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A Stock Where Neither the Business nor the Price Matters
Posted by: Geoff Gannon (IP Logged)
Date: April 18, 2012 01:36PM

Someone who reads my articles asked me this question:

Geoff,

Emerson Radio (MSN).

I haven't looked too deeply at the company yet. They've discontinued certain businesses and I haven't adjusted any of these numbers for any of that. There is some issue with the holding company being restructured and there was talk of the company itself reorganizing its operations, but I haven't read further yet to be able to comment intelligently on that. The good thing is the mgmt doesn't seem to think it's a keen acquirer of other businesses and doesn't seem bent on blowing the cash on something stupid. The bad thing is, they don't seem to care for distributing it to shareholders, either.

It's not a NCAV, as with most NCAVs, that I'd be excited to hold in my portfolio. And I have no idea what good things could happen to it (and I'm still trying to sort out what bad things could happen to it)... but it doesn't seem terribly risky, especially if it could be bought even closer to net cash. I'm almost tempted to hang a bid out there around $1.41/share even if there's little chance of it being filled at the moment.

I am curious if you've read up on the company at all and could quickly tell me if I am wasting my time considering it, and why?

- Taylor

Yeah. You’re wasting your time.

And, no, this isn’t going to be quick. It’s going to be very, very slow. You’ll see why in a minute. Anyone who isn’t up for 4,000 words of old magazine articles, SEC reports, lawsuits, etc. should turn back now.

Look, I’m not saying Emerson Radio’s stock couldn’t return 400% sometime soon. It could totally do that. You could easily make a $2 or $4 or $8 profit on this $2 stock. I can see that happening. Maybe the odds even say you should make the bet. But I would never do it.

So I'm not saying it's a bad bet. It's so cheap that I can't say that.

What I can say is that Emerson Radio is not what you think it is. Nobody is concerned about the business. It may not be a great business. But business risk is the least of your problems here.

I’m familiar with the company. It has been a net-net in the past. But I never bought it. There’s a good reason for this. More on that later.

I’m also familiar with the products. There are a lot of them at Wal-Mart (WMT), Target (TGT), etc. Maybe most of what you see in the microwave aisle of a Target is Emerson.

As far as investors are concerned, Emerson Radio is effectively a Chinese company. Not an American company. The stock price reflects this.

The Emerson brand is old. And people do know it. Maybe not people who are as young as you. But my parents and their parents know Emerson. And now people who shop at Target know Emerson. It’s similar to using Zenith as the name of a TV or something like that. Emerson was once a well-known American brand.

The concern here is that you get wiped out completely because of management.

I remember it being talked about on one of The Value Guys shows – I think it was near the end of last year. And they said it best when they noted the company was selling at an EV/EBITDA of something like 1 or less than 1 at the time.

So the question is: Will this company be around in one year?

And, then, if the cash that’s reducing the EBITDA might not be around – the question becomes what is the company’s earnings relative to its market cap? And can the company stick around for at least that many years.

Anyway, The Value Guys – like you – talked a lot about the business and people’s concerns about that business and so on.

(They’re older than you. So they recognized the Emerson name. And they knew it was a really old brand.)

They focused on that.

But this stock has traded at an EV that is about 1 times EBITDA (and 3 to 4 times market cap). So, nobody is concerned primarily about the business. They are concerned about fraud and business failure.

I should quickly note that you can find companies without these problems with an EV/EBITDA that low. I’m definitely not saying you should pass on a company with an EV/EBITDA around 1. Sometimes you can even find perfectly decent little companies with a negative EV. I found five in Japan with negative enterprise values in 2011. And I found a perfectly decent, perfectly safe – in my opinion – American stock with a negative enterprise value in 2010 and another one in 2012.

But it’s a bit of a needle in a haystack situation. There are probably 60 U.S. companies with a negative enterprise value right now. Maybe six of them are perfectly safe companies. Most are unprofitable. And there are as many Chinese reverse merger frauds on the list of negative EV stocks right now as there are American companies I’d call perfectly decent.

The rest of the negative EV group is a mix of businesses – many of them have never turned a profit. A few may never turn a profit in the future.

Emerson doesn’t have a negative EV. But it’s awfully close. It’s really in the same category as those stocks. And it’s reason for trading this low are very similar to why those reverse merger Chinese stocks trade so low.

There are a lot of warning flags with Emerson Radio. Not in the 10-year financials. Not anywhere you’ll see on websites. But in the actually filings.

The SEC reports are chock full of some eye-popping paragraphs.

Like this one from the 14A:

“..The Grande Holdings Limited (Provisional Liquidators Appointed) (“Grande”) had advised the Company that one of its indirect subsidiaries held beneficially 15,243,283 shares or approximately 56.2% of the outstanding common stock of Emerson. That number of shares includes 3,391,967 shares (the “Pledged Shares”) which, according to public filings made by Deutsche Bank AG (“Deutsche Bank”) in March 2010 had previously been pledged to Deutsche Bank to secure indebtedness owed to it. In February 2011, Deutsche Bank filed a Schedule 13G with the U.S. Securities and Exchange Commission (“SEC”) stating that Deutsche Bank had sole voting and sole dispositive power over the Pledged Shares (which represent approximately 12.5% of the Company’s outstanding common stock). The Company believes that both Grande and Deutsche Bank have claimed beneficial ownership of the Pledged Shares. As of October 14, 2011, the Company has not been able to verify independently the beneficial ownership of the Pledged Shares.”

And this description of the Chairman:

“Christopher Ho has served as the Company’s Chairman since July 2006. Mr. Ho is presently the Chairman of Grande, a Hong Kong based group of companies engaged principally in the distribution of household appliances and consumer electronic products and licensing of trademarks. Grande indirectly, through a wholly-owned subsidiary, owns the controlling interest in the Company’s outstanding common stock. Mr. Ho also currently serves as Chairman of Lafe Corporation Limited, a company listed on the Singapore Exchange.”

You can look up Lafe to find out more about that company and Ho. It is a publicly traded company.

But Lafe is only the start of this story.

Then there is this description of their CEO:

“Duncan Hon, a director of the Company since February 2009, has been the Company’s Chief Executive Officer since August 2011 and, prior to that, was the Company’s Deputy Chief Executive Officer since November 2009. In addition, Mr. Hon was appointed as a director of Grande in January 2011. Mr. Hon also serves as Chief Executive Officer of the Branded Distribution Division of Grande. Mr. Hon currently serves as a director and Vice Chairman of the board of directors of Sansui Electric Co. Ltd., which is listed on the Tokyo Stock Exchange, and also serves as a director of several of Grande’s non-listed subsidiaries.”

Remember those names: Ho, Grande, Lafe, Sansui. We might be Googling them later.

If you look at the amount of beneficial ownership, you see there is 56.2% of the company owned by Grande. Several people have relationships with Grande and so are shown as if they control 56% of the company or 12.5% in Deutsche Bank’s case. All of the shares shown except for the 50,000 shares owned by Eduard Will are owned by Grande. So, this is a controlled company.

Again, there is the note about Deutsche Bank and Grande:

Grande has advised the Company that, as of October 14, 2011, one of its indirect subsidiaries, S&T International Distribution Ltd. (“S&T”), held beneficially 15,243,283 shares, or approximately 56.2% of the outstanding common stock of Emerson (the “Shares”). As the sole stockholder of S&T, Grande N.A.K.S. Ltd. (“N.A.K.S.”) may be deemed to own beneficially the Shares. As the sole stockholder of N.A.K.S., Grande may be deemed to own beneficially the Shares. Mr. Ho is one of the beneficiaries under a discretionary trust which owns approximately 70% of the capital stock of Grande...Deutsche Bank filed a Schedule 13G with the SEC stating that Deutsche Bank had sole voting and sole dispositive power over the Pledged Shares (which represent approximately 12.5% of the Company’s outstanding common stock)... The Company believes that both Grande and Deutsche Bank have claimed beneficial ownership of the Pledged Shares. As of October 14, 2011, the Company has not been able to verify independently the beneficial ownership of the Pledged Shares.”

Ho owns 70% of Grande and Grande owns 53% of Emerson. So, Ho controls Grande and Ho controls Emerson. However, Grande had pledged shares of Emerson to Deutsche Bank which Deutsche bank claims it has sole power over. Ho’s economic interest in Emerson is about 37%. Which certainly aligns his interests with shareholders.

Or does it?

Hold that though. First let’s just note that three of the seven board members of Emerson are employees of Grande. And the chairman and CEO of Emerson are both employees of Grande.

So what is the story with Grande?

First of all, the company says it has not been able to verify independently the beneficial ownership of the pledged shares. However, Emerson basically is Grande. The company is Grande. Ho and Hon and Fok work for Grande.

Even more than that Hon “also serves as chief executive office of the Branded Distribution Division of Grande.” Well, Grande owns 53% of Emerson and Grande describes its business as: “The distribution of household appliances and consumer electronic products and licensing trademarks.”

But that’s Emerson’s business!

So Emerson’s business is Grande’s business. And Emerson’s CEO is Grande’s “Branded Distribution Division” CEO.

Sounds a lot like they are the same company.

On corporate governance Emerson says this:

“In March 2011, after final court approval and associated appeal and implementation periods of the settlement agreement that the Company entered into to bring to a close a shareholder derivative lawsuit, the Company updated its policy regarding the review and approval of transactions with related parties...”

Last year, their CEO – Adrian Ma – resigned. The press release came out on Aug. 11, 2011. He resigned from the CEO job and board effective August 8. So, I guess he resigned effective immediately. This is how they dealt with that:

“...as of August 31, 2011, Duncan Hon, age 50, was appointed as Chief Executive Officer of Emerson Radio Corp....Mr. Hon has served as the Company’s Deputy Chief Executive Officer since November 2009 and as a director since February 2009. He continues in his role as a director of the Company. Concurrent with Mr. Hon’s appointment as Chief Executive Officer of the Company, the position of Deputy Chief Executive Officer was eliminated.”

“The Company also announced that its Board of Directors appointed Mr. Vincent Fok, age 41, as a director of the Company, to fill a vacancy on the Board. Mr. Fok is a senior managing director of FTI Consulting (Hong Kong) Limited, a global advisory firm assisting companies to protect and enhance enterprise value, and was appointed by the High Court of Hong Kong on May 31, 2011 as one of two Joint and Several Liquidators over The Grande Holdings Limited (Provisional Liquidators Appointed), which indirectly, through a wholly-owned subsidiary, is a controlling shareholder of the Company.”

Grande Holdings has a website. They also have a Wikipedia page. Wikipedia info isn’t always reliable. So I’m not going to link to it. But I can’t stop you from Googling the name Grande Holdings and clicking on that Wikipedia link, can I?

It was once a pretty big company. They have a history of cross ownership, repeated bankruptcies, last second changes in corporate ownership, and shifting assets away from creditors.

In 2002, Business Week wrote an article about James Henry Ting’s business empire, its collapse, and the shifting of assets to Grande.

Here is a quote:

“Officers at one company may know how Ting's empire fell: Grande Holdings Ltd., founded by none other than Ting's old associates, billionaire Stanley Ho and Christopher Ho. In November, 1999, control of many of Akai's remaining assets mysteriously shifted to Grande--and without any notification to the Hong Kong Stock Exchange, creditors, the courts, or other regulatory authorities. The deal was done through a simple, seemingly hastily prepared four-page management agreement. Creditors say they only learned of the change in corporate ownership in September, 2000, when Grande presented 54 boxes of Akai records to liquidators. Grande Holdings executive director Samuel K. Yuen denied in a brief telephone interview that Grande had taken over Akai, saying that the management agreement had been "misunderstood." Whatever the case, Grande now does control key Akai assets, including the Zhongshan Tomei TV factory. In fact, Ting, in conversations two years ago, asserted that Grande was in control of his former empire.”

For the relationship between Grande and Emerson – and especially their history – you can read this article posted at NJ.com (Emerson is a New Jersey company):

The latest chapter in the Emerson saga began nearly three years ago, when Grande Holdings, a Hong Kong-based group of businesses founded by the Chinese gambling magnate Stanley Ho, started buying Emerson stock.

By August 2006, Grande had bought up more than 50 percent of Emerson's shares, and its chairman, Christopher Ho -- no relation to Stanley Ho -- was named Emerson's chairman. Then, Emerson started cutting deals with Grande subsidiaries.

That's when the trouble began.

During the past year, Emerson has been subject to an internal probe of some $50 million in off-the-book loans it made to Grande affiliates. Those dealings have made the company the target of a shareholder lawsuit, which accuses Emerson of breaching its fiduciary duty through "unfair, self-dealing transactions." And the flap has led to the exit of four board members -- three in the past month.

Emerson, headquartered on the second floor of a nondescript office building in Parsippany, now faces delisting by the American Stock Exchange for a lack of independent directors on the board's audit committee. Its stock has fallen below $1, down 70 percent from its 52-week high of $3.15. And the company has had to pay monetary penalties to its lender, Wachovia, for breaching its loan covenants.

Troubles continue. While the company has said in filings with the Securities and Exchange Commission that Grande subsidiaries have repaid tens of millions of dollars, a former director said money is still owed and alleges the questionable conduct continues.

"Emerson was exploited as a financial resource by Grande," W. Michael Driscoll, a former director and chair of the board's audit committee, wrote in his July 14 resignation letter.

"Emerson's losses from past related-party transactions have not yet been fully compensated," said the letter, included in company filings with the SEC. "More recent problematic transactions have occurred, but have not yet been fully reviewed, much less redressed. I lack confidence that the highest levels of Emerson management can be trusted to police themselves."

As mentioned in the article, Michael Driscoll was the chairman of the company’s audit committee. He resigned in July 2008. And wrote this letter of resignation:

“This letter provides notice to the Emerson Radio Corp. of my resignation from its Board of Directors, effective immediately. I regret that this has become necessary, and I provide here a summary of my rationale.

Upon joining the Board, I was optimistic regarding prospects for Emerson under its new management... Those positive impressions were disabused upon my discovery of egregious related party transactions that were planned and executed by Grande-affiliated directors and employees, to Emerson’s terrible detriment. Rather than gaining opportunities from Grande, Emerson was exploited as a financial resource by Grande in ways both large and small, direct and insidious. The issues are developed well in the April 4, 2008 Report to the Audit Committee of the Emerson Radio Corp. Board of Directors Regarding Certain Related Party Transactions by the law firm of Pinnisi & Anderson, LLP (“RPT Report”), which was copied to all members of this Board. Other questionable conduct of Grande-affiliated parties has occurred since the RPT Report was delivered.”

He goes on to describe the financial reforms he was able to achieve while chairman of the audit committee and then says:

...Although the Board’s cooperation in these matters has been reluctant, it ultimately was obtained, and that is positive. However, considerable additional work remains to be done. Emerson’s losses from past related party transactions have not yet been fully compensated. More recent problematic transactions have occurred but have not yet been fully reviewed, much less redressed. Certain of the financial reforms described above have not yet been fully put into operation. Persuasive recommendations set forth in the RPT Report have not yet been adopted. All control enhancements, past and future, will need to be monitored diligently and enforced aggressively, as I lack confidence that the highest levels of Emerson management can be trusted to police themselves in these matters. On the contrary, I am concerned that their intention is to circumvent or subvert the important reforms of the recent past to the greatest extent they can. Oversight and action by Emerson’s independent directors, perhaps led by the Audit Committee as in the past, may be an essential safeguard against reversion.

There are other problems with the company. It filed a NT 10-K notice inability to timely file a 10-K. That isn’t necessarily a problem. I’ve invested in companies that have failed to timely file a 10-K. But you don’t want to see this. They are vague in explaining why they couldn’t file:

“The delay in filing is principally attributable to the Company’s need to analyze certain transactions and additional non-financial information in order to complete the disclosure in the Company’s financial statements and the Form 10-K.”

Compare this to something like the NT 10-K for a company I did invest in. They go on for three paragraphs explaining what the problem is and how they plan to fix it.

Other issues include the fact that Emerson settled a shareholder lawsuit (see 10-K):

“...in which it was alleged that the named defendants violated their fiduciary duties to the Company in connection with a number of related party transactions with affiliates of The Grande Holdings Limited (Provisional Liquidators Appointed), the Company’s controlling shareholder. As approved, the settlement calls for the payment to the Company by or on behalf of the defendants of the sum of $3.0 million, which was paid to the Company in full by the named defendants in March 2011, and the continuation of a number of previously adopted corporate governance reforms. On March 28, 2011, the Court approved an award to plaintiff’s attorneys payable out of the settlement proceeds of $875,000 on account of legal services rendered and costs and expenses incurred, which the Company paid to the plaintiff’s attorneys in April 2011.”

There is also a second item:

“...On July 7, 2011, the Company was served with a complaint filed in the Federal District Court for the Central District of California alleging that it, certain of its present and former directors and other entities or individuals now or previously associated with Grande, intentionally interfered with the ability of the plaintiffs to collect on a judgment (now approximately $47 million) it had against Grande by engaging in transactions (such as the dividend paid to all shareholders in March 2010) which transferred assets out of the United States. The complaint also asserts claims under the civil RICO statute. In the Company’s opinion, based on an initial review, the claims appear to be devoid of merit. Emerson intends to defend the action vigorously.”

I’ve read some documents connected with the case. I will quote from the opinion affirming the original decision to impose sanctions on Grande for the inappropriate way they turned over evidence in the case.

The original lawsuit involved MTC Electronic Technologies. MTC was sued in 1995. In 2005, there was a judgment of $37.56 million against MTC. The “plaintiffs (alleged) that MTC which ceased doing business in 2003, was Grande’s alter ego, and that Grande misused or converted MTC’s assets over a period of several years before leaving it a judgment-proof shell.”

You see the problem. This is awfully similar to Grande’s behavior alleged to have happened in Asia in the late 1990s and early 2000s. And it’s awfully similar to what we saw the head of Emerson’s audit committee resigned over.

For the trial, Grande turned over 30,600 pages of documents. The plaintiff complained that literally 99.99% of these were documents Grande knew the plaintiffs already had. They went back and forth. Grande finally turned over 60,000 more pages of accounting and banking records – which the plaintiff said were unlabeled, unordered, and undated. The judge said: “On the bell curve of document production, this one is very near the end of the bell curve.” Grande was forced to pay $75,000.

Here is another court document. I will quote the parts that an investor might be interested in:

“Plaintiffs allege that ultimately Grande siphoned all of MTC’s funds rendering MTC a judgment proof shell and advised MTC’s counsel to withdraw from the Kayne action.”

If you read the footnotes to this document – it’s titled Fred Kayne v. Christopher Ho and dated November 15, 2010 – you’ll find a description of how Christopher Ho controls Grande. More importantly, for our purposes looking at Emerson Radio, you’ll have an idea of how he controls that company too (because Grande owns 53% of Emerson).

The dealings are incredibly complex. Start on page 4. You’ll be lost by page 5. But the key points are this. Ho takes over a company. He distributes its assets to other companies. When someone tries to collect from the now bankrupt shell – the funds are elsewhere. Like another company. In another country. That he also controls. He then claims that the companies are separate. While the people trying to collect the debts they are owed claim the companies are the same.. And that the last minute payment of the special dividend, transfer of assets, etc. was designed to keep them from getting to the money they are owed.

Putting aside what various judges said – it’s quite obvious to me that those claims are true. Grande and Ho’s other controlled companies do transfer assets among each other causing them to enter businesses they were never in before. The reason for these transfers is obviously to keep valuable assets away from creditors. Transfers such as moving office buildings between companies have no other purpose.

Most importantly of all though, in 2010 a judge agreed that almost half a dozen other companies are alter egos of Grande and Ho. Grande owns 53% of Emerson. Grande and Emerson have related party transactions. Emerson’s head of the audit committee resigned over these. It is not out of the question that Emerson will be forced to pay for Ho’s fraud.

So the two main risks at Emerson – and why investors are staying away from the stock – are that Emerson will be forced to pay for actions taken by Grande, Ho, etc. Or that Ho will move assets out of Emerson at some point as he has done with other controlled companies in the past.

So people might be shying away from the stock because they figure at some point either a judge or Ho is going to grab Emerson’s cash – leaving shareholders with nothing.

For this reason, I’ve never considered buying Emerson Radio for the Ben Graham: Net-Net Newsletter.

Emerson Radio is a very cheap stock. You can consider it if you want to. But the questions to start with are not questions about the company. They are questions about management.

By the way, while you might not have been able to turn up all this information about Ho, Grande, etc. yourself using your normal routine for researching a stock – the key clue that either should have led you to drop your research entirely or focus on management was in both the 14A and the 10-K. You always want to read the latest 10-Q, 10-K and 14A when you research a stock. Have a highlighter ready. And a pen for taking notes.

Here are the first three business risks as titled in the 10-K:

· Uncertain Impact of Appointment of Provisional Liquidators for Grande, Emerson’s Controlling Shareholder.
· The majority ownership of the company’s stock by an indirect subsidiary of Grande, which is listed and based in Hong Kong, substantially reduces the influence of other stockholders, and the interests of Grande may conflict with the interest of the company’s other stockholders.
· A number of the company’s directors and senior executive officers also are managing directors or senior officers of Grande and have loyalties and fiduciary obligations to both Grande and the Company.
These are huge clues about what to focus on with this company. But the oddest bit of information is that on in the 14A:

“As of October 14, 2011, Grande had advised the Company that one of its indirect subsidiaries held beneficially 15,243,283 shares or approximately 56.2% of the outstanding common stock of Emerson. That number of shares includes the 3,391,967 Pledged Shares which, according to public filings made by Deutsche Bank in March 2010 had previously been pledged to Deutsche Bank to secure indebtedness owed to it. In February 2011, Deutsche Bank filed a Schedule 13G with the SEC stating that Deutsche Bank had sole voting and sole dispositive power over the Pledged Shares (which represent approximately 12.5% of the Company’s outstanding common stock). The Company believes that both Grande and Deutsche Bank have claimed beneficial ownership of the Pledged Shares. As of October 14, 2011, the Company has not been able to verify independently the beneficial ownership of the Pledged Shares.”

It’s hard to overstate how weird that paragraph is. If you are looking for a simple company to invest in and you find something like that – just drop it. If you are still interested in the company focus on the ownership structure and the management.

It’s not worth analyzing Emerson as a business until you first analyze the people controlling the company.

Personally, I would pass on Emerson Radio at any price.

Either way, it’s a bad idea to dive right into analyzing the business when the biggest risks at Emerson Radio are human rather than economic.

Analyze the human element first.

Then worry about the business and the price.

Read Geoff’s Other Articles
Ask Geoff a Question
Check out the Buffett/Munger: Bargain Newsletter
Check out the Ben Graham: Net-Net Newsletter


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Re A Stock Where Neither the Business nor the Price Matters
Posted by: Harney246 (IP Logged)
Date: April 18, 2012 02:34PM


Geoff:

Thank you.

I appreciate your notice at the top of your article about perhaps choosing not to read further. About half way through, I felt dizzy. It's the same effect that I had once watching a 3 Card Monty "game."

Regards,
Tom


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Re A Stock Where Neither the Business nor the Price Matters
Posted by: Brian_Harper@twitter (IP Logged)
Date: October 29, 2013 01:42PM

You should take another look, a lot has changed


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Re A Stock Where Neither the Business nor the Price Matters
Posted by: DicksonP (IP Logged)
Date: December 16, 2013 09:38PM

Dear Brian_Harper, What do you mean by a lot has changed? Can you elaborate? Thanks. Best, Dickson


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