Making sense of the JTH-STI Reverse Merger

Reverse merger occurs when a buying company becomes the acquired company. This is possible in transactions that involves share swap.

On a disclosure by JTH, JTH shall swap 6.5 JTH shares with a par value of P.50 for every 1 share of the majority shareholders of STI that has a par value of P1.  [1] The result of the said transaction shall make the majority shareholders of STI gain 83.96% ownership in JTH. However, discussions on the controlling stake are irrelevant since both companies are led by the same man, Mr. Eusebio H. Tanco.[2]

Currently, JTH is a company that has no commercial operations and has total assets of 664 million which is composed of 51% cash. With a total liability of only 21 million, JTH is virtually debt free. The recent disclosure regarding the purchase STI will provide JTH a sustainable source of revenue. However, since STI is a private company, we have no information regarding its total assets and earnings. With incomplete information, let us calculate the unknown factors using publicly available information.

JTH generates no income so we can assume that JTH will book an estimated whole year net income of P270 million for 2013 or an estimated forward EPS of .07 (P270 M / 3,749,226,871sh[4]).

Mr. Tanco’s move in making STI public through backdoor listing would hint that his ultimate goal is to raise funds through share issuance. The funds may be used for expansion through offering of additional courses throughout STI’s 85 campuses and educational centers or opening of new campuses. The funds may also be used to invest in industries that can create synergy with their current revenue generating businesses.

Disclosure: No shares on any stock mentioned

1.   Comprehensive Corporate Discolsure re: share-for-share swap with STI Education Services, Group, Inc.; Trading Halt
2.   JTH and STI ownership structure:

3.   Estimation of profit margin:

For conservatism, STI’s profit margin is assumed to be 18%.

4.   Estimated total outstanding shares: