TPCS) reported fiscal fourth quarter and full year results last week – the stock has been hammered in the week since.  Yearly results still reflect the order cancellation from the Company’s largest customer, GT Solar, in April 2009.

Although orders have picked up again from GT Solar, this event threw off the Company’s numbers for the entire year.

Financial Results

Sales decreased 25.7% for the fiscal year, with EPS dropping from $.23/share to $.15/share, primarily driven by lower sales and margins.

As part of the order cancellation in April 09, TPCS sold off a large chunk of raw material at much lower margins than usual. I’m anticipating gross margins should return to near 2008/2009 levels, with the Company reported 4th quarter margins of 40.3%.

Total debt to equity has dropped slightly from .7 to .63. The Company also reduced diluted shares outstanding by almost 5m:

On August 14, 2009, the Company entered into a warrant exchange agreement pursuant to which the Company agreed to issue 3,595,472 shares of Series A Convertible Preferred Stock to certain investors in exchange for warrants to purchase 9,320,000 shares of common stock. The warrants carried exercise prices ranging from $0.44 to $0.65 per share.

Owner earnings came in at 1.5m for the fiscal year.

Key Metrics

Revenue Composition

Defense and Nuclear were both up a decent amount in 2010 on a percentage basis. Nuclear was one of the exciting growth prospects I identified in my original writeup of TPCS, so it’s encouraging to see an increase there.

Despite the Company’s efforts to broaden their sales composition, Alternative Energy still makes up 52% of total sales.

Backlog

Order backlog stood at $21.5m on March 31, 2010, an increase of $5.8m from the previous quarter.

Although the raw numbers are down, non-GT Solar backlog has increased significantly, both in dollars and percentage of total backlog. This is a very good sign as the Company tries to mitigate the risk of being dependent on such a large customer.

Conclusion

The market has not treated TPCS kindly this year, as it is very easy to focus on the sharp decrease in sales and income.

Could an order cancellation happen again? It’s possible, but, I think it was largely a one-time event that unfortunately affected the Company for the entire year.  In any case, TPCS’s future outlook is better positioned to handle such an event.

On the positive side, quarterly results show signs of stabilization, with increasing demand from not only GT Solar, but also the other business segments.

According to TPCS’s CEO,

“We have seen three consecutive quarters of steady improvements throughout the industries we serve and increased activity including requests for proposals and expanded sales activity.”

Based on 2010 numbers, I will probably lower my intrinsic value target, but I still think TPCS offers at least 50% upside at its current price. After TPCS reports Q1 numbers, I think the stock will get a boost, as the results will show a much cleaner picture of how the business is executing its strategy.

Disclosure

Long TPCS.