Special Situation Alert: Interesting Setup at the PAR

Long-time readers are probably aware that I rarely write about special situations, and instead focus on uncovering the cheapest opportunities around (businesses selling for free type cheap). The last time I wrote up a special situation was on BNED two years ago, which you can find here. That turned out to be a phenomenal bet, returning us over +600% in a month (absolute return, not annualized).

Today’s setup is a bit different, in that the opportunity doesn’t quite yet exist, but may very well arrive by the time you read this.

We’re talking about PAR Technology Corporation (PAR), a foodservice technology provider for large QSRs like Mcdonald’s, Burger King, and Taco Bell. Put simply, they provide point-of-sale systems, back-office tools, digital ordering, loyalty and a plethora of other software and analytics in an all-in-one offering to help their customers run their operations.

As impressive as that may sound, the company isn’t that large, generating roughly $500M in annual sales. Part of the reason for that is they’ve only begun to scratch the surface in terms of customer penetration (many of their customers’ locations have yet to onboard), and spent the past few years building up a compelling and unified solutions offering. With the pieces now in place, subscription growth has accelerated and is likely to continue for the foreseeable future.

So, what’s the setup? Here’s where things start to get interesting.

Late last night after markets closed, the company dropped a press release announcing a $250 million 4% convertible senior note offering due 2031 at a conversion price of $19.02. That’s 13.1M shares dilution (8.3M net after other actions we’ll get into below), or roughly 20% of the existing float. You can read it here.

Immediately, the stock plunged -20% in the after-hours, as the market likely saw it as a massive dilutive maneuver at probably the worst possible time (the stock had already dropped more than -80% from its 2024 highs prior to the announcement).

Why did the company have to do this?

The thing is, as PAR grew its operations, it was reinvesting significant sums of capital into the business, to the point that they were burning cash (and only this year barely became EBITDA breakeven). As such, they frequently tapped the debt and equity markets to finance their growth.

As noted in the press release, $207.5M of the proceeds will be used to repurchase most of the $235M 1.5% convertible notes due 2027. The remaining $33.1M will be used to repurchase 2.09M shares at $15.85 a piece. Since the 2027 convertibles had a conversion ratio of $77/ share, it equates to a repurchase of roughly 2.7M shares. For a net increase of 8.3M shares (13.1M issuable - 2.09M - 2.7M).

That’s not a good trade. The company basically replaced:

1.5% 2027 Convertible Note $77 strike —> 4% 2031 Convertible Note $19.02 strike

They basically committed to a higher interest expense, lowered conversion price (at a price far below many investors’ perceived intrinsic value for the company), and roughly 4x more dilution (or about 3x after accounting for the net repurchases).

On the surface, the only positive is they extended their financing maturity to improve balance sheet flexibility and extend their runway to execute their business plans. Since the 2027 note carried a conversion price of $77 (far above current market prices), they would likely have to pay the $235M in cold hard cash upon maturity, rather than shares. For a company barely breakeven, that could be onerous.

In a sense, they preemptively nipped a potential refinancing issue in the bud, but at a rather expensive cost…

However, thinking more about it, there could be another dynamic at play. In the press release, they also mention:

“To the extent that the Company repurchases any 2027 Notes, the Company expects that holders that sell their 2027 Notes to the Company may enter into or unwind various derivatives with respect to the Company’s common stock and/or purchase shares of the Company’s common stock concurrently with or shortly after the pricing of the notes. The Company also expects that holders of the 2027 Notes may employ a convertible arbitrage strategy with respect to the 2027 Notes and have a short position with respect to the Company’s common stock that they would close out through purchases of the Company’s common stock and/or the unwinding of various derivatives with respect to the Company’s common stock, as the case may be, in connection with the Company’s repurchase of any 2027 Notes. This activity could increase (or reduce the size of any decrease in) the market price of the Company’s common stock, which may also affect the trading price of the Notes at that time and could result in a higher effective conversion price for the Notes.”

In plain English, they’re basically telling us that they expect buying pressure for the company’s shares from arbitrageurs in the short term when/ if the company starts to buy the 2027 notes, as they need to unwind their short position. In such a case, the stock could experience a significant short-term surge.

This would create a potentially lucrative exit window for several funds that own meaningful amounts of the company, who have large concentrated positions in their portfolios, and are sitting on huge losses. Since the entire payments/ software space is currently bombed out and there is limited appetite for money-losing software businesses, this may be their best/ only avenue in the near to intermediate term to cash out. Of course, this is just conjecture, so please do your own due diligence.

So here we are, and the market doesn’t like what it sees so far. The stock is down more than -20% in the premarket. And fundamentally, the markets are correct to punish them, as this corporate exercise eroded intrinsic value.

However, the stock is nearing levels (in my opinion) that make it an attractive long-term purchase regardless, even after factoring in the value erosion. And given the dynamics with the arbitrageurs, there could be a meaningful runup on the horizon. If that doesn’t materialize, as long as the market punishes it enough, a prospective investor could be looking at an interesting and potentially lucrative long-term setup.

Happy Hunting.

(Disclosure: The author and funds under their management do not hold shares of PAR Technology (PAR) at this time. We may hold, buy, and sell any securities mentioned on this blog at any time. The information contained herein should not be construed as investment advice or a recommendation to purchase or sell any specific security.)