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Archive for the ‘ValueVision Media (NASDAQ:VVTV)’ Category

Greenbackd Portfolio Q1 performance and update

Posted in About, ARC Wireless Solutions (NASDAQ:ARCW), Arrhythmia Research Technology Inc (AMEX:HRT), Audiovox Corporation (NASDAQ:VOXX), Autobytel (NASDAQ:ABTL), Avigen (NASDAQ:AVGN), Axcelis Technologies Inc (NASDAQ:ACLS), Barnwell Industries (AMEX:BRN), Borders Group (NYSE:BGP), Chromcraft Revington (AMEX:CRC), Cobra Electronics Corporation (NASDAQ:COBR), CuraGen Corporation (NASDAQ:CRGN), Ditech Networks Inc (NASDAQ:DITC), Greenbackd, Greenbackd Portfolio, Ikanos Communications Inc (NASDAQ:IKAN), InFocus Corporation (NASDAQ:INFS), Kona Grill Inc (NASDAQ:KONA), MathStar Inc (OTC:MATH), Multimedia Games Inc (NASDAQ:MGAM), Network Engines Inc (NASDAQ:NENG), Neurobiological Technologies Inc (NASDAQ:NTII), Northstar Neuroscience Inc (NASDAQ:NSTR), OrthoLogic Corporation (NASDAQ:CAPS), Soapstone Networks Inc (NASDAQ:SOAP), Stocks, ValueVision Media (NASDAQ:VVTV), Zale Corporation (NYSE:ZLC), tagged , , , , , , , , , , , , , , , , on March 2, 2009| 10 Comments »

March 1, 2009 marked the end of Greenbackd’s first quarter, so we thought we’d take the opportunity to update you on the performance of the Greenbackd Portfolio and the positions in the portfolio, discuss some changes in our valuation methodology since our first post and outline the future direction of Greenbackd.com.

First quarter performance of the Greenbackd Portfolio

We get many questions about the content and performance of the portfolio. We had originally planned to report on a six-monthly basis, but we have now decided to report on a quarterly basis so that we can address these questions on a more frequent basis. Although it is still too early to determine how Greenbackd’s strategy of investing in undervalued asset situations with a catalyst is performing, we’ve set out below a list of all the stocks we’ve included in the Greenbackd Portfolio and the absolute and relative performance of each at the close on the last trading day in our first quarter, Friday, February 28, 2009:

greenbackd-portfolio-performance-2009-q13The absolute total return across the current and former positions as at February 28, 2009 was -3.7%, which was +7.0% higher than the S&P500’s return over the same periods. A negative return for the first period is disappointing, but we are heartened by the fact that we outperformed the market by a small margin.

You may have noticed something odd about our presentation of performance. The S&P500 index declined by 18.0% in our first quarter (from 896.24 to 735.09). Our -3.7% performance might suggest an outperformance over the S&P500 index of +14.3%. We calculate our performance on a slightly different basis, recording the level of the S&P500 index on the day each stock is added to the portfolio and then comparing the performance of each stock against the index for the same holding period. The Total Relative performance, therefore, is the average performance of each stock against the performance of the S&P500 index for the same periods. As we discussed above, the holding period for Greenbackd’s positions has been too short to provide any meaningful information about the likely performance of the strategy over the long term (2 to 5 years), but we believe that the strategy should outperform the market by a small margin.

Greenbackd’s valuation methodology

We started Greenbackd in an effort to extend our understanding of asset-based valuation described by Benjamin Graham in the 1934 Edition of Security Analysis. Through some great discussion with our readers, many of whom work in the fund management industry as experienced analysts or even managing members of hedge funds, we have had the opportunity to refine our process. We believe that what started out as a pretty unsophisticated application of Graham’s liquidation value methodology has evolved into a more realistic analysis of the balance sheet and the relationship of certain disclosures in the financial statements to asset value. We’re not yet ready to send it into space, but we believe our analyses are now qualitatively more robust than when we started and that has manifest itself quantitatively in better performance (more on this below).

The two main differences between our early analyses and our more recent ones are as follows (these are truly cringe-worthy, but that’s why we undertook the exercise):

  1. We didn’t take account of the effect of off-balance sheet arrangements and contractual obligations. This caused us to enter into several positions we should have avoided, including BGP and VVTV.
  2. We were using overly optimistic estimates for the recovery rates of assets in liquidation. For example, we started using 50% of Gross PP&E. We now use 20% of Net PP&E. We now apply Graham’s formula as the base case and deviate only when we believe that Graham’s formulation doesn’t reflect reality.

The effect of these two broad errors in analysis was to create several “false positives,” which is to say that we added stocks to the portfolio that wouldn’t have passed our current, more rigorous standards. The performance of those “false positive” stocks has been almost uniformly negative, and dragged down the performance of the portfolio. As an exercise, we went back through all the positions we have opened since we started the site and applied our current criteria, which are more stringent and dour than our earlier standards. We found that we would not have opened positions in the following eight stocks:

  • BRN (-13.1% on an absolute basis and +4.9% on a relative basis)
  • BGP (-10.8% on an absolute basis and -21.6% on a relative basis)
  • COBR (-17.1% on an absolute basis and +3.6% on a relative basis)
  • HRT (-25.3% on an absolute basis and -9.7% on a relative basis)
  • KONA (+87.8% on an absolute basis and +81.9% on a relative basis)
  • MGAM (-24.2% on an absolute basis and -5.0% on a relative basis)
  • VVTV (-25.0% on an absolute basis and -23.1% on a relative basis)
  • ZLC (-72.0% on an absolute basis and -61.1% on a relative basis)

It seems we got lucky with KONA, but the performance of the balance of the stocks was wholly negative. The performance across all stocks listed above was -12.5% on an absolute basis and -3.9% on a relative basis. Excluding these eight stocks from our portfolio (i.e. treating the portfolio as if we had not entered into these positions) would have resulted in a slightly positive absolute return of +0.7% and a relative performance over the S&P500 of +12.5%. This is a compelling reason to apply the more dour and rigorous standards.

We like to think we’ve now learned out lesson and the more dour and rigorous standards are here to stay. Set out below is an example balance sheet summary (for Chicago Rivet & Machine Co. (AMEX:CVR)) showing our present base case discounts from book value (circled in red):

example-summary-2

Readers will note that these are the same base case discounts from book value suggested by Benjamin Graham in the 1934 Edition of Security Analysis, more fully described in our Valuing long-term and fixed assets post under the heading “Graham’s approach to valuing long-term and fixed assets.” Why we ever deviated from these standards in the first place is beyond us.

Update on the holdings in the Greenbackd Portfolio

Leading on from our discussion above, four of the stocks we picked using the initial, overly optimistic criteria no longer meet our more stringent standards but haven’t yet been removed from the portfolio. We’re going to take our medicine now and do just that. To make it clear, these stocks aren’t being removed because the value has deteriorated, but because we made a mistake adding them to the portfolio in the first place. As much as we’d like to treat these positions as void ab initio (“invalid from the beginning”), we’re not going to do that. We’ve made a full accounting of the impact they’ve had on the portfolio in the First quarter performance of the Greenbackd Portfolio section above, but we don’t want them affecting our future performance. The stocks to be removed from the Greenbackd Portfolio and their absolute and relative returns are as follows:

  • BRN (-13.1% on an absolute basis and +4.9% on a relative basis)
  • HRT (-25.3% on an absolute basis and -9.7% on a relative basis)
  • MGAM (-24.2% on an absolute basis and -5.0% on a relative basis)
  • COBR (-17.1% on an absolute basis and +3.6% on a relative basis)

We’ll provide a more full discussion of where we went wrong with these stocks at a later date, but suffice it to say for present purposes that all were errors from the second bullet point in the Greenbackd’s valuation methodology section above (i.e. overly optimistic estimates for the recovery rates of assets in liquidation).

There are fifteen stocks remaining in the Greenbackd Portfolio:

Eight of these positions (ABTL, ACLS, ARCW, CAPS, CRC, CRGN, NSTR, and VOXX) are trading at or below our nominal purchase price and initial valuations. The remaining seven positions (AVGN, DITC, IKAN, MATH, NENG, NTII, and SOAP) are trading above our intial purchase price but are still at varying discounts to our valuations. We’ll provide a more full update on these positions over the course of this week.

The future of Greenbackd.com

We are going to trial some small changes to the layout of the site over the next few weeks. We’ve already made the first change: the newest comments now appear at the top of the list. We’ll also be amalgamating some pages and adding some new ones, including a page dedicated to tracking the portfolio with links to the analyses. We’re also considering some options for generating income from the site. At the moment, Greenbackd is a labor of love. We try to create new content every week day, and to get the stock analyses up just after midnight Eastern Standard Time, so that they’re available before the markets open the following day. More than 80% of the stocks that are currently trading at a premium to the price at which we originally identified them (NTII, SOAP, IKAN, DITC, NENG, MATH and AVGN) traded for a period at a discount to the price at which we identified them. This means that there are plenty of opportunities to trade on our ideas (not that we suggest you do that). If you find the ideas here compelling and you get some value from them, you can support our efforts by making a donation via PayPal.

We look forward to bringing you the best undervalued asset situations we can dig up in the next quarter.

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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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Welcome back for 2009 and update on Greenbackd Portfolio holdings

Posted in About, Autobytel (NASDAQ:ABTL), Avigen (NASDAQ:AVGN), Barnwell Industries (AMEX:BRN), Borders Group (NYSE:BGP), Chromcraft Revington (AMEX:CRC), Greenbackd, Greenbackd Portfolio, InFocus Corporation (NASDAQ:INFS), Kona Grill Inc (NASDAQ:KONA), MathStar Inc (OTC:MATH), Stocks, ValueVision Media (NASDAQ:VVTV), Zale Corporation (NYSE:ZLC), tagged , , , , , , , , , on January 5, 2009| Leave a Comment »

Welcome back to Greenbackd and happy new year for 2009. We hope that you had a good break. There have been a number of positive developments in the companies we discussed last year. Set out below is an update on those positions we had open in the Greenbackd Portfolio at the close of 2008:

  • Trilogy has increased its stake in ABTL to 7.4%. ABTL is up 18.6% since our first post but we are maintaining our position because we think it’s still worth 50% more.
  • BVF has endorsed the MNOV offer for AVGN. AVGN is up 20% since our first post but we are holding on because we think the merger presents an opportunity for AVGN’s stockholders to receive around $1.20 per share in cash (almost 60% higher than AVGN’s $0.78 close Friday) and the possibility of “an extraordinary, uncapped return” if MNOV is successful post-merger.
  • BRN has filed its September 10Q and we believe that its liquidation value has increased from $6.52 per share to $6.91 per share. The stock is up 41% since our initial post. We still see the liquidation value some 40% higher than BRN’s Friday close of $4.95, so we will maintain our position.
  • CRC is down 6.3% from our initial post. Other than the retirement of the CFO, we have no other news to report. With CRC in a liquidity crisis, the retirement of the CFO is a worrying development. That said, we see CRC’s liquidation value at around $2.45 per share, which is more than 450% higher than its Friday close of $0.43, so we propose to maintain our position.
  • A group of “high-powered executives” plan to save INFS from “New York sharks.” The stock is up 15.9% to $0.73 since our initial post. Its liquidating value is still some 58% higher at $1.15 per share and so we are maintaining the position.
  • We’ve closed our position in KONA for an 88% gain in 18 days.
  • A new activist investor has filed a 13D for MATH and is lobbying the company to liquidate. MATH is up 17.7% since our first post but it’s still trading at half its liquidating value and a little more than half its net cash backing, so we’re maintaining our position.
  • ZLC is off 16.8% from our initial post. We’ve estimated its liquidation value at $7.63 per share, which is still 90% higher than its $4.01 close Friday, so we are maintaining our position in ZLC.

Although it is still too early to determine how Greenbackd’s strategy of investing in undervalued asset situations with a catalyst is performing, we’ve set out below a list of all the stocks we’ve included in the Greenbackd Portfolio and the absolute and relative performance of each. This is the standardized format we propose to adopt to track Greenbackd’s performance at 6-monthly intervals:

Current holdings (As at January 5, 2009)

greenbackd-portfolio-current-holdings-performance

Former holdings (As at date of our closure of the position)greenbackd-portfolio-former-holdings-performance

The absolute total return across the current and former positions as at January 5, 2009 is 14.2%, which is 8.4% higher than the S&P500’s return over the same periods. As we discussed above, the holding periods for Greenbackd’s positions has been too short to provide any meaningful information about the likely performance of the strategy over the long term (2 to 5 years), but we believe that the strategy should outperform the market by a small margin.

We look forward to bringing you the best undervalued asset situations we can dig up in 2009.

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VVTV quarantined until further notice

Posted in Activist Investors, Cannell Capital, J. Carlo Cannell, Stocks, ValueVision Media (NASDAQ:VVTV), tagged , , on December 22, 2008| 10 Comments »

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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ValueVision Media Inc (NASDAQ:VVTV) Q3 Update

Posted in Activist Investors, Cannell Capital, J. Carlo Cannell, Net Net Stocks, Stocks, ValueVision Media (NASDAQ:VVTV), tagged , , , , , , on December 17, 2008| 3 Comments »

ValueVision Media Inc. (NASDAQ:VVTV), which we posted about on Wednesday last week, has filed its November 10Q. In our earlier post, we wrote that VVTV 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 valuable assets and noted activist investor Carlo Cannell of Cannell Capital has an activist position in it. The company also seemed to us to be taking steps to realise that value, publicly announcing that it has appointed a special committee of independent directors to “review strategic alternatives to maximize stockholder value.” The strategic alternative the company was pursuing was an auction that the company expected to complete by February 2, 2009. At $1.66 per share, VVTV’s liquidating value is still some 300% higher than its close yesterday of $0.41, which should provide a good margin of safety until the auction can be completed.

Updated value proposition

When we first looked at the company we wrote that we estimated its liquidating value, which included its property, FCC broadcasting licence, NBC trademark licence agreement and the Cable distribution and marketing agreement, at around $2.23 per share. We now see that value lower at $1.66 per share due to the increase in liabilities from $74M to $94M, which equates to an increase of $0.57 per share. Set out below is our updated summary analysis (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):

vvtv-summary-q3-update

At its close of $0.41, VVTV is trading at 25% of its liquidating value.

The Catalyst

Given the substantial deterioration in the company’s liquidating value in the last quarter (and in the last few years), we were expecting an update on the auction, which the company has not provided in this 10Q. The company has simply restated its earlier disclosure almost verbatim:

On September 11, 2008, our board of directors announced that it had appointed a special committee of independent directors to review strategic alternatives to maximize shareholder value. The committee currently consists of three directors: George Vandeman, who serves as the committee’s chairman, Joseph Berardino and Robert Korkowski. The special committee retained Piper Jaffray & Co., a nationally-recognized investment banking firm, as its financial advisor. There can be no assurance that the review process will result in the announcement or consummation of a sale of our company or any other strategic alternative.

The company removed the final sentence from the last disclosure:

We do not intend to comment publicly with respect to any potential strategic alternatives we may consider pursuing unless or until a specific alternative is approved by our board of directors.

This may have been removed because Mr. George Vandeman, chairman of VVTV’s special committee of independent directors charged with administering the stategic review, made public statements that VVTV has received bids from a number of companies and instructed its advisers to invite several of the proposed buyers to take part in the next phase of the process.

There have been no further public statements from Cannell Capital. We will provide an update if one is made.

Conclusion

Provided that management will sell the company in the auction process if it receives a sensible bid, this still seems to us to be one of the better opportunities available in the market. Although it has deteriorated since the last 10Q, at $1.66 per share, VVTV’s liquidating value is still some 300% higher than its close yesterday of $0.41. Cannell Capital has previously publicly stated that he sees the value as high as $5.98 per share. The company seems to be taking steps to realise that value through an auction that it expects to complete by February 2, 2009. Any investor intending to take a position should bear in mind the company’s disclosure that “there can be no assurance that the review process will result in the announcement or consummation of a sale of our company or any other strategic alternative.”

VVTV closed yesterday at $0.41.

The S&P 500 Index closed yesterday at 913.18.

[Disclosure: We 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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ValueVision Media Inc. (NASDAQ:VVTV)

Posted in Activist Investors, Cannell Capital, J. Carlo Cannell, Stocks, ValueVision Media (NASDAQ:VVTV), tagged , , , , on December 10, 2008| 7 Comments »

ValueVision Media Inc. (NASDAQ:VVTV) is exactly the kind of opportunity we like to find: a net net stock with a management taking active steps to rectify the situation. At yesterday’s close of $0.44, VVTV has a market capitalization of $14.8M, which is half its net current asset value of around $29.5M, or $0.88 per share and 20% of our estimate of its value in liquidation of around $74.8M or $2.23 per share. After receiving some full and frank advice criticism on an August earnings call, VVTV’s board of directors has publicly announced that it has appointed a special committee of independent directors to “review strategic alternatives to maximize stockholder value.” The company is currently conducting an auction expected to close in February 2009. The auction has uncovered a number of interested bidders, including GE Capital Equity Investments (most recent 13D filing here), which owns 13.7% of the company. Activist investor Carlo Cannell of Cannell Capital LLC has disclosed an interest in the company and has also sent a number of entertaining letters to the CEO (which we’ve reproduced below).

About VVTV

According to its website, VVTV is a direct marketing company that markets, sells and distributes products directly to consumers through various forms of electronic media and direct-to-consumer mailings. The company’s principal electronic media activity is the television home shopping business, which uses on-air spokespersons to market brand name merchandise and private label consumer products at competitive prices. 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. In addition, ValueVision Media distributes its programming through a television station in Boston, Massachusetts. It also markets and sells an array of merchandise through http://www.shopnbc.com and http://www.shopnbc.tv.

The value proposition

According to its most recent 10Q, VVTV lost $15.7M in the August quarter, which continues a string of five quarterly losses. Operating cash flow has also turned negative for the August quarter, which is particularly concerning. The company does have value on the balance sheet, however, as our summary analysis demonstrates (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):

vvtv-summary1

With $59.7M in cash and equivalents, $55.7M in receivables and $55.6M in inventory, VVTV’s is trading at a substantial discount to its current assets alone. The company has $1.78 per share in cash. We’ve discounted the receivables by 20% to $44.6M or $1.33 per share and the inventory by a third to $37.3M or  $1.11 per share. Subtracting all liabilities of $74M or $2.20  per share and the preferred stock of $44.1M or $1.31 per share gives us a net current asset value for VVTV of around $29.5M or $0.88 per share. At yesterday’s closing price of $0.44, VVTV is trading at a 50% discount to its net current asset value alone.

VVTV has other valuable assets, including substantial property, its FCC broadcasting licence, its NBC trademark licence agreement and its Cable distribution and marketing agreement. We have no idea how to value these assets, but discounted by an arbitrary 50%, they are worth an additional $45.3M or $1.35 per share. This puts our estimate of the company’s liquidating value at around $74.8M or $2.23 per share, which means that VVTV is trading at 20% of its value in liquidation.

Carlo Cannell suggested in the October 27 letter to the CEO (reproduced below) that VVTV’s value is much higher. He thinks the company is “worth closer to $6.00 per share, exclusive of the $120 million net operating loss and substantial intangible value in the broad 72 million reach enjoyed by ShopNBC.” Cannell’s analysis is as follows (all figures are $/share figures):

Net Working Capital – $3.73 (Includes $2.39/share in Cash. Excludes NOL and value of Shop NBC.)
Headquarters – $1.03
Television Station – $0.95
NBC License Agreement – $0.27
Total Asset Value – $5.98

VVTV is trading at less than 7% of Cannell’s valuation.

The catalyst

VVTV’s stock is down about 91% ($5.53 per share) this year. During VVTV’s second-quarter conference call in August, shareholders lambasted management and called for the sale of the company. As a result, VVTV disclosed in its 10Q that it was pursuing “strategic alternatives”:

On September 11, 2008, our board of directors announced that it had appointed a special committee of independent directors to review strategic alternatives to maximize stockholder value. The committee currently consists of two directors: George Vandeman, who will serve as the committee’s chairman, and Robert Korkowski. We expect to appoint an additional independent director to the board, who we anticipate will serve on the special committee. The special committee retained Piper Jaffray & Co., a nationally-recognized investment banking firm, as its financial advisor. There can be no assurance that the review process will result in the announcement or consummation of a sale of our company or any other strategic alternative. We do not intend to comment publicly with respect to any potential strategic alternatives we may consider pursuing unless or until a specific alternative is approved by our board of directors.

On September 24, 2008 Cannell Capital amended an earlier 13G filing for VVTV in this 13D filing, annexing an entertaining letter from Carlo Cannell to Mr. John Buck, VVTV’s CEO (reproduced below):

Dear Mr. Buck

Cannell Capital LLC (“Cannell”), an investment adviser and General Partner to several private investment funds and partnerships, which own shares in ValueVision Media Inc. (“VVTV”), is amending its reporting requirements to reflect a more active stance.

Congratulations on your September 11, 2008 decision to appoint “a special committee of independent directors to review strategic alternatives to maximize shareholder value.” Cannell interprets this to mean that the representatives of the shareholders (aka “Directors”) have finally elected to monetize the assets on behalf of its owners.

ValueVision’s stock price is $2.20 per share. Based upon analysis our from Craig-Hallum it is our opinion the company is worth closer to $6.00 per share, exclusive of the $120 million net operating loss and substantial intangible value in the broad 72 million reach enjoyed by ShopNBC.(1)

                                                    $/Share
                                                    -------

                 Net Working Capital*                $3.73
                 Headquarters                        $1.03
                 Television Station                  $0.95
                 NBC License Agreement               $0.27
                 Total Asset Value                   $5.98

                 *Includes $2.39/share in Cash. Excludes NOL
                 and value of Shop NBC.

We will be watching carefully to make sure the committee’s actions are congruent with the interests of shareholders. We are concerned that the hiring of Piper Jaffray & Co. may be a ploy to continue to justify its pattern of wheel spinning and protection of jobs over what is best for the owners of the business. For example, on Monday, September 15, 2008 we were shocked to learn that your agent (Piper Jaffray & Co.) called to “permission” when and to whom we might talk at our Company. This is characteristic of Stalinist Russia, not America. This does not have a good taint to it. You may try to muzzle other investors, but not Cannell. It bites.

You further have called for representatives to the Board of Directors. We have several candidates in mind. Two will be contacting you shortly to present their credentials directly.

It is amazing to us how much value has been destroyed under your stewardship. That you would have to hire an agent at all to advise you on what should have been done long ago is shameful.

Godspeed!

J. Carlo Cannell
Managing Member
Cannell Capital LLC

————————-
(1) Robert J. Evans, Craig-Hallum Capital Group, 8/25/08

Cannell sent a follow up letter on October 27, 2008, which was annexed to this 13D filing and is reproduced below:

Dear Mr. Buck

Thank you for taking the time to speak with us this month. I imagine that you are busy consulting with sundry advisors as to ways to maximize shareholder value, including, but not limited to the immediate liquidation of our assets.

Regrettably, at this rate there will not be much value to realize. The price of the common stock has declined 65% this month alone.

I am sorry that you feel the name of the broker hired to sell our buildings at 6740, 6680 and 6690 Shady Oak Road, Eden Prairie, MN 55334 to be material non-public information. I disagree.

Given the slope of shareholder wealth destruction and given the inconsistency of information delivered to us by sundry directors and officers of our Company I would like to suggest that you deliver a special dividend of $1.20 per share to its owners, the shareholders.(1) Although I can’t speak for all shareholders, it is my opinion that most would see copious opportunities to allocate their capital to other stewards of this capital than that of the current board of VVTV.

If the board agrees with me, please tell me by Halloween when my investors and other shareholders might get their dividend. (Time is of the essence. If Senator Barack Obama is elected President the taxation of dividends is likely to become less favorable.) If you disagree, please state the reasons behind your opposition.

In the case of the latter outcome, Cannell Capital LLC will review your opposition and, if appropriate, we will evaluate our options in calling a special meeting of all shareholders to vote upon whether: (i) our cash should be returned to its owners or (ii) the existing board should be allowed to continue to manage it.

Best regards!

Sincerely

J. Carlo Cannell
Managing Member

————————-
(1) As of August 2, 2008, VVTV had $79.4 million of cash – $48.8 million of liquid, $10.9 million of short term equivalent and $20.5 million of auction rate securities (which should likely be discounted by $1.5 million). That is $2.36 per share. I like the idea that returning this cash is tax efficient and will deter management from performing more “science projects.” More pressure is good in my opinion.

On a conference call with analysts to discuss VVTV’s third quarter results, Mr. George Vandeman, who is chairman of VVTV’s special committee of independent directors, said the company had received bids from a number of companies and instructed its advisers to invite several of the proposed buyers to take part in the next phase of the process. Final bids would be due after that phase is completed. One of those interested bidders is GE Capital Equity Investments, which disclosed its holding in this November 17, 2008 13D filing. Vandeman also said the committee was “evaluating other alternatives to boost value, including share buybacks, paying a dividend and monetizing its balance sheet.”

The special committee and its financial advisors continue to review the full range of strategic alternatives available to the company. We anticipate that the special committee will conclude its review by the end of the fiscal year.

VVTV’s fiscal year ends February 2. These are all promising developments for VVTV.

Conclusion

This seems to us to be one of the better opportunities available in the present market. VVTV, a net net stock with additional valuable assets, is very cheap. At yesterday’s close of $0.44, VVTV has a market capitalization of $14.8M, which is half its net current asset value of around $29.5M, or $0.88 per share. Including the other assets – its property, FCC broadcasting licence, NBC trademark licence agreement and the Cable distribution and marketing agreement – we estimate VVTV is worth closer to $2.23 per share. Cannell Capital sees the value as high as $5.98 per share. The company also seems to be taking steps to realise that value, publicly announcing that it has appointed a special committee of independent directors to “review strategic alternatives to maximize stockholder value.” Currently, that means that the company is conducting an auction with a number of interested bidders but it may also mean the company buys back shares, pays a dividend or monetizes its balance sheet. The committee expect to complete this process by February 2, 2009, which means that this opportunity won’t be around for much longer.

VVTV closed yesterday at $0.44.

The S&P 500 Index closed at 888.67.

[Disclosure: We 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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