TLDR: Star Equity (STRR) is buying Harte-Hanks (HHS) at $5.00 a share, half in cash and half in a 10% cumulative preferred (STRRP). HHS trades at $3.60. Downside is $1.60. Upside is $1.35. AcknowledgementsYou voted and the merger arb article won, so here you go.I will work up the bankruptcy case at a later date, as it is quite involved.I found these two ideas using my hand-crafted artisanal special situations analysis tool using back end data from SpecialSitDigest.If you are serious about special situations and overpaying for KEDM, you should consider this product instead.Anyway, I don’t get paid for product placement (or this newsletter), so probably my last time mentioning this as I can imagine it gets annoying.Onto our main news story…Thanks for reading Triple S Special Situations Investing! Subscribe for free to receive new posts and support my work.The Merger Arb I am not writing aboutI had two arbs to write about.Let me tell you about the one I chose not to discuss, which you can go locate if you want.It’s a Chinese company, which has a founder led take private, that is highly illiquid and a 33% potential return in 4 months.I think the deal will close, but most brokers are blocking opening transactions in the security due to Chyna, and I don’t want to talk about a security most of you can’t access.For the same reason, I rarely mention expert market stocks, which tend to have some insane value propositions.Why I’m looking at thisTo start with, it is a signed deal with unanimous board support and a 37% spread from my purchase price of $3.60.The merger is clearly subscale and somewhat too complicated for merger arb desks, given its compensation is half, not in cash but in preferred scrip.The security itself is plenty liquid for people my size and smaller.Finally, I want to mention this right away.THE DOWNSIDE RISK HERE IS HUGE, WITH A $2 BREAK PRICE ($1.60 LOSS) VS A $1.35 POSSIBLE GAIN.Don’t bet the farm on this please!Or do if you are degenerate. I don’t judge your choices. This is a safe space.The dealIt was announced last week.$5.00 per HHS share, with a valuation of $38.4 million on roughly 7.68 million fully diluted shares.You elect cash or preferred for each share, which is really a false choice, since everyone on this Substack with a brain will obviously choose cash.Cash is capped at $19,200,000 in total, which is 50% of the deal.Preferred elections are uncapped, so cash electors get prorated.So in the real world, each HHS share becomes $2.50 in cash plus 0.25 shares of STRRP.STRRP is Star’s 10% Series A Nasdaq listed Cumulative Perpetual Preferred.Not one share of Star common is issued in this deal, which we will get into why shortly.The go-shop runs to September 13th, with matching rights for Star.Directors and officers signed support agreements that resulted in unvested equity and every performance stock unit getting cancelled for nothing, which tells you what management thought the PSUs were worth.Harte-Hanks, a centenarian businessHarte-Hanks started as a chain of Texas newspapers and spent the latter half of the last century becoming the company that fills your mailbox with great opportunities.It printed lots of coupons and ran the mailing lists, and for decades that was a wonderful business until it wasn’t. Revenue and profit dropped like a rock and so did the stock price from $300 (split adjusted) to $3.60.The financials of HHThe first half of 2026 was $75m of revenue from three market segments with an operating loss of $5.3 million (Fulfillment & Logistics [~45%], Customer Care [~35%], and Revenue Solutions/B2B [~20%]).On paper, that doesn’t make for an interesting merger candidate, but what is killing profitability is corporate overhead which is over $10 million dollars.Board, audit, listing, SOX, D&O insurance and a C-suite cost real money.Balance sheet wise, the company has about $5 million of cash and no long-term debt.Star Equity, a baby public private equity fundThe buyer needs as much explaining as the seller.Star Equity Holdings is a mishmash of various businesses it owns in four sectors.Building Solutions is KBS Builders, EdgeBuilder, Glenbrook and Timber Technologies, modular homes and lumber in New England and the upper Midwest.Energy Services is Alliance Drilling Tools.Investments is Star Equity Fund, Real Estate, and some other odds and ends.And of most relevance to this article Business Services is Hudson Talent Solutions, the recruitment outsourcing firm, which they merged with in 2025 gaining much more revenue and access to $215 million of NOLS.The stated plan for Star is microcap aggregation with a five-year goal of outperforming the Russell 2000 and getting added to it through a combination of scaling businesses, activism, acquisitions, and use of creative financing arrangements.Insiders own about one third of the company, so they are incentivized to make it work.Star’s FinancialsQ2 had some real challenges due to Building Solutions being in a housing downturn.Across all business segments, Star had $55 million of revenue and $22.8 million of gross profit.Net loss was $2.5 million with adjusted EBITDA of $2.2 million.Cash ended June at $6.8m with $2.1m more restricted, against $14.1m of debt.So, in summary, not great, but not terrible, and definitely enough to cover the preferred dividends.The combined companyThe merger slide deck claims FY pro forma revenue of $384m and adjusted EBITDA of $30m after $10m of synergies.Synergies meaning all the costs of running a public company and Harte Hank’s C-Suite.They published the reconciliation, which is above for review.Actual combined pro forma EBITDA is $6.7 million. I am generally ok with adding back in Depreciation and Amortization for an older business.You can judge the rest of the line items on your own, but for the most part I am OK with many of them also.If you add back in one time expenses and the run rate savings, things seem pretty peachy.Ultimately, we care about if Star can cover their preferred and nothing so far indicates they cannot, so let’s discuss that given it’s half the compensation.The preferred$10.00 liquidation preference.10% coupon, $0.25 per quarter.Cumulative, which is the only way I like my preferred, so a missed payment accrues instead of vanishing.Perpetual. No mandatory redemption. This is good or bad depending on your views on glasses of water.This preferred has been in existence for many years now without a missed dividend.The one thing I don’t like is they have an approximately $9 million ATM program on their preferred which is something I have never seen but also companies this small rarely have preferred stock, so what do I know?So, why does Star use preferred stock, which has a large dividend, vs. cheaper common?Star has $215m of federal NOLs, as of this moment, due to the Hudson merger.They would lose this valuable asset if there is a massive ownership change in their common equity due to tax law. Lawyers and accountants can be very creative and this was the solution they came up with. Closing riskBoth boards approved unanimously, and the HHS directors signed support agreements.Insiders own about 35% of the buyer, and the buyer needs this more than the target does, because $215m of NOLs are worthless without income to shelter.At $38.4m there’s no HSR filing, and no Star shareholder vote is required.Star is a serial acquirer, so I am not super concerned about the buyer’s willingness to close, however, given these are microcaps, there is a financing addendum.Closing is conditioned on completing a debt financing of up to $15 million, drawn on Harte-Hanks’ own $25m Texas Capital Bank facility, or alternative financing acceptable to Star. This is the main risk. The lender not consenting or Star failing to arrange for a new facility.There is also a required vote by Harte Hanks shareholders.Harte Hanks has no alternative except burning its remaining cash as a subscale public company.The termination fee is $1,152,000, both directions, so not much teeth in that.Finally, the S-4 has not been filed yet so that is a small risk too.For what it’s worth, I give this a high probability of closing, but keep in mind as I mentioned at the start, the downside here is $2, so DYDD AND YMMV.ConclusionAt first, I didn’t really care for this transaction, but after doing the work, I think it is a decent merger arb to hold in a basket of other stuff.You should consider your risk tolerance and interest in holding a preferred stock as half your compensation, and the financing risk, which is probably the biggest impediment to closing. I’ll be back in a week or two with another idea.If you enjoyed this write-up, please like and restack.I don’t get paid to do this, so consider that my reward.Substack seems to throttle free article writers, which makes attracting new readers difficult. I do not want to charge for this substack, but the algorithm may end up requiring it. I am trying to avoid this, so please spread this substack if you can.Also, if you have other ideas I should write about, my DM’s are always openAll writeups are subject to our TOSThanks for reading Triple S Special Situations Investing! This post is public so feel free to share it.Share