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Posts Tagged ‘Cannell Capital’

J. Carlo Cannell runs Cannell Capital, the long/short activist investment firm he founded in 1992 with just $600,000 under management. Cannell’s ideas are as unconventional as the man himself – he’s a Princeton liberal arts major, then freelance journalist in Fiji – and he describes himself as a “fox, not a hedge hog” (referring, I guess, to either the Isaiah Berlin essay or the Philip Tetlock book). Cannell has also taken the unconventional step of returning money to investors. In 2004, when funds under management had grown to $765 million, Cannell started returning funds to investors and stepped down to spend more time with family, saying:

The mortality rate of hedge funds with more than a billion dollars of assets under management is very high. I think about that every time we rise to that level through retained earnings. I would like to think that we practice prudence over greed.

He left only briefly, returning just six months later to manage the three Cannell Capital funds, the Cuttyhunk Fund, the Tonga Fund and the Anegada Fund, but funds under management were considerably reduced: By September 30, 2009, Cannell had trimmed his holding to approximately $168 million, investing in 85 companies. (See here for more on Cannell’s background, and investment approach)

Given his unconventionality, the awesome oddness of Cannell’s presentations at the Value Investors Congress should come as no surprise. For example, Cannell’s 2009 presentation was called Hydrodamalis Gigas, the Steller’s Sea Cow, which we hunted to extinction just 27 years after discovering it:

Steller’s Sea Cow: Delicious, and easy to catch.

How does the Sea Cow relate to investing? Cannell looks for companies that, like the Steller’s Sea Cow, have a difficult time adapting to a changing environment. He gave as an example a restaurant stock, which would have a more difficult time adapting to a slowdown in the economy than an oil and gas company. In the 2010 New York Value Investing Congress, Cannell expanded on his restaurant theme. He compared his search for short candidates in the restaurant industry to picking up roadkill on the side of the freeway, saying that he avoids them if they still have any life left, but if they’re dead, he grabs his shovel and sticks them in his portfolio. Another short anecdote: I was hanging out in the audience at the Pasadena Value Investing Congress in 2010 when Carlo sat down beside me. We had quick chat and he was lovely guy. Another hedge fund manager lamented to Cannell about the high cost of activist campaigns. Cannell’s response was words to the effect, “My activist campaigns are cheap. All I spend is the cost of the stamp to send a letter.” That’s really deep value investing.

Cannell is speaking again at this year’s Spring Value Investing Congress in Omaha, NE on May 6 and 7. (The Spring event was previously held in Pasadena, CA, but was moved because Charlie Munger no longer holds the Westco meeting in Pasadena). This year’s event is conveniently scheduled immediately after the Berkshire Hathaway Annual meeting at the CenturyLink Center (formerly the Qwest Center). Register here by December 19th and you’ll save $1,800 from the $4,595 others will pay later to attend. Remember to use Discount Code O12GB1.

I’ve attend the last four Value Investing Congresses, and can highly recommend them. There’s nothing better than seeing an investor you admire explaining live his or her process for finding stocks. There’s also a chance they’ll sit down beside you in the audience. For more information on Cannell or the other speakers, click here.

Disclosure: I get a commission if you buy through this link. You should know that every little bit helps keep me in the style to which I’ve become accustomed, by which I mean I buy the third cheapest bottle of vintage Champagne on the wine list, and all of my caviar is Sterlet. Above all, I am a deep value guy. Know that the commission is well spent.

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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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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), 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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