Exela Technologies (NASDAQ:XELA) is a company focused on solutions for business process management. These include services such as digital mailrooms, payment processing, and workflow automation. The firm (XELA stock) came about as a merger of several entities and went public via a special purpose acquisition company (SPAC).
As you know, SPACs are having a rough go of it as of late. Even so, XELA stock stands out as a particularly poor performer. Shares are down from a (split-adjusted) $30 in 2017 to less than $1 per share now.
It’s not hard to see why. Exela had revenues of $1.6 billion in 2018. These fell to $1.3 billion in 2020. And full-year 2021 is shaping up to be worse yet. The company’s Q3 revenue missed expectations badly and fell 8% year-over-year. Adding insult to injury, the company guided to less than $1.2 billion of full-year 2021 revenues, which is another sequential decline and is, again, well short of prior expectations.
Not The Flashiest or Most Profitable of Businesses
Exela’s press releases give the appearance of a cutting-edge technology company. As the revenue numbers show, however, Exela has struggled to obtain organic revenue growth; in fact, the opposite is happening. The truth is that things such as digital mailrooms are useful to certain customers but are not major growth centers.
It’s also not a particularly high profit margin collection of businesses, either. Exela’s overall gross margin was an already low 34% in 2016. It’s consistently slid over the years, hitting just 21% in full-year 2020. It’s simply hard to make money at that sort of low profit margin in this industry. Accordingly, Exela has generated either miniscule operating profits or small losses in recent years. That’s before other costs — notably interest — however, which has pushed the company well into the red.
Over the past 12 months, Exela generated an operating profit of $18 million. That’s not much, but it is at least in positive territory. However, things become bleak once you factor interest into the equation. Over that same time period, Exela paid $172 million in interest expense. Clearly, $18 million of operating income doesn’t come close to sustaining that level of interest burden. Exela’s massive debtload and interest expense is the leading factor in causing the terrible run in XELA’s stock price in recent years.
Exela Launches Unusual Stock-For-Bond Offer
In January, Exela announced plans to buy back as much as 100 million shares of its outstanding stock at a reported price of $1 per share. However, Exela wouldn’t be giving shareholders cash. Rather, they’d receive tradable 2029-expiry Exela bonds worth the equivalent of $1 per share. In other words, if you tendered 1,000 shares of XELA stock, you’d receive $1,000 of Exela bonds. These would pay 6% interest annually, plus the owner would get the $1,000 of principal back at the maturity date in 2029.
At the time, XELA stock was trading for around 55 cents per share. This means that in our hypothetical 1,000 share example, a shareholder would be giving up $550 worth of stock (at 55 cents per share) to get $1,000 of face value bonds that would pay $60 per year in interest.
Market Seems Skeptical Of This Deal
That’s not a bad offer on the face of it. Yet, it seems, many shareholders didn’t take up Exela on its stock-for-debt offer. What might be the reason for that? While the 6%-per-year interest rate is nice, the majority of the bond’s value comes from the face value which will be repaid in 2029. Or at least, hopefully it will be.
As described above, however, Exela’s financial results have been poor bordering on terrible in recent years. And it’s not exactly in the most dynamic or fast-moving parts of the technology industry. One could reasonably wonder if Exela will still be solvent and in business by the time 2029 rolls around. If the company were to go bust before then, shareholders that accept the offer might be giving up tradable stock now to get bonds of dubious value which may never be repaid in full.
Given the seeming lack of shareholder interest in the deal, Exela has amended it several times. Earlier in February, it announced that it would be raising the offering price from $1 to $1.25, meaning it would now be giving shareholders a whopping 127% premium to take newly-issued bonds instead of holding XELA stock. And now, this past week, Exela announced that it is prepared to offer shareholders a preferred stock, again at a $1.25 deal price, in order to buy back shares of XELA common stock.
XELA Stock Verdict
On the one hand, I give Exela’s management team credit for trying to create shareholder value. This stock-for-bond or preferred stock swap is something different, and it takes courage to launch an unusual plan such as this one. And, if the company can get its operations trending in an upward direction, this could be quite profitable for shareholders.
However, given the company’s uneven track record in terms of cash flow and profitability, this move is also fraught with risk. Up-front, it will raise Exela’s annual interest payments. And, longer-term, it adds more leverage to the overall balance sheet as it swaps common stock for interest-bearing securities. That’s probably the wrong direction to go in for a company that is already struggling to earn anywhere near enough cash to meet its interest expenses.
Ultimately, Exela needs to reliably start generating profits and organic business growth. Until then, these sorts of financial maneuvers are interesting, but not nearly enough to justify buying the stock.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.
