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Archive for the ‘Net Net Stocks’ Category

Avigen Inc (NASDAQ:AVGN) 10K update

Posted in Activist Investors, Avigen (NASDAQ:AVGN), Biotechnology Value Fund, Net Cash Stocks, Net Net Stocks, Stocks, tagged , , , , on March 17, 2009| Leave a Comment »

Avigen Inc (NASDAQ:AVGN) has filed its 10K for the fiscal year ended December 31, 2008.

We’ve been following AVGN (see archived posts 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 specialist biotechnology investor Biotechnology Value Fund (BVF) has been pushing it to liquidate and return its cash to shareholders. MediciNova Inc (NASDAQ:MNOV) has made an offer for AVGN that we think represents a clever way for AVGN’s stockholders to receive cash equivalent to that which they would receive in a liquidation (less $7M to be paid to MNOV) with the possibility for “an extraordinary, uncapped return” if MNOV is successful post-merger. The stock is up 60% from $0.65 to close at $1.04 yesterday. We initially estimated AVGN’s net cash value to be around $1.22 per share (BVF estimates $1.20 per share). We’ve now increased our estimate slightly to $37M or $1.24 per share. The net cash estimate does not take into account AVGN’s AV411 assets and program, which could be worth considerably more, perhaps as much as $10M to $25M or between $0.30 or $0.65 per share.

The value proposition updated

AVGN used net cash in operating activities of $21.1m in 2008. While the cash burn rate has been reduced, it still represents a significant risk for AVGN stockholders. AVGN has attempted to reduce cash burn but expects to incur future expenses in connection with efforts to monetize the AV411 assets and evaluate merger and acquisition proposals. AVGN does expect that expenses for 2009 will be significantly below the spending levels of recent years. Our updated estimate for the company’s net cash value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

avgn-summary-2009-1-31Off-balance sheet arrangements and Contractual obligations

AVGN does not have any off-balance-sheet arrangements. Its total contractual obligations not included in the balance sheet include $3.2M in operating leases and $1.8M in research funding for third parties.

Conclusion

At its $1.04 closing price yesterday, AVGN is trading at a 20% discount to our estimate of its net cash value of $37M or $1.24 per share. The liquidation value could be considerably higher again, as we have not included in the estimate the potential value of the AV411 assets and program, which could be worth an additional $10M to $25M or between $0.30 or $0.65 per share. BVF has made considerable head way, and we believe they have a good chance of securing the AVGN board seats they seek. The stock is up considerably since we initiated the position, but has not yet reached our estimate of value, and so we are maintaining our position.

[Full Disclosure: We 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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Rackable Systems Inc (NASDAQ:RACK)

Posted in Greenbackd Portfolio, Net Cash Stocks, Net Net Stocks, Rackable Systems Inc (NASDAQ:RACK), Share buy-backs, Stocks, tagged , , , on March 11, 2009| 6 Comments »

Rackable Systems Inc (NASDAQ:RACK) is a new undervalued asset play with a plan to repurchase almost 40% of its stock at current prices. At RACK’s $3.56 closing price yesterday, the company has a market capitalization of $106.4M. We estimate the company’s liquidation value to be 60% higher at $170.3M or $5.74 per share. If the buy back is completed at the current stock price, the company’s per share liquidation value will increase by almost 25% to $7.00. We’re adding RACK to the Greenbackd Portfolio.

About RACK

RACK is a provider of servers and storage products for data centers. The company was founded in 1999 and is based in Fremont, California. The company’s investor relations website is here.

The value proposition

RACK, as its CEO points out in its earnings release, has had a tough year, burning through $15.7M in the 12 months to January 3, 2009. The company does still have a huge amount of cash and equivalents on its balance sheet (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

rack-summary

We estimate the company’s liquidation value to be around $171.6M or $5.74 per share, which is predominantly cash and equivalents in the amount of $172M or $5.75 per share. RACK’s net cash value is around $118M or $3.95 per share.

Off balance sheet arrangements and contractual obligations

The company hasn’t disclosed any off-balance sheet arrangements in its most recent 10Q. The contractual obligations as at September 27, 2008 were around $10.2M, around $2.1M of which falls due in the next 12 months. Those committments are minimum lease payments under the company’s operating leases. The company also had purchase committments in the amount of $30.9M to the end of 2008. We’re not sure what these committments are for the next 12 months.

The catalyst

RACK has announced a radical buy back plan to repurchase $40M of its stock. From the press release:

“2008 was a tough year for our industry and for Rackable. Given our strong financial flexibility with $181 million in cash and investments, we plan on making key investments for 2009,” said Mark J. Barrenechea, president and CEO of Rackable Systems. “First, we plan to invest up to 10% of our cash to expand our product offerings and our sales and service capabilities. Second, the company announced a $40 million share repurchase program today. We believe this is an ideal time to invest in Rackable and that these investments will place the company in a stronger competitive position to gain market share as the economy recovers.”

We estimate that that such a buy back at the present prices will increase the company’s per share liquidation value by almost 25% to $7.00. This is a substantial upside to the current stock price.

Conclusion

It’s great to see company recognizing that its stock is deeply undervalued and taking radical action to capitalize on it. If the market is pricing your stock below its liquidation value, there are bargains to be had by investing in that stock, and we believe it should be your priority. With its stock at $3.56, RACK has a market capitalization of $106.4M, which means it’s trading at a discount to both its net cash value of $118M or $3.95 per share and its liquidation value of $171.6M or $5.74 per share. The cash burn is a risk, but we think RACK is a good bet at this level.

RACK closed yesterday at $3.56.

The S&P500 Index closed yesterday at 719.60 (!).

Hat tip to manny.

[Full Disclosure:  We do not have a holding in RACK. 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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Digirad Corporation (NASDAQ:DRAD)

Posted in Digirad Corporation (NASDAQ:DRAD), Greenbackd Portfolio, Net Net Stocks, Stocks, tagged , on March 9, 2009| 5 Comments »

Digirad Corporation (NASDAQ:DRAD) is a tiny undervalued asset play with a plan to sell assets and buy back its stock. At its $0.88 close on Friday, the company has a market capitalization of $16.7M. We estimate the liquidation value to be around 76% higher at $29.3M or $1.55 per share. The company’s net cash value is around $16M or $0.85 per share, which means the company is trading at a small premium to its net cash. DRAD plans to put the cash to good use, announcing a share buyback to repurchase $2M of its stock.

About DRAD

DRAD is a provider of cardiovascular imaging services and solid-state nuclear medicine imaging products to physician offices, hospitals and other medical services. The company operates through its wholly owned subsidiaries, Digirad Imaging Solutions, Inc. and Digirad Ultrascan Solutions, Inc. The company’s investor relations website is here.

The value proposition

DRAD’s earnings and cash flow are nothing to write home about. The company generated positive cash from operating activities for the last two years of $4.72M in 2007 and $2.37M in 2008, but capital expenditures have made the company a net consumer of cash. The summary of our estimate for the company’s liquidation value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

drad-summaryWe estimate DRAD’s liquidation value at around $29.3M or $1.55 per share.

Off balance sheet arrangements and contractual obligations

The company hasn’t disclosed any off-balance sheet arrangements in its most recent 10K. The contractual obligations as at December 31 were around $3.0M, around $1.4M of which falls due in the next 12 months.

The catalyst

DRAD’s board has announced a stock buyback program:

The Company also announced that its board of directors has authorized a stock buyback program to repurchase up to an aggregate of $2 million of its issued and outstanding common shares. Digirad had approximately 19 million shares outstanding as of December 31, 2008. At current valuations, this repurchase plan would authorize the buyback of approximately 2.1 million shares, or approximately 11 percent of the company’s outstanding shares.

Chairman of the Digirad Board of Directors R. King Nelson said, “The board believes the Company’s direction and goals towards generating positive cash flow and earnings coupled with an undervalued stock price present a unique investment opportunity. We are confident this will provide a solid return to our shareholders.”

The impact of a $2M stock buyback at Friday’s closing price is to increase per share liquidation value by around 6% to $1.64 and leaves the company with $26.3M in cash and short term investments. We’d like to see a larger buyback (for example, $5M increases the per share value by around 20% and leaves $23.3M in cash), but this is a good start.

Conclusion

At its $0.88 close on Friday, DRAD is trading at around 57% of its $29.3M or $1.55 per share in liquidation value and at a small premium to its $16M or $0.85 per share in net cash. The share buyback to repurchase $2M of its stock will increase the per share liquidation value by around 6% to $1.64. We’re adding DRAD to the Greenbackd Portfolio.

DRAD closed Friday at $0.88.

The S&P500 Index closed Friday at 683.38.

Hat tip to JM.

[Full Disclosure:  We do not have a holding in DRAD. 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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Amtech Systems Inc (NASDAQ:ASYS)

Posted in Activist Investors, Amtech Systems Inc (NASDAQ:ASYS), Greenbackd Portfolio, Net Net Stocks, Richard L. Scott, Stocks, tagged , , on March 5, 2009| 7 Comments »

Amtech Systems Inc (NASDAQ:ASYS) is a new addition to the Greenbackd Portfolio. At its $2.78 closing price yesterday, the company has a market capitalization of $25.3M. We estimate the liquidation value to be almost 60% higher at $40M or $4.40 per share. A private investor, Mr. Richard L. Scott, disclosed a 7.0% holding in July last year. Mr Scott has continued to purchase stock, and, as of February 17 this year, holds 9.1% of ASYS’s outstanding stock. We’re not sure what Mr. Scott has planned for ASYS, but we think the stock is a relatively good bet as it has continued to generate positive operating cash flow and earnings.

About ASYS

ASYS is a supplier of horizontal diffusion furnace systems used for solar (photovoltaic) cell and semiconductor manufacturing. The company operates in two business segments: solar and semiconductor equipment, and polishing supplies, under the brand names Tempress Systems and Bruce Technologies. ASYS also supplies insert carriers to manufacturers of silicon wafers under the PR Hoffman brand, and provides lapping and polishing consumable products, as well as equipment used in various industries. The company’s investor relations website is here.

The value proposition

The summary of our estimate for the company’s liquidation value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

asys-summaryWe estimate ASYS’s liquidation value to be around $40M or $4.40 per share.

Off-balance sheet arrangements and Contractual obligations

According to the company’s most recent 10Q, as of December 31, 2008, ASYS had no off-balance sheet arrangements. The only significant changes in contractual obligations since the end of fiscal 2008 have been purchase obligations in the amount of $6.1M. These purchase obligations consist of outstanding purchase orders for goods and services. While the amount represents purchase agreements, the actual amounts to be paid may be less in the event that any agreements are renegotiated, cancelled or terminated.

The catalyst

Mr. Scott disclosed his initial 7.0% holding in a 13D notice dated July 28, 2008, purchasing $5.4M of stock in ASYS at prices between $8.95 and $9.50. The initial 13D notice contains the standard disclosure for Purpose of Transaction, which we’ve reproduced below:

[Mr. Scott] purchased the Common Stock in open market transactions for general investment purposes. Consistent with such purposes, [Mr. Scott] may seek to engage in future discussions with management of [ASYS] and may make suggestions concerning [ASYS]’s operations, prospects, business and financial strategies, assets and liabilities, business and financing alternatives and such other matters as [Mr. Scott] may deem relevant to his investment in [ASYS]. In addition, [Mr. Scott] may from time to time, depending on prevailing market, economic and other conditions, acquire additional shares of the Common Stock of [ASYS] or engage in discussions with [ASYS] concerning further acquisitions of shares of the Common Stock of [ASYS] or further investments in [ASYS]. [Mr. Scott] intends to review his investment in [ASYS] on a continuing basis and, depending upon the price and availability of shares of the Common Stock, subsequent developments affecting [ASYS], [ASYS]’s business and prospects, other investment and business opportunities available to [Mr. Scott], general stock market and economic conditions, tax considerations and other factors considered relevant, may decide at any time to increase or to decrease the size of his investment in [ASYS].

Mr. Scott has continued to purchase stock in ASYS and has disclosed a 9.1% holding in an amended 13D notice dated February 20, 2009.

Stock repurchase program

According to the most recent 10Q, the company’s board approved a stock repurchase program in December authorizing the repurchase of up to $4M of ASYS’s common stock. If the buy-back is completed at the current stock price, we estimate that the company’s per share liquidation value would increase by around 7% to $4.70.

Conclusion

At its $2.78 close yesterday, ASYS is trading at a little under two-thirds of our estimate of its value in liquidation.  Given that it has continued to generate positive operating cash flow and earnings in a difficult operating environment, we think ASYS represents very good value at a discount to its liquidation value. Management seem to have recognized that the stock is too cheap, and have taken the right steps by authorizing a $4M stock buy-back. Our only criticism is that the buy-back could be bigger. For example, if the buy-back was increased to $10M and stock bought back at the current stock price, the company’s per share liquidation value would increase by 24% to $5.45, leaving ASYS with around $28M in cash and short-term investments. This is a very small criticism, and ASYS has the option to increase the buy-back in subsequent quarters if the stock price continues to trade at a discount to liquidation value. We don’t know anything about Mr. Scott, but we like to see large stockholders increasing their stakes when the stock price drops. We think ASYS is very good value, and that’s why we’re adding it to the Greenbackd Portfolio.

ASYS closed yesterday at $2.78.

The S&P500 Index closed yesterday at 712.87.

[Full Disclosure:  We do not have a holding in ASYS. 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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Network Engines Inc (NASDAQ:NENG) December 10Q

Posted in Activist Investors, Greenbackd Portfolio, Net Net Stocks, Network Engines Inc (NASDAQ:NENG), Stocks, Trinad Management, tagged , , on February 19, 2009| Leave a Comment »

Network Engines Inc (NASDAQ:NENG) has released its results for the quarter to December 31, 2008. We’ve adjusted our valuation down 7% from $25.5m or $0.59 per share to $23.8M or $0.55 per share. With the stock price at $0.51, we’re going to maintain our position for now, but we’re mindful that NENG is a perennial net net stock and so we might take the opportunity to exit if it gets to our target valuation of $0.55.

We started following NENG on January 13 when it was trading at $0.38, which gave it a market capitalization of just $16.5M. The stock is up 34.2% since our initial post to $0.51, which gives it a market capitalization of $22.0M. In November 2007, an activist investor, Trinad Management, pushed the company to “immediately [implement] a share buy-back program.” The company demurred and saw its stock sink to all-time lows.

The value proposition updated

NENG’s Q1 10Q shows an increase in cash, which seems to be largely as a result of reducing accounts receivable and inventories (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):

neng-summary-q4

Conclusion

We are inclined to exit NENG if it gets to our $0.55 valuation. It’s a perennial net net stock, so we think there’s a good chance NENG will be back in net net land again. As we pointed out in our earlier post, Jonathan Heller of Cheap Stocks-fame mentioned it back in October 2005 in a list of the Top 20 Market Cap Companies Trading Below Net Current Asset Value. It was then trading around $1.30 against a net current asset value of around $1.31. Investors buying back in October 2005 had plenty of opportunity to unload the stock at a profit while it traded up to $3.17 in March 2006. We’re planning to do the same again, but at $0.55.

[Full Disclosure:  We do not have a holding in NENG. 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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Audiovox Corporation (NASDAQ:VOXX)

Posted in Activist Investors, Audiovox Corporation (NASDAQ:VOXX), Howson Tattersall, Net Net Stocks, Stocks, tagged , , , , on February 18, 2009| 1 Comment »

Audiovox Corporation (NASDAQ:VOXX) is a rarity in our universe: a profitable undervalued asset play. At its $3.73 close yesterday, VOXX has a market capitalization of $85.3M. We estimate the liquidation value to be 50% higher at around $128.4M or $5.60 per share. Howson Tattersal filed a 13D notice in September last year disclosing a 7.3% holding. While VOXX has been another perennial inclusion on lists of net-net stocks, we think it’s hard to ignore at this price.

About VOXX

VOXX is an “international distributor and value-added service provider in the accessory, mobile and consumer electronics industries.” The company markets its products under the Audiovox brand name and other brand names, including Acoustic Research, Advent, Ambico, Car Link, Chapman, Code-Alarm, Discwasher, Energizer, Heco, Incaar, Jensen, Mac Audio, Magnat, Movies2Go, Oehlbach, Phase Linear, Prestige, Pursuit, RCA, RCA Accessories, Recoton, Road Gear, Spikemaster and Terk, as well as private labels through a domestic and international distribution network. See the company’s website here. The company’s investor relations website is here.

The value proposition

VOXX’s sales, operating income and net income increased in the quarter ended November 30, 2008. Net sales for the third quarter were $195.6 million compared to net sales of $183.6 million reported in the comparable prior year period. Operating income was $10.7 million in the third quarter compared to $6.7 million in the preceding third quarter. Net income was $6.5 million compared to net income of $4.7 million in the comparable period. This doesn’t tell the full story however as operating activities used cash of $26.7M for the nine months ended November 30, 2008. The company used less cash for its operating activities compared to the prior year period ($92.9M), but it is still a concern for us. The balance sheet looks interesting (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

voxx-summaryWe’ve written down VOXX’s receivables by 20% to $144.2M or $6.30 per share and VOXX’s investory by 50% to $74.7M or $3.26 per share to arrive at a total current asset value of $236.7M or $10.35 per share. Deducting total liabilities gives a net current asset value of $119.1M or $5.21. We’ve discounted $46M in non-current assets to $9.2M or $0.40 per share, which, added to the net current assets, gives a liquidation value of around $128.4M or $5.61 per share.

Off-balance sheet arrangements and Contractual obligations

According to its most recent 10Q, VOXX does not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon its financial condition or results of operations.

VOXX has around $42M in contractual cash obligations (including $11M in capital lease obligations and $31M in operating leases), around half of which falls due in the next 5 years and $23.7M falling due after 5 years. VOXX also has another $43M in unconditional purchase obligations falling due in the next 12 months.

The catalyst

Howson Tattersall Investment Counsel Limited filed its 13D notice on September 24, 2008 disclosing a 7.3% holding in VOXX. It seems from the filing that Howson Tattersall paid $18,825,883.44 for 1,508,075 shares in VOXX, giving them an  average purchase price around $12.50 per share. Given that Howson Tattersall has listed in the filing the “Date of Event Which Requires Filing of this Statement” as April 11, 2007, it’s possible that they are an example of the “reluctant activists” we referred to on Monday.

Conclusion

At $3.73, VOXX is trading at a discount to its net current asset value and around two-thirds of our estimate of its liquidation value of around $5.61 per share. We’ve got no particular insight into the business. The negative operating cash flow is an issue and its near term contractual obligations are significant. That aside, we think VOXX is a reasonable punt and we’re adding it to the Greenbackd Portfolio.

VOXX closed yesterday at $3.73.

The S&P500 Index closed yesterday at 789.17.

[Full Disclosure:  We do not have a holding in VOXX. 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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MathStar Inc (OTC:MATH) investor urges voluntarily liquidation

Posted in Activist Investors, MathStar Inc (OTC:MATH), Net Cash Stocks, Net Net Stocks, S. Muoio & Co, Salvatore Muoio, Stocks, tagged , , , on February 17, 2009| Leave a Comment »

S. Muoio & Co. has called on MathStar Inc (OTC:MATH) to include in the proxy statement for the 2009 Annual Meeting a vote by shareholders to approve a voluntary liquidation of MATH.

We’ve been following MATH since December last year when it was trading at $0.68 because it was a net cash stock with a substantial stockholder lobbying management to liquidate. The stock is up 19% to $0.81 Friday, giving it a market capitalization of $7.4M. We estimate MATH’s liquidation value still to be around 94% higher at $14.4M or $1.57 per share. That value is predominantly cash and short term investments and doesn’t take into account any further value that the sale of the FPOA technology and intellectual property may yield. Two activist investors, Mr. Salvatore Muoio of S. Muoio & Co. and Mr. Zachary McAdoo of The Zanett Group, have been urging MATH’s board to consider liquidation rather than a merger. MATH’s board seems to agree, twice rejecting unsolicited merger proposals, suspending the company’s operations and exploring “strategic alternatives, which could include merger, acquisition, increasing operations in another structure or liquidation.”

S. Muoio & Co. attached to its most recent schedule 13D notice amendment the following letter to the board of MATH:

February 10, 2009

Mr. Douglas M. Pihl
Chairman of the Board
MathStar, Inc.
19075 NW Tanabourne, Suite 200
Hillsboro, OR 97124

Dear Mr. Pihl,

It has come to our attention that MathStar has timely received a proposal from another shareholder to include in the proxy statement for the 2009 Annual Meeting a vote by shareholders to approve a voluntary liquidation of MathStar.

As we stated in our letter of December 12, 2008, we believe that a prompt liquidation of MathStar is in the best interest of the company and its stakeholders. We also continue to believe that pursuit of a merger or alternative transaction flies in the face of the wishes of many of the company’s owners.

As such, the board of directors must act in good faith and cause the proposal to be put on the ballot for the forthcoming annual meeting of shareholders.

Sincerely,

Salvatore Muoio, C.F.A.
Managing Member

cc: MathStar, Inc. Board of Directors

[Full Disclosure: We do not have a holding in MATH. 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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ValueVision Media Inc (NASDAQ:VVTV) auction fails

Posted in Activist Investors, Cannell Capital, Net Net Stocks, Stocks, ValueVision Media (NASDAQ:VVTV), tagged , , , on February 4, 2009| Leave a Comment »

Our posts on ValueVision Media Inc. (NASDAQ:VVTV) attract more attention than any other posts on this site, though we exited the position last year. We initially liked VVTV because it looked like a cheap net net with other potentially valuable assets. That was a mistake. VVTV has huge contractual obligations relative to its current assets.* Those contractual obligations are the difference between VVTV being a cheap net net and having no value in liquidation. Let us repeat that: VVTV has no value in liquidation. VVTV’s stockholders face an absolute loss of capital if VVTV fails. In other words, VVTV’s downside is 100%. We exited on that basis. Really, we should never have opened the position.

VVTV’s best chance to salvage some value for its stockholders lay in the auction process it was conducting. The auction process seems to have been reasonably extensive (the financial advisor contacted 137 parties and executed confidentiality agreements with 39 of them). It was also unsuccessful:

ShopNBC (Nasdaq: VVTV), the premium lifestyle brand in electronic retailing, today announced that the Special Committee of independent members of its Board of Directors has concluded its comprehensive review of strategic alternatives commenced on September 10, 2008, with the assistance of its independent financial advisor, Piper Jaffray & Co.

The Special Committee and Piper Jaffray broadly solicited expressions of interest in a purchase of or strategic relationship with the company and also evaluated several other strategic alternatives, including a distribution to shareholders through a sale of assets and liquidation of the company. While a number of parties engaged in the process and conducted due diligence, the Special Committee did not receive any final bids from any of the parties involved. In addition, the Special Committee concluded that a liquidation of the company would not likely result in any distribution to the company’s shareholders. Therefore, at the recommendation of the Special Committee, the full Board of Directors determined to continue and subsequently to conclude the strategic alternatives review process. As outlined in the accompanying press release, the company plans to continue its implementation of new corporate strategies designed to grow its EBITDA levels, increase revenues and decrease expenses.

Since September 10, 2008, Piper Jaffray contacted a total of 137 parties and executed confidentiality agreements with 39 of them. Initial indications of interest were received from 13 parties and, based on the credibility of their financing plans, four parties were invited to the second round of the sale process, which included in-depth discussions and meetings with management. Of the four, two were strategic parties and two were financial sponsors. Additionally, each of the four parties had access to an extensive electronic data room and the opportunity to conduct a thorough due diligence process.
The company encountered a number of external and internal issues that adversely affected the process, including current market conditions and economic circumstances, difficult retail and credit environments, the company’s recent operating performance and cost structure, uncertainty surrounding the status of the possible redemption of the Series A Redeemable Convertible Preferred Stock held by GE, and the early stage of the company’s cable and satellite distribution negotiations.
The Special Committee stated that after the conclusion of this extensive process, no final bids were received. “Over the last few months, we thoroughly explored a wide range of strategic alternatives and held extensive discussions with a number of interested parties,” commented George Vandeman, Chairman of the Special Committee and member of ShopNBC’s Board of Directors. “While we hoped to find a viable transaction through these discussions, no final bids were received. As a result, the Special Committee concluded and recommended to the Board that the best option at this time is to continue to operate the company as an independent entity.”

Notwithstanding the formal termination of the strategic alternatives process, the Special Committee and Board remain committed to maximizing shareholder value and will pursue any reasonable alternatives that present themselves.

The failure of the company to sell was obviously disappointing for those holding on for the conclusion of the auction process: the stock crashed from $0.52 to $0.28 on the day of the announcement and now trades at $0.26. There are now no other positive catalysts for the company in the near term. Those holding on for a turnaround in this particular situation might wish to consider two points:

  1. A position in VVTV carries the risk of a 100% loss of capital. From the press release: “The Special Committee concluded that a liquidation of the company would not likely result in any distribution to the company’s shareholders.”
  2. Of the four parties invited to the second round of the sale process, which included in-depth discussions and meetings with management, access to an extensive electronic data room and the opportunity to conduct a thorough due diligence process, none submitted a final bid.

*The obvious question is how we missed the contractual obligations. The answer’s not a particularly good one, but here it is: It was a rookie blunder. When we started applying Graham’s formula, we were applying it too narrowly and we missed anything that wasn’t carried in the financial statements, including VVTV’s huge contractual obligations. We figured it out after several commenters pointed it out first. We now make sure to at least consider whether a prospect’s contractual obligations, off-balance sheet arrangements or litigation could have a material effect on the asset value.

[Full Disclosure:  We do not 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. Do your own research before investing in any security.]

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Wesley Gray’s Empirical Search Strategies

Posted in About, Liquidation Value, Net Cash Stocks, Net Net Stocks, Stocks, tagged , on January 30, 2009| Leave a Comment »

Wesley Gray, who occasionally drops by here to provide some high quality commentary, has launched his maiden hedge fund, “Empirical Search Strategies.”

The fund follows a “long-biased micro-cap equity strategy,” which means it invests in “special situations opportunities such as liquidations and companies selling for less than cash value.” Sounds like a good strategy to us.

The fund is down 12.56% since its September launch, which compares favorably with the performance of the Russell 2000 Index (down more than 39% during the same period).

Gray is completing his Ph.D. at the University of Chicago Booth School of Business.

You can read more about Gray’s strategy in the FinAlternatives article Ten Hut! Ex-Marine Launches Long/Short Hedge Fund or Gray’s own website Empirical Finance Research Blog.

Congratulations, Wes. We hope to see you here more often.

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Ikanos Communications Inc (NASDAQ:IKAN)

Posted in Greenbackd Portfolio, Ikanos Communications Inc (NASDAQ:IKAN), Net Cash Stocks, Net Net Stocks, Stocks, tagged , , , , , on January 27, 2009| 2 Comments »

Ikanos Communications Inc (NASDAQ:IKAN) is a net cash stock that has retained a financial advisor to “assist it in exploring and evaluating strategic alternatives to maximize shareholder value.” IKAN closed yesterday at $1.14, giving it a market capitalization of $32.9M. Based on its September 10Q, we estimate the company’s liquidating value to be more than 90% higher at $63.2M or $2.19 per share. IKAN’s liquidating value is predominantly cash, and it has a net cash value of $41.2M or $1.43 per share. With a deeply undervalued stock and a board and management taking proactive steps to realise the value, we think IKAN presents a good investment opportunity.

About IKAN

IKAN is a developer and provider of semiconductors and silicon and software solutions for “interactive triple-play broadband.” Its customers consist primarily of original design manufacturers (ODM), contract manufacturers and original equipment manufacturers (OEMs), such as NEC Corporation, Sagem Communications, Uniquest Corporation and Altima. Its customers include Alcatel-Lucent, Dasan Networks, Inc., Innomedia, Inc. and Millinet Co., Ltd. The company’s investor relations website can be found here.

The value proposition

As its September 10Q demonstrates, IKAN’s income statement is a horror show. The company has consistently generated losses for the last five quarters. IKAN’s balance sheet has some value (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

ikan-summary

$66.2M of IKAN’s $85.8M current asset value is in cash. After deducting total liabilities of $25M, we estimate IKAN’s net current asset value at $60.8M, and its liquidating value at $63.2M or $2.19 per share. IKAN’s net cash value is $41.2M or $1.43 per share.

Contractual commitments and Off-balance sheet arrangements

According to the September 10Q, IKAN does not use off balance sheet arrangements with unconsolidated entities or related parties, nor does it use other forms of off balance sheet arrangements such as special purpose entities and research and development arrangements. Its liquidity and capital resources are not subject to off balance sheet risks from unconsolidated entities. IKAN leases office facilities, equipment and software under “non-cancelable” operating leases. Its contractual obligations as of September 28, 2008 are around $4.7M in total. In the normal course of business, IKAN provides indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant, but IKAN is unable to estimate the maximum potential impact of these indemnification provisions on its future consolidated results of operations.

The catalyst

The company disclosed in its September 10Q that it has retained investment bankers to advise the board about IKAN’s strategic options:

We recently decided to retain Barclays Capital (formerly Lehman Brothers) to provide financial advice regarding potential strategic options for the Company. Such options include, without limitation, financing transactions, acquisitions, strategic partnerships, corporate restructuring and other activities. There can be no assurance that the evaluation of our options will result in the identification, announcement or consummation of any transaction. If the Board of Directors does decide to authorize a transaction, that decision could cause significant volatility in the price of the Company’s outstanding common stock. Moreover, any transactions we do sign may not be acceptable to our stockholders. In addition, our investigation of strategic options may result in added costs, potential loss of customers and key employees as well as management’s distraction from ordinary-course business operations.

There seems to be some appetite for acquisitions in this industry. IKAN competitor Centillium Communications Inc (NASDAQ: CTLM) was acquired in October last year.

Conclusion

At $1.14, IKAN is trading at a little over half its liquidating value of $2.19 per share. With the board proactively seeking a new strategic direction, which might include “financing transactions, acquisitions, strategic partnerships, corporate restructuring and other activities,” we think there’s a good chance that IKAN can realise at least its liquidating value. We’re adding IKAN to the Greenbackd Portfolio.

IKAN closed yesterday at $1.14.

The S&P500 Index closed yesterday at 836.57.

Hat tip to Steven Lobo.

[Full Disclosure:  We do not have a holding in IKAN. 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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