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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This is not ‘new’. A review of the current 10Q and the the prior 4 year’s annual reports:
10Q Q3 2008: $185M obligation over 5 years
2007 AR: $245,873M
2006 AR: $344,762M
2005 AR: $412,288M
2004 AR: $481,346M
TV Homeshopnets pay either a fixed $/home or a % of sales or some combination thereof for carriage by the cable/satellite companies. That is part of the cost of doing business.
In VV’s case it is the root of their challenge as they have paid 15%++ for this carriage over the years vs 5-10% paid by QVC/HSN. (NBC has been the indirect beneficiary to the tune of …. a lot of money…the OLYMPIC PREMIUM FOR 10 YEARS)
The majority of the carriage agreements expire 12/31/08.
To put it in perspective…if VV had paid 10% of sales the past 10 years…they would have been profitable to the tune of $300M over that timeframe. (That amount and then some went to NBC…see above)
The mgmt changes they have had are a direct result of not being able to generate the sales growth needed to pay for carriage AND make a profit.
VV has paid far more for carriage than QVC or HSN did when they were the same size. (Thanks NBC who negotiated all those carriage agreements for VV)
One wonders if carriage is really all that valuable in a world where internet video is becoming more and more accepted. If VV could operate in a pure broadband world…they would be immediately EBITDA profitable to the tune of $100M (and that is on projected 08 sales of 575M)
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If you use “transponder agreement + liquidation” as your google search, you will come across many documents that contain ‘liquidation’ as a means for termination of an agreement.
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Here is a transponder sub-lease agreement I found at its link:
” TERMINATION.
7.1 This Agreement shall automatically terminate in the event that
the Contract expires by effluxion of time.
7.2 Either party shall be entitled to terminate this Agreement
forthwith by notice of writing if the other:
(a) is in material breach of its obligations hereunder
and such breach is incapable of remedy or is not
remedied (if capable of remedy) within thirty (30)
days of receipt of written notice specifying the
breach and requiring it to be remedied;
(b) goes into receivership or liquidation (other than for
the purposes of amalgamation or reconstruction) or
becomes insolvent or makes any composition or
arrangement with its creditors.
7.2 Either Party shall be entitled to terminate this Agreement by
giving six months notice to the other party without giving any reason, such
notice not to expire within 18 months from 1st June 1997. ”
Link: http://www.secinfo.com/dpJx8.7p.c.htm
Although it isn’t a lease agreement between direct tv and vvtv, it gives insight to the verbiage used and that it is possible that termination of operator agreements can happen due to a liquidation.
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Here’s an interested link regarding Gaylord Entertainment and Charter Communications. It makes the statement that it seems plausible that a lease can be sub-leased or purchased. Although Charter isn’t Direct TV, they are direct competitors and I would think work very similarly in terms of contract.
http://findarticles.com/p/articles/mi_m0EIN/is_/ai_53536869
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Another thing to think about is this. During a liquidation sale, the first parties that are obligated to be paid are the debtors. If $185 Million were a ‘hidden’ debt, that would mean the $44.xx million that VVTV owes GE would not be paid. In that case, why would GE allow them to liquidate? In my opinion GE wouldn’t as they are not in the business of losing money. I would think GE would push for an acquisition which could transfer those agreements to the purchasing party. If that $185 is binding, GE will lose just as big as the common shareholders. I don’t see that happening especially given GE’s current economic situation. Every dollar is important to them.
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Apparently the ‘long-term’ agreement is with Direct TV in which VVTV pays them, according to subscribers, on a month to month basis. The agreement, however, is long term and the only ‘long-term’ agreement I can find that VVTV has thus far. I searched their 2005 fiscal 10K in which the agreement was made but details were not released so I’m searching for similar agreements made by Direct TV and other broadcast stations. So far, it seems to be a standard situation in which Direct TV signs ‘long-term’ agreements. And so far I haven’t found details that are released on any of those agreements either meaning these are pretty hush hush situations. I’m now going to search court records of any companies that may have had litigation concerning direct tv agreements. Wish me luck.
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Most of our concerns can be addressed here:
http://sec.gov/Archives/edgar/data/870826/000095013708006189/c23312e10vk.htm
This is fiscal 2008 10K and it speaks extensively concerning the lease obligations. What I get from it initially is that these lease obligations can be discontinued on a month to month basis. It will take a few days of reading to be sure though.
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Also, an initial thought here: could it be possible that the operating lease would be with GE? And if so, in order to persuade VVTV to liquidate the company do you think GE would write off those leases in order to provide an incentive for the liquidation therefore allowing GE to receive the money that is owed them as well as a profit in the common shares they own?
It seems plausible to me as an initial thought.
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This is Jim, I’m currently trying to ascertain information concerning these lease obligations and so far have come up with this bit of information from Reuters along with the link to the article. It gives some encouragement that these lease obligations may not impair the overall liquidation value. Until I find anything significant that would deter me from this opportunity, I’m still holding my shares. Here is the quote that gives hope:
“A live around the clock television home shopping programming is distributed primarily through cable and satellite affiliation agreements and the purchase of month-to-month full- and part-time lease agreements of cable and broadcast television time.”
Apparently these particular lease obligations are month to month. Here’s the link: http://www.reuters.com/finance/stocks/companyProfile?symbol=VVTV.O&rpc=66
I will post more information regarding these obligations when I’m able to find them.
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