If there’s a company that holds the top spot for customer loyalty in the technology space it’s Apple Inc. (NASDAQ:AAPL). Buyers of Apple’s products, led by the iPhone but also including its MacBook and Apple Mac hardware, forego often technically similar and almost always cheaper products in favor of the company’s brand and reputation.
For an Apple shareholder, that’s great news. This brand loyalty has helped to drive the company’s share price from less than $20 back in 2007 to current prices in and around $160 today. Apple is now very much a blue chip stock, however, meaning its upside potential is limited by its vast size. For a large portion of the retail investment community, this is no problem. Small but steady and stable returns on an allocation are a reasonable price to pay for the very limited risk level an exposure to a company of Apple’s size brings with it. For some, however, that’s not enough. A smaller company can bring with it an increased degree of risk but can also offer a much larger potential upside.
There are some companies that bring a combination of these two concepts. A high potential upside based on current price and growth potential in their respective industries but with a connection to a larger, more stable entity that serves to reduce the downside risk tied to an exposure.
One of these companies is InfoSonics Corporation (NASDAQ:IFON). Not only that, but the company to which it’s connected and that serves to limit the downside risk associated with an exposure is Apple.
InfoSonics is a technology stock that’s headquartered in San Diego and that provides a variety of technological hardware items to carriers and distributors in Latin America and the United States. Tablets, smartphones, accessories, all that sort of thing. The company provides the products to its resellers and they set out selling them to customers in the regions they represent.
Last year (to December 31, 2016) this model led to revenues of $39.1 million for the company and a gross profit of $4.59 million. A year earlier, this revenues number was a little higher, reported at $47.8 million, but the dip came on the back of InfoSonics cutting some of its US operations in an attempt to streamline financials. As such, while topline decreased slightly, operating expense also decreased.
Where does this tie into Apple?
As many reading will likely already be aware, a company that wants to sell Apple products legally has to be an Approved Apple Reseller. This reseller relationship allows a retail entity to set up a brick and mortar location (as well as an online presence) through which it can sell Apple hardware under the moniker of an Official Apple Distributor. Most of these resellers (and there aren’t that many, Apple is very strict with who it allows this official designation) set up stores that mimic the now famous Apple store – a large amount of floor space, practically no vertical shelf space, and items displayed on tables.
So why would Apple choose to distribute through stores like that owned by OneClick as opposed to setting up locations itself? In a word, it’s much cheaper. These sorts of locations cover their own overheads and essentially pay Apple a fee for the privilege of becoming a distributor. Apple gets to sell its products in regions that might be difficult to set up shop in (for political or legal reasons, that sort of thing) or that might be more expensive to do so than the company stands to make on the sale of its products through the channel.
The relationship is win win of course. Apple can sell products at a branded brick and mortar store without having to worry about overheads, while (in this instance) OneClick can draw benefit from the reputation associated with Apple and the customer loyalty that the company and the brand enjoys.
So, where does this tie into InfoSonics?
Well, InfoSonics just acquired OneClick.
As per the announcement, the two companies have entered into a merger agreement that will see InfoSonic acquire Cooltech, which is the name of the company that owns and operates the OneClick brand in Latin America. Cooltech also owns a number of these stores in the US, most of which are again branded as OneClick.
When the merger closes, Cooltech will become a wholly-owned subsidiary of InfoSonics in exchange for 62.5 million shares of InfoSonics common stock. Three of the current directors of InfoSOnics will step down and be replaced with three Cooltech appointed members and the combined entity will pool the resources of the two companies to drive forward the operations of both Cooltech and InfoSonics.
What does this mean for shareholders?
Shareholders of InfoSonics are getting a number of things on the back of this merger. First and foremost, they are picking up an exposure to Apple through the relationship that Cooltech has with the technology giant and this serves to reduce the risk associated with their exposure to InfoSonics, as outlined above. Second, they are getting an established chain of retail outlets (Apple branded ones, at that) through which InfoSonics will be able to distribute its own products.
Cooltech is picking up exposure to public market capital (since the merger will allow the company to essentially list on the NASDAQ), meaning it can easily and efficiently raise the funds that are necessary to drive growth in this sort of rapidly expanding technology retail environment.
The deal is expected to close during the fourth quarter of this year and is subject to shareholder approval. With that said, the merger looks like a win win for both companies as outlined above and shareholder approval shouldn’t be difficult to pick up.
Bottom line here is that this is a company that’s currently priced as a small US based distributor but that is about to close on a transaction that sees it form a link to one of the biggest and most reputable technology companies in the world. When this deal closes, therefore, there’s a good chance of upside revaluation, even before the financial ramifications of the combination filter through to the key metrics.
Disclosure: The author holds no positions in any of the stocks mentioned in this piece.