Archive for the ‘Dolphin Limited Partnership’ Category

The Official Activist Investing Blog has published its list of activist investments for January (the investments with links are to our latest update at the time of this post):

Ticker Company Activist Investor
ABVA Alliance Bankshares Corp John Edgemond
AMLN Amylin Pharmaceuticals Carl Icahn; Eastbourne Capital
AVGN Avigen Inc. Biotechnology Value Fund
BIOD Biodel Inc Moab Partners
BKS Barnes & Noble, Inc Yucaipa Companies
CHUX O’Charley’s Inc Crescendo Partners
CITZ CFS Bancorp Financial Edge Fund
CLCT Collectors Universe Shamrock Activist Fund
CNBC Center Bancorp Lawrence Seidman
CPWM Cost Plus Inc Stephens Investment Holdings
CRGN CuraGen Corp DellaCamera Capital
CTO Consolidated Tomoka Land Co Wintergreen Advisers
CWLZ Cowlitz Bancorporation Crescent Capital
DFZ R.G. Barry Corporation Mill Road Capital
DITC Ditech Networks Lamassu Holdings
EDCI EDCI Holdings Chapman Capital
ENZN Enzon Pharmaceuticals DellaCamera Capital; Carl Icahn
EPL Energy Partners Wexford Capital
FNHM.OB FNBH Bancorp Andrew Parker
FSBI Fidelity Bancorp Finacial Edge Fund
FSCI Fisher Communications Gamco Investors
FSFG First Savings Financial Group Joseph Stilwell
GET Gaylord Entertainment TRT Holdings
ICGN ICAgen Inc Xmark Opportunity Partners
INFS InFocus Corp Nery Capital Partners
ISH International Shipholding Corporation Liberty Shipping Group
JTX Jackson Hewitt Tax Service Shamrock Activist Value Fund
KANA Kana Software Inc KVO Capital Management
KFS Kingsway Financial Sevices Joseph Stillwell
KONA Kona Grill Mill Road Capital
LAQ The Latin America Equity Fund City of London Investment Management
MGAM Multimedia Games Inc Dolphin Limited Partnership
MIPI Molecular Insight Pharmaceuticals David Barlow
NDD Neuberger Berman Dividend Advantage Western Investment
NTII Neurobiological Technologies Highland Capital Management
NTMD Nitromed Inc Deerfield Capital Management
OFIX Orthofix Ramius Capital
PIF Insured Municipal Income Fund Inc Bulldog Investors
PPCO PenWest Pharmaceuticals Perceptive Advisors;

Tang Capital Partner

PRSC Providence Service Corp 73114 Investments
PRXI Premier Exhibitions, Inc Sellers Capital
QDHC Quadramed Corp BlueLine Capital
RDC Rowan Companies Steel Partners
SLTC Selectica Inc Trilogy
SONS Sonus Networks Legatum Limited
SSE Southern Connecticut Bancorp Lawrence Seidman
SUAI Specialty Underwriters Alliance Hallmark Financial Services
SUG Southern Union Co Sandell Asset Management
SUMT SumTotal Systems Discovery Capital
SUTM.PK Sun Times Media Group Davidson Kempner Partners
TEC Teton Energy Corp First New York Securities
TESS Tessco Technologies Discovery Equity Partners
TIER Tier Technologies Inc Parthenon Capital
TMI TM Entertainment & Media Bulldog Investors
TRGL Toreador Resources Nanes Delorme Partners
TRMA Trico Marine Services Kistefos AS
TUTR Plato Learning Stephen Becker
TWMC TransWorld Entertainment Riley Investment Management
VLCY.PK Voyager Learning Company FoxHill Opportunity
WFMI Whole Foods Market Inc Yucaipa Companies
WMPN.OB William Penn Bancorp Joseph Stilwell
WOC Wilshire Enterprises Bulldog Investors
WRLS Telular Corp Simcoe Partners
YSI U-Store-It Trust Todd Amsdell
ZEP Zep Inc. Gamco

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Multimedia Games Inc (NASDAQ:MGAM) is an undervalued asset play with two activist investors, Liberation Investment Group, which owns 8.7% of MGAM and has “urged the Company to retain an experienced investment bank to evaluate all strategic alternatives to maximize shareholder value and to expand the Company’s board of directors to include new independent directors who have strong industry backgrounds and are sensitive to shareholder concerns,” and Dolphin Limited Partnership, a formerly passive investor controlling 5.5% of the outstanding stock now seeking board representation. MGAM closed yesterday at $2.48, giving it a market capitalization of $66M. We estimate its liquidation value to be 50% higher at $98.3M, or $3.70 per share. The main risk to MGAM is the legal and regulatory environment. MGAM is involved in extensive litigation and its business operations and product offerings are subject to strict regulatory licenses, findings of suitability, registrations, permits and approvals.

About MGAM

MGAM is a supplier of interactive systems, server-based gaming systems, interactive electronic games, player terminals, stand-alone player terminals, video lottery terminals, electronic scratch ticket systems, electronic instant lottery systems, player tracking systems, casino cash management systems, slot accounting systems, slot accounting systems, slot management systems, unified currencies and electronic and paper bingo systems for Native American, racetrack casino, casino, charity and commercial bingo, sweepstakes, lottery and video lottery markets and provide support and services and operations support for MGAM’s customers and products. It designs and develops networks, software and content that provide its customers with, among other things, gaming systems, some of which are delivered through a telecommunications network that links its player terminals with one another, both within and among gaming facilities. MGAM’s investor relations website is here.

The value proposition

MGAM has been marginally cash flow positive for the last four years, generating good operating cash flow that seems to have been consumed in capital expenditures. That significant capital investment, while not reflected in earnings, still persists on the balance sheet (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):


MGAM’s value resides in its $346.3M in property, plant and equipment, which we’ve written down by half to $173.2M or $6.51 per share. The company also has healthy receivables in the amount of $48.8M, which we’ve discounted by a fifth to $39.1M or $1.47 per share. MGAM has a substantial debt load of $87M or $3.27 per share. Our estimate for its liquidation value is around $98M or $3.70 per share.

MGAM’s most recent 10K reveals that the company is particularly vulnerable to the legal and regulatory environment. Its business operations and product offerings are subject to strict regulatory licenses, findings of suitability, registrations, permits and approvals. It is also involved in extensive litigation to protect its intellectual property rights, or defend claims that it is infringing upon the intellectual property rights of others. The outcome of this litigation is unknown and unknowable. It is conceivable that much of the company’s value could be lost in the litigation or as a result of changes to the regulatory environment.

The catalyst

Two activist investors, Liberation Investment Group and Dolphin Limited Partnership, have declared holdings in MGAM. Dolphin Limited Partnership’s original 13D filing sets out its rationale for it amending its filing from a passive to an activist stance:

[Dolphin Limited Partnership] are long-term shareholders of [MGAM]. [Dolphin Limited Partnership] have visited [MGAM]’s facilities in Oklahoma, Austin, Texas and Mexico and have conversed in person and by teleconference with members of the Board and senior management. On numerous occasions, [Dolphin Limited Partnership] have expressed their views on the strategic, operational and financial issues facing [MGAM] and have actively encouraged efforts to maximize shareholder value. Specifically, [Dolphin Limited Partnership] have highlighted the necessity to more efficiently finance [MGAM]’s growth opportunities with its key customers and sought to provide assistance to [MGAM] in May, 2008 in optimizing its balance sheet.

[Dolphin Limited Partnership] believe that the lack of a coherent business strategy, poor execution and poor capital allocation have contributed to significant deterioration in shareholder value. Specifically, [Dolphin Limited Partnership] are deeply concerned by the following:

  • On September 30, 2008, the price for [MGAM]’s Shares closed at a level at which the Shares traded over eight years ago.
  • Since the beginning of fiscal 2005, [MGAM] has invested over $360 million (over 3x the current market capitalization of [MGAM]) on capital and other expenditures. In that time, a $59 million cumulative cash flow loss has contributed to the share price falling over 72%. (See Chart below).
  • Since the Board was reconstituted in October, 2006, the price of [MGAM]’s Shares has declined 54%, while comparable companies, on average, are down only just 7%1.
  • Since its high following the ill-fated Dutch-auction tender in June, 2007, the price of [MGAM]’s Shares has fallen 66% while comparable companies2, on average, are down considerably less.
  • At the current share price, [MGAM] is trading at just 2.1x Enterprise Value/2009 EBITDA,3 while comparable companies4 average 7.7x — a 73% discount.
  • At the current share price, [MGAM] is trading at just over its tangible book value per share of $4.22.

[Dolphin Limited Partnership] believe the Board of [MGAM] has failed to close the significant valuation gap for its long-term investors. In light of these significant concerns and the erosion of shareholder value and the share price, [Dolphin Limited Partnership] began requesting a change in senior level management in February, 2007. More than a year later, [MGAM] finally heeded [Dolphin Limited Partnership]’ calls and made a change in June, 2008.

[Dolphin Limited Partnership] look forward to hearing a Board approved, detailed strategic operating plan by the 2008 fourth quarter conference call addressing how [MGAM] intends to close the sizeable valuation gap for its shareholders. [Dolphin Limited Partnership] intend to continue to pay special attention to opportunities to make the current operations of [MGAM] more productive, efficient and profitable, as well as plans to grow the business, with prudent use of [MGAM]’s valuable equity capital. Sell-side analysts are forecasting as much as $45-$50 million in free cash flow for fiscal 2009 from the Winstar facility ramp-up, increased machine counts and notes receivable repayments. The Board faces critical decisions as to how best to deploy this inflow to maximize shareholder value.dolphin-13d

In light of the unacceptable financial performance highlighted in the chart above, [Dolphin Limited Partnership] believe a rigorous debate about proper capital allocation is required. Heretofore, the Board has followed a formula that has led to the destruction of shareholder value. [Dolphin Limited Partnership] are seeking Board representation because they understand the necessity of reversing this negative trend. As one of the largest shareholders, [Dolphin Limited Partnership] have a strong incentive to maximize shareholder value. Accordingly, in September, 2008, [Dolphin Limited Partnership] sent a letter to [MGAM] requesting consensual representation on the Board. [Dolphin Limited Partnership]’s representative(s) will be committed to working with the other members of the Board to evaluate all strategic and other alternatives to set [MGAM] on a path to maximizing shareholder value.

1 Comparable companies include IGT, WMS, BYI, ALL AU and SGMS.
2 See footnote 1.
3 Based on Bloomberg average analyst estimates. MGAM average analyst fiscal 2009 estimate of $73 million.
4 See footnote 1.

Liberation Investment Group now controls around 8.7% of MGAM’s outstanding stock. Liberation Investment Group’s original 13D filing attached the following letter to the board setting out its demands:

February 2, 2006

Mr. Clifton Lind
Chief Executive Officer
Multimedia Games, Inc.
206 Wild Basin Rd
Bldg B, Suite 400
Austin, Texas 78746

Dear Clifton:

As you know, Liberation Investments has been a shareholder in Multimedia Games for a year now. We believe the business has substantial value that isn’t reflected in its current stock price. In order to unlock this value for the benefit of all shareholders, we have developed several strategies which we have discussed with you on more than one occasion. We have also offered to introduce you to people with relevant expertise.

I met with you in September of 2005 at the G2E conference in Las Vegas. At that time, I gave you a presentation outlining three specific transaction alternatives which we believe would greatly enhance shareholder value. Shortly thereafter, an investment bank experienced in the gaming industry presented you with another potential option, which we believe would increase shareholder value. Despite our efforts to engage with you, you have not returned our calls since our meeting, except on one occasion when Randy Cieslewicz informed me that Multimedia’s Board would review the information we provided to you at its meeting during the first week of December 2005. Since then, we have not heard any feedback nor seen any progress.

We are disappointed by your lack of responsiveness, especially in light of Multimedia’s languishing stock price. It is currently trading below its levels of even four years ago. What’s more, we believe that Multimedia’s stock trades at a multiple that is significantly discounted to that of its industry peers.
Clearly, the company is not able to take full advantage of the public capital markets under these circumstances.

Now is the time to act. Multimedia must take real steps to boost shareholder value. The company should retain an experienced investment bank immediately to evaluate all strategic alternatives to maximize shareholder value. Furthermore, Liberation believes that you should add new members to the Board who have strong industry backgrounds and are sensitive to shareholder concerns. We have identified some potential candidates who are currently (or have previously been) licensed in major gaming jurisdictions, and would like to discuss with you the possibility of adding these qualified candidates to the Board.

If patient shareholders don’t see real progress quickly, you can be fairly certain that they will soon become frustrated shareholders who will demand progress. We have spoken to other large shareholders who are likewise disappointed by the performance of Multimedia’s stock and who we believe would be supportive of efforts to increase value through the execution of a strategic transaction.

Lastly, given that you have been aware of our interest in a strategic transaction for some time, we wonder why you have yet to file a proxy statement and schedule an annual meeting for 2006. The company’s amended annual report filed on January 30, 2006 provided no reason for missing the usual 120-day deadline. It has already been over a year since Multimedia filed its last proxy statement.

Liberation Investments is prepared to meet with the Board and/or the company’s financial advisors to further discuss the range of alternatives available to Multimedia and answer any questions about our presentation. Please feel free to call me to set up a meeting. As always, we remain committed to working with you to maximize value for all shareholders.

Very truly yours,

Emanuel R. Pearlman
Chairman and CEO

MGAM has now consented to Dolphin Limited Partnership’s nominee being appointed to the board, as the following letter from MGAM filed with Dolphin Limited Partnership latest 13D explains:

December 26, 2008

Dolphin Limited Partnership III, L.P.
156 W 56th Street
Suite 1203
New York, New York 10019
Attn: Mr. Justin Orlando
Vice President and Managing Director

Dear Mr. Orlando:

This letter is to confirm that the Nominating and Governance Committee of the Board of Directors (the “Board”) of Multimedia Games, Inc. (“MGAM” or the “Company”) has resolved to include your name with the Company’s slate of nominees for the Company’s Board of Directors at the Company’s upcoming annual meeting of stockholders, and to support your candidacy to the same extent as the candidacies of the other Company nominees. The Company’s Board of Directors has also unanimously approved this recommendation. The Company intends to hold its annual meeting on or about April 6th or 7th, 2009, and looks forward to your joining the Board at that time.

We would also like to invite you to attend our regularly scheduled meeting of the Board of Directors to be held telephonically on January 8th. We would ask that you and Dolphin Limited Partnership III, L.P. sign a standard confidentiality agreement in connection with your attendance at that meeting. Our counsel will provide a form to your counsel to review.

We look forward to your joining the board and working with you to build value for our stockholders.

Very truly yours,

Mike Maples, Chairman of the Board

Liberation Investment Group’s most recent 13D filing seems to suggest that it is liquidating its position in MGAM by distributing to its investors its proportionate share of MGAM stock.


At $2.48, MGAM is trading at two-thirds of our $3.70 per share estimate of its liquidation value. With Dolphin Limited Partnership’s nominee being invited to join the board, it seems that the chances of the company henceforth taking shareholder-friendly steps are good. The main risk to MGAM remains the legal and regulatory environment, with legal proceedings threatening much of the company’s value. Without knowing the detail of the litigation beyond what is disclosed in the financial statements, it is impossible to handicap the company’s chances. At these levels, we still think that MGAM is a worthwhile investment, but we will watch closely any and all developments in its various legal proceedings.

MGAM closed yesterday at $2.48.

The S&P500 Index closed yesterday at 909.73.

[Disclosure:  We do not have a holding in MGAM. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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