Is Mega Dealer Welfare the Way Forward?
Those who watch my Podcast/Vlog, The End Of The Day With Ray! are aware of Visual Edge IT, the industry's known financially nonperforming mega dealer roll-up.
I have been asked to summarizing those many episodes in an article. This article is long; sometimes, you can't abbreviate complex stories. What's unfolding regarding Visual Edge IT and its BDC Lender, Ares Capital, is very telling. Unfortunately, I believe Visual Edge IT is not the only private equity or BDC-backed roll-up in financial struggles.
It's essential to learn from what's known not to be working.
I became aware of the financial disaster concerning Visual Edge IT in October 2022.
Ares Capital, the BDC lender to Visual Edge IT, is a publicly traded company that, by the rules of all publicly traded companies, must publish a 10Q every fiscal quarter and, of course, a 10K at fiscal year-end.
Looking through Ares Capital 10Q, I discovered that Visual Edge IT had stopped paying on a senior subordinate note at an amortized cost of $87.5 Million as Ares Capital had placed the loan in nonaccrual status.
Like some, I describe nonaccrual loans as a form of welfare.
The organization needs help to satisfy its financial liabilities, so its largest creditor puts off the required payments by placing the loan in nonaccrual.
The decision to put a loan in nonaccrual usually happens when the lender is the largest creditor to a non-financially performing company. By placing the debt on hold, the debt-troubled investment can focus on paying other creditors to avoid those creditors from having to force bankruptcy. If a company can't satisfy the debt with its primary lender, it probably has other financial obligations under pressure as well.
In the case of Visual Edge IT, at the time, Ares Capital placed the senior subordinate loan in nonaccrual status. Ares Capital was betting that things could turn around.
However, Ares Capital obviously realized they had lost the bet when, in the third Quarter of 2023, they booked a $48 million loss and took a preferred position on the balance of the senior subordinate loan in nonaccrual, which had an amortized cost of $87.5 million.
This 2023 Third-Quarter Loss on Visual Edge IT was Ares Capital's greatest quarterly loss within its entire portfolio, as much as the industry loves winning things. No role-up wants to be recognized as the winner of the greatest loss for its investor.
I believe that Visual Edge IT has a flawed business strategy. I base that thinking on how their leader describes his vision and aspirations regarding transitioning a nationwide roll-up of copier/printer dealers into a trusted nationwide IT services company.
When an organization is financially failing, its leaders must address reality. It should be obvious to the entire industry that the leaders at Visual Edge IT are completely ignoring what appears to be an inability to execute profitably on a viable business strategy.
In an interview, the CEO of Visual Edge IT explained some of the company's strategies. He told the interviewer that one of the greatest advantages Visual Edge IT has over a regional IT Services company is that Visual Edge IT has tremendous revenue from its print services business.
When I heard that, I thought maybe the advantage they really have is the fact their largest creditor whipped out at amortized cost 87.5 million dollars’ worth of debt; debt that Visual Edge IT hadn't paid any interest or principal on for over a year as the loan was in nonaccrual.
Again, I refer to lenders parking loans in nonaccrual as (Welfare), Especially regarding those organizations who pretend they have no issues and brag of success.
As the CEO discussed this, it became apparent that he needs to calculate or pay attention to the cost of the company's transition. He believes that his copier/print services revenues pay the cost for IT services, and he reaffirms that a major financial lender, Ares Capital, backs him.
It seems the company’s CEO believes that as long as the company's major lender is OK with writing off loans and swapping debt for equity, everything will be just fine. Of course, now that Ares Capital has consumed most of the company's equity (I am thinking around 80%), maybe the Visual Edge leaders will be forced to produce profitably based on strategies with a foundation in reality.
There is a strategy that can include investing the profits from one's core deliverable to offset the cost of the diversification. However, that can't be the model for years, and no company should be excited about business models where success is only achieved by lenders writing off and swapping debt for equity.
In the case of Visual Edge IT, I believe the corporate welfare they received (the writing off of a massive debt) gave the CEO a delusion that his strategy was working.
With a lack of accountability to reality, one's delusions will expand in one's mind.
The fact is—if the lender to Visual Edge IT Ares Capital was not a publicly traded BDC Lender, the industry would have no idea that Visual Edged IT is a non-financially performing company.
I have often been critical of the industry's media for allowing Visual Edge IT leaders to use media platforms to distract their employees and marketplace peers from the company's realities. Surly the media and industry analyst can read 10Q’s &10K’s. Or at least question the leader based in reality.
How will the industry improve if it ignores all its challenges?
Visual Edge IT's non-financial performance has been ongoing, and something will eventually give. All pressure has to escape.
Sometimes, the pressure leaks through the small cracks in broken foundations, and sometimes, it explodes all at once. It is only logical to prepare for Visual Edge IT's coming eruption.
Who is actually calling the shots, Ares Capital or Visual Edge IT? Of course, it has to be Ares Capital, as they control the majority equity.
If Ares Capital's original lending officer is still in charge of the Visual Edge IT investment and Visual Edge IT has not changed its business strategy, I think Ares Capital has no intention of saving the investment.
Is Ares Capital just parking the investment temporarily as it explores avenues of divestiture?
Apply logic to the situation. Without the top leadership being forced out after Ares Capital realized those massive losses in 3rd QTR 2023, I have to conclude one or the other. Either Ares Capital is continuing to buy into the current strategy, which defies all logic, or it has written the company's viable future off already in its mind and sees no purpose in going through the aggravation of major changes, knowing it will divest of the failed investment soon.
If the leadership at Visual Edge IT had shown any humility or had articulated a strategy based on reality, I would be more inclined to understand why any BDC lender would continue betting on a financially non performing asset where they own the majority of equity.
However, it seems counterproductive for any investor to double down on a bet they already lost.
To compound my worries in Visual Edge IT, surviving as an ongoing concern, is that their leadership continues avoiding any real strategy discussions; instead, they focus more on marketing discussion, such as Look who we sponsor or Look at us having fun at some sports venue.
At a time when the Visual Edge IT employees and their peers in the marketplace need confidence in the company's leadership, their leadership is instead delivering nonsensical distractions, completely voiding the much-needed thought leadership.
A good sign of a troubled company is when its leaders discuss things irrelevant to the value they actually provide to the company's end-users.
I would challenge Ares Capital to evaluate the company's strategy and look for what has changed in that strategy since the senior subordinate loan was placed in nonaccrual. If the company's leaders are still discussing the same strategies as when you first engaged them, I, for one, question that logic!
I don't believe that Ares Capital's business plan is a welfare agency for financially non performing investments.
As I look to Visual Edge IT's future, I see a company that was liquidated as its main creditor finally shut off the funding ending the welfare.
Based on what Ares Capital 10Q and 10K reflect, I don't see a viable option for Ares Capital to turn this investment, with its current massive losses, into any exciting payouts.
Here's my thinking on the exit strategy for Ares Capital.
During an interview, the CEO of Visual Edge IT said Visual Edge IT's 2022 revenues were 309 Million. He also said that no one would take Visual Edge IT seriously regarding IT services unless its IT services revenues were at least 30% of total revenues.
In reality, it doesn't matter if Visual Edge IT is a 400-million-dollar company. The facts are!
Visual Edge IT has not produced adequate profitability to support its debt with Ares Capital. Hence, that $48 million write-off and the taking of a preferred position in Qtr. 3 of 2023.
By the way, Visual Edge IT still has a loan showing on Ares Capital's latest 10 Q ending March 2024 for a fair value of $33.5 Million. This loan is in (PIK) payment in kind status.
Visual Edge IT also has debt that is not shown on the Ares Capital 10Q or 10K. Of course, the CEO of Visual Edge IT could easily share that information, especially when he claims that Visual Edge IT is much better off than any regional IT services company.
I am predicting that Visual Edge IT has at least 250 Million in debt on its balance sheet.
So, given Ares Capital's losses to date and the amount of debt, the company more than likely has on its balance sheet, Visual Edge IT is upside down, and the investment needed to turn it right-side up would be considered more good money after bad.
Ares Capital should reach out to the industry's dealers and sell off Visual Edge IT in pieces. Visual Edge IT is worth more in pieces than the sum of its pieces.
I predict that Visual Edge IT's service revenues for just the print piece clicks and supplies will be no more than 130 million per year. I suggest that the 130 million is profitable. Since that is all I believe is valuable I conclude that the entire Visual Edge IT business is only worth between 60-70 Million dollars.
A Reality Check: If Visual Edge IT is unsavable, or no one would be interested in buying the whole of it based on its current financially non performing business strategy, it seems the only option is for Ares Capital to sell Visual Edge IT off in pieces.
Visual Edge IT defines its company in six areas:
The Great Lakes, Northeast, Central, Southeast, Texas, and California.
Those dealers in the marketplaces shared with Visual Edge IT would be excited to add the Visual Edge IT service base to theirs. Ares Capital would get more money in this approach.
Dealers buying the top off of individual Visual Edge IT branches or areas could justify the investment based on the many add-backs as these assets were rolled into the acquiring dealer's business model.
In other words, the purchasing dealers wouldn't need any Visual Edge IT infrastructure. Sadly, this approach would result in the loss of most of the Visual Edge IT employees' jobs.
I do not see Visual Edge IT as a strategy investment for dealers or investors. What would they be buying? Most likely, all the IT business deliverables are unprofitable, hence Visual Edge IT's inability to support its debt.
So, dealers acquiring the assets will need to deal with the IT business, which is a burdened and cost they will consider when buying an area.
The areas with little or no IT business will bring more money. No one wants to add an IT strategy that apparently failed to their dealership.
Ares Capital has to realize that the journey they started with Visual Edge IT will not be reached, and there must be a new direction.
Here are my thoughts as Ares Capital sits at the intersection between dreams and reality
The first direction, which should be immediately recognized as the wrong direction, is the one continuing in the same direction.
The second direction to avoid is turning towards fixing the problems by throwing in more money.
The third choice is to remain stopped at the intersection and do nothing. Of course, sooner or later, a tow truck will be called to haul your inoperable vehicle to the junkyard.
The right direction is turning towards the liquidating of Visual Edge IT by its pieces. Ares Capital should take a new journey that has a clearly defined destination.
In closing, for over a year, I have argued that Visual Edge IT needs a new strategy and new leadership. That argument was and continues to be based on public information regarding Visual Edge IT and what its leaders say and don't say in the marketplace.
During the last year, the Visual Edge IT leadership strategy seemed to consist only of elementary social media jargon, nonsensical rebuttals, or threatening text messages to my social media fans.
For those who work at Visual Edge IT, I am generally concerned for all of you as I do not see a good ending.
The good news is the recent changes the government is implemented regarding non-compete agreements could not have come at a better time. Unfortunately, our industry is going to face many challenges so it's great the industry's workers will soon be able to seek better options more freely.
Ares Capital, you should also consider how the changes in non competes will affect the human capital component of this non financial performing investment.
Ray Stasieczko, host of The End Of The Day With Ray!
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