Spruce Point Capital Shorts Mercury Systems
NYC-based activist Spruce Point Capital announced a short call on Mercury Systems in an email today. The full text of the release is below.
“Spruce Point Capital Management is pleased to announce it has released the contents of a unique research report on Mercury Systems, Inc. (Nasdaq: MRCY) ("Mercury" or "the Company").
Spruce Point has conducted a critical forensic and fundamental analysis of the Company. In our opinion, Mercury’s business is showing extreme financial strain, and has multiple material adverse effects converging on its business in 2018. Notably, we observe that while Mercury’s Adjusted EBITDA has grown 113% in the past three years, its free cash flow has been stagnant. This has coincided with a recently declassified government audit report by the Dept. of Defense Inspector General validating allegations and evidence of material cost overruns at SEWIP 3, a Navy program which has been a large growth driver of Mercury’s recent financial out-performance. Spruce Point finds recent public comments made by management on SEWIP conflict with SEC disclosures, which suggests a material loss to Mercury. Furthermore, both Mercury’s CFO and Chief Accounting Officer and Treasurer recently resigned, shortly before the initiation of an insider sales program, the disclosure of new company mechanism to report accounting concerns, and amendments to executive severance terms to define conditions of fraud and dishonesty.
Our report will detail why we believe Mercury’s recent acquisition of Themis Computers days before Christmas, appears motivated to replace slowing organic growth. By funding the deal with $190m on its line of credit (utilizing nearly 50% of borrowing capacity), Mercury is very likely to issue over 4 million of new shares to deleverage. Mercury’s growth by acquisition strategy also jeopardizes its status as a small business contractor, which will have Material Adverse Effect on its business in 2018, by making it ineligible for certain small business opportunities, and increasing its operating costs.
We believe none of these factors are being incorporated into Mercury’s current valuation, which is among the highest in the Aerospace and Defense industry at 4.7x, 19.3x and 31.5x sales, Adj. EBITDA and Adj. EPS, respectively.
As a result of our investigative analysis, we have issued a "Strong Sell" opinion, and a long-term price target of approximately $7.00 to $23.00 per share, or approximately 50% - 85% downside risk.”