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Is STG's $119.5M deal for PSS dead?

It looks like STG Group might have to wait a bit longer to make its first acquisition.

In February, the company announced an agreement to buy Preferred Systems Solutions for $119.5 million. That would have been STG's first deal since it had been acquired by a special purpose acquisition company -- or SPAC -- known as Global Defense & National Security Systems Inc.

SPAC’s are publicly-traded companies created solely to make an acquisition. When Global Defense acquired STG it met its obligations to its investors when it was launched. Part of its strategy was to use STG as a platform and make more deals.

The PSS deal was to be STG's first and it was supposed to close by the end of March. But that didn’t and apparently still hasn't happened.

According to STG’s filings with the Security and Exchange Commission, STG was planning to use equity and debt financing to pay for the deal. Apparently, it couldn’t get a loan to close the acquisition.

“We do not presently have commitments for such financing,” the company wrote in its April 17 10-K filing.

On April 13, PSS sent STG a letter terminating the agreement unless STG could show it was ready to close and could schedule a closing no later than April 23, according to the filing.

“The Company does not believe the purported termination of the Merger Agreement is valid, and the Company is evaluating its alternatives and rights under the Merger Agreement,” STG wrote in the filing.

I’ve reached out to both companies to see where things stand now but so far no response.

If the deal is cancelled, STG may be required to pay PSS $625,000, according to the filing.

STG had a rough 2016, according to its 10-K. Revenue fell from $193.6 million in 2015 to $164.1 million in 2016. Net income also fell from $3.6 million in 2015 to a loss of $48.2 million. The 2016 loss was offset by a $41 million goodwill impairment the company took in the fourth quarter of 2016.

The company also acknowledged that in the last two quarters of 2016 it was not in compliance with the agreements governing their debt.

STG also said that it didn’t expect to be in compliance by the end of the first quarter of 2017 – March 31 – so that would be three quarters of non-compliance. This may explain the difficulty STG is having getting financing to close the PSS deal.

While I don’t closely track SEC filings, I received multiple comments on the February story and a few emails today telling me the deal had been cancelled. That is what sent me looking at the filings.

When the agreement was announced, STG said it was an opportunity to expand its work with the intelligence community. PSS has capabilities around advanced computing, analytics, program and acquisition management, and cyber and software solutions.

PSS is owned by CM Equity Partners, which acquired the company in 2007. It looks like they may be back on the market.

Posted by Nick Wakeman on May 04, 2017 at 12:12 PM

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