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Posts Tagged ‘ValueVision Media Inc (NASDAQ:VVTV)’

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 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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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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