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Archive for December, 2008

We’re unabashed fans of Carl Icahn, who’s reputation for pushing up the stock prices of the companies he invests in has led to a phrase that describes his Midas touch: the “Icahn lift.” We’ve previously covered the billionaire investor’s antics in YHOO here. Our gift to you is 60 Minutes’ August profile on Icahn:

It takes a certain breed of stock market investor, the kind with lots of money and lots of guts, to thrive in queasy times like these, when the market keeps losing altitude. Carl Icahn is one of that breed.

He has a knack for turning someone else’s loss into profit for himself. But he can also help others improve their bottom line through the so-called “Icahn Lift,” an upward bounce that often happens when he starts buying a beleaguered stock.

To see the video, click here: (60 Minutes’ “The Icahn Lift”). Enjoy!

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Avigen, Inc. (NASDAQ:AVGN) has received an offer from MediciNova, Inc. (NASDAQ:MNOV), a biopharmaceutical company that is publicly traded on both the Nasdaq Global Market and the Hercules Market of the Osaka Securities Exchange (Code Number: 4875).

We’ve been following AVGN (see earlier posts here, here, here and here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and it has a specialist biotechnology activist fund Biotechnology Value Fund (BVF) pushing it to liquidate and return its cash to shareholders. We esimate AVGN’s net cash value at $43.5M or $1.46 per share.

According to this filing, MNOV proposes to offer AVGN stockholders a pro rata portion of 1.75M shares of MNOV and a convertible security representing AVGN’s Net Cash Assets,” which MNOV defines as AVGN’s cash remaining after it is wound up less $7M paid to be paid to MNOV. The convertible security issued by MNOV would allow each AVGN stockholder at their election to either (i) convert each share of the convertible security into MNOV at a conversion price of $4.00 per share or (ii) have the convertible security redeemed for cash in an amount per share that represents the Net Cash Assets per share of AVGN. The redemption would occur on the later of March 31, 2010 or 12 months from the closing of the merger transaction. The letter from MNOV to AVGN is reproduced below:

Zola Horovitz, Ph.D.

Chairman of the Board

Avigen, Inc.

Dear Dr. Horovitz:

The purpose of this letter is to provide you with more details concerning the recent expression of interest MediciNova, Inc. (“MediciNova”) made to Avigen, Inc. (“Avigen”) with respect to a potential merger of the two companies in the letter to you dated December 9, 2008.

Our present thinking, based upon the information in publicly available documents and preliminary due diligence, is that we would offer as consideration a combination of registered MediciNova common stock and shares of a MediciNova convertible security for each share of Avigen common stock outstanding. In connection with the merger, Avigen would wind up all of its business activities, including satisfying all of its obligations by way of indebtedness, severance and related liabilities, while retaining all intellectual property assets for the combined companies.

MediciNova proposes that at closing each Avigen shareholder will receive a pro rata portion of 1.75 million shares of MediciNova common stock. In consideration for this, MediciNova will receive $7 million of Avigen cash.

The remaining amount of Avigen cash after Avigen’s wind-up activities are completed and less the $7 million in cash received by MediciNova (the “Net Cash Assets”) will be sequestered and, unless converted earlier as described in the next sentence, not used until the later of March 31, 2010 or 12 months from the closing of the merger transaction (the “Final Conversion Date”). The Net Cash Assets of Avigen will be attested by an independent auditor. The convertible security issued by MediciNova as consideration would allow each Avigen stockholder at their election to either (i) convert each share of such convertible security into shares of MediciNova common stock at a conversion price of $4.00 per share at certain pre-specified accelerated conversion dates or the Final Conversion Date or (ii) have the convertible security redeemed by MediciNova on the Final Conversion Date for cash in an amount per share which represents the Net Cash Assets per share of Avigen.

Based on this proposal, we note that the proposed transaction values each Avigen share at a substantial premium to both your recent stock price and the closing average market price of Avigen’s common stock since your October 21, 2008 announcement. Additionally, the convertible security allows each Avigen stockholder the choice of receiving cash in an amount not presently available to them, other than in a liquidation scenario, or participating in what we believe will be growth in value of the combined entity.

We continue to believe that a merger between MediciNova and Avigen would be in the best interests of the stockholders of both companies for many reasons, including the likely incremental increase in value of the Companies’ combined product candidates. We note that it also addresses the recent pressures Avigen has faced from its stockholder base.

Our proposal remains subject to the completion of customary due diligence, as well as the negotiation of definitive transaction agreements and the satisfaction of necessary approvals and customary conditions to closing of a transaction to be set forth in such agreements. While this letter, and our prior letter to you dated December 9, 2008, are not intended as a binding offer, we continue to stand ready to meet with you and your advisors immediately to discuss this matter.

Please be advised that, because of the past relationships among various of our respective directors, MediciNova has constituted a Special Committee of Directors to represent MediciNova with respect to the proposed business combination. That Special Committee consists of myself as Chair, along with Alan Dunton, Arlene Morris and Hideki Nagao from the MediciNova Board. Our Committee continues to believe this proposal represents a unique opportunity for Avigen’s stockholders and we look forward to a prompt and favorable reply.

Very truly yours,

Jeff Himawan, Ph.D.

Chairman of the Board of Directors

MNOV’s offer represents a clever way for AVGN’s stockholders to receive cash in an amount almost equivalent to what they would receive in a liquidation scenario less $7M paid to MNOV. This equates to approximately $1.22 per share in cash. AVGN’s shareholders also have the option to receive MNOV shares valued at $4.00 (MNOV closed yesterday at $1.60) instead of the cash. AVGN shareholders would also receive 1.75M shares of MNOV divided between 30M AVGN shares on issue.

The offer seems broadly positive to us. Our few quibbles are as follows:

  1. the $7M payment to MNOV seems excessive
  2. the MNOV conversion price of $4.00 is too high
  3. the redemption date – on the later of March 31, 2010 or 12 months from the closing of the merger transaction – is too far away.

If these could be negotiated to a more favorable position for AVGN, the MNOV offer should be welcomed by AVGN’s stockholders.

Hat tip to commenter KC.

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We posted yesterday that Avigen, Inc. (NASDAQ:AVGN) had announced the sale of its rights to an early-stage blood coagulation compound for $7M. We weren’t sure that the sale was for cash. According to this filing, the sale was for cash:

On December 17, 2008, Avigen, Inc. entered into an Asset Purchase Agreement with Baxter Healthcare Corporation, Baxter International Inc., and Baxter Healthcare S.A. (collectively “Baxter”), providing for the sale of the rights to Avigen’s early stage blood coagulation compound, AV513, to Baxter.

Avigen received a cash payment of $7.0 million from Baxter as proceeds from the sale of AV513. At September 30, 2008, Avigen reported cash, cash-equivalents, and available for sale securities and restricted investments of $56.4 million and an accumulated deficit of $244.9 million. Avigen reported no revenue for the first nine-months of 2008 and a net loss of $24.2 million. The Company is in the process of evaluating the terms of the transaction, but believe that if the transaction had been completed at the beginning of the 2008 fiscal year, the cash received would have been recorded as revenue and would have increased the amount of financial assets and decreased each of the net loss and the accumulated deficit reported at September 30, 2008 by $7.0 million. Avigen is unable to estimate the amount of any expenses that would have been avoided, if any, if the sale of AV513 had been completed at the beginning of the 2008 fiscal year. Other than these items, the transaction would not have had any other impact on Avigen’s financial statements.

We’ve been following AVGN (see earlier posts here, here and here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and it has a specialist biotechnology activist fund Biotechnology Value Fund (BVF) pushing it to liquidate and return its cash to shareholders. In our initial post,we noted that AVGN’s net cash position was $36.5M. Adding the $7M or $0.24 per share to AVGN’s cash position gives it a net cash value we estimate at $43.5M or $1.46 per share against a close yesterday of $0.73.

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Happy holidays

We would like to wish all our readers (both of them) the season’s greetings. We’ll be taking a break from regular posting until January 5, 2009. We will be keeping an eye on the market and we’ll update anything that might affect the positions we have open. Here’s hoping 2009 is a prosperous new year.

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A number of commenters have identified in the notes to ValueVision Media Inc. (NASDAQ:VVTV)‘s latest 10Q that VVTV has substantial cash obligations under the cable and satellite agreements and operating leases falling due over the five fiscal years from 2009 to 2012 and not reflect in VVTV’s balance sheet. The worst case scenario is that these obligations represent an additional $185M liability. If this is the case, then our previous estimate for VVTV’s $55.7M in liquidating value is obviously wrong and VVTV may have no value in liquidation.

The value proposition

We’ve previously posted about VVTV here and here, writing that it seemed to us to be one of the better opportunities available because it’s a net net stock (i.e. a stock trading for less than its net current assets) with other apparently valuable assets and noted activist investor J. Carlo Cannell of Cannell Capital holding an activist position in it. The company also seemed to us to be taking steps to realize its value, publicly announcing that it had appointed a special committee of independent directors to conduct an auction to be completed by February 2, 2009. We estimated VVTV’s liquidating value at $55.7M or $1.66 per share. We may have to alter this estimate now to account for the “contractual cash obligations and commitments with respect to [VVTV]‘s cable and satellite agreements and operating leases.”

The offending statement is to be found under the Financial Condition, Liquidity and Capital Resources – Cash Requirements section and reads as follows:

In addition to the potential preferred stock redemption cash commitment mentioned above, we have additional long-term contractual cash obligations and commitments with respect to its cable and satellite agreements and operating leases totaling approximately $185 million over the next five fiscal years with average annual cash commitments of approximately $44 million from fiscal 2009 through fiscal 2012.

We don’t know the terms of the cable and satellite agreements and operating leases and so it is impossible to determine whether the “contractual cash obligations” are absolute or contingent on VVTV continuing to use the services contracted. The worst case scenario is that the obligations are absolute, and therefore represent an additional $185M liability not carried in VVTV’s financial statements. If this is the case, then VVTV may have no value in liquidation.

Conclusion

This is a particularly unfortunate situation because we don’t know how to deal with the “contractual cash obligations.”  If any commenters have a suggestion, we’d be keen to hear it. We note that Williamss commented as follows:

Operating leases are notorious for making the balance sheet appear much better than it actually is. If you add these back to the balance sheet, and combine it with the 44.6 million coming due as part of the GE capital redemption for the preferred shares, then I worry that this company seems to be rapidly headed towards illiquidity, if not insolvency.

When we run into an issue with a financial statement, we generally return to first principles. Graham writes in Security Analysis

A company’s balance sheet does not convey exact information as to its value in liquidation, but it does supply clues or hints which may prove useful.  The first rule in calculating liquidating value is that the liabilities are real but the assets are of questionable value.  This means that all true liabilities shown on the books must be deducted at their face amount.

We have to take the most conservative position, which is that the liability is real and a “true liability” and must therefore be deducted at its face amount. On that basis, VVTV has no value in liquidation and we’re out.

As we’ve discussed in our About Greenbackd and About liquidation value investing pages, we apply Graham’s liquidating value methodology because it’s conservative, it doesn’t require a great deal of sophistication – it’s a simple formula – and it doesn’t require the heroic leaps in reasoning required to forecast future earnings. We believe that this type of analysis will yield reasonable results given a sufficiently large sample size and sufficiently long period of time, even allowing for our mistakes. We’ve committed a real howler with VVTV.

VVTV closed yesterday at $0.33. We liked it at $0.44, so we’re down 25% on an absolute basis.

The S&P 500 closed yesterday at 871.63 and closed at 888.67 (-1.92%) when we liked VVTV first, so we’re down 23.08% on a relative basis.

Hat tips to commenters Williamss and Jim.

[Disclosure: We do have a holding in VVTV. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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Avigen, Inc. (NASDAQ:AVGN) announced on Thursday that it had sold its rights to an early-stage blood coagulation compound for $7M. We have not been able to confirm that the sale was for cash. Assuming that it was, we estimate that it adds $0.24 per share to AVGN’s cash position and takes its net cash value to $1.46 per share, some 122% higher than its close Friday at $0.658.

We’ve been following AVGN (see earlier posts here and here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and it has a specialist biotechnology activist fund Biotechnology Value Fund (BVF) pushing it to liquidate and return its cash to shareholders. In our initial post,we noted that AVGN’s net cash position was $36.5M. Assuming that the $7M sale was for cash, adding it to AVGN’s cash position gives it a net cash value we estimate at $43.5M or $1.46 per share, 122% higher than its Friday close.

If BVF is able to cause the company to quickly distribute its remaining cash to stockholders, AVGN is an attractive investment opportunity. The risk is that BVF is unable to persuade the company to do so before AVGN dissipates its remaining cash.

AVGN closed Friday at $0.658.

The S&P 500 Index closed Friday at 887.88.

[Disclosure: We do not presently have a holding in AVGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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According to the Portland Business Journal, a group of “high-powered executives” plan to save InFocus Corporation (NASDAQ:INFS) from “New York sharks” who want to liquidate the company for a quick profit. The group, which includes Steve Hix, INFS’s co-founder, wants to buy the company if they can get financing. The group says its strategy, which entails expanding beyond projectors, could save the company. Said one of the group:

We’ve got some whispers that there’s a guy in New York looking at buying 50 percent of this company, and he’ll liquidate it. We are scared. We don’t want that to happen to this company. We’ve been working for nine months on a way to save it.

We’ve been following INFS recently (see earlier posts here, here, here and here) writing that it is a deeply undervalued asset situation with two activist investors, Nery Capital Partners and Lloyd I. Miller, III, pushing the company to “consider the views expressed by its shareholders and pursue new alternatives to increase shareholder value.” We see a second bidding group as a positive catalyst.

Hat tip to commenter Steven.

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