Warning: Illiquid, closely held, de-registration (suspending SEC reporting) susceptible toward an unfriendly shareholder environment. The negatives are significant and only suitable for patient longer-term investors.
But I'm embracing the words of Mohnish Pabrai (Trades, Portfolio)'s, "Heads I Win, Tails I Don't Lose Much."
During the prior five years, Pendrell (PCO) acquired and monetized IP (Intellectual Property) rights. The company continues to monetize existing IP assets. But today's main focus is on deploying and leveraging its cash, and NOL by acquiring new business opportunities.
To optimize its new business strategy management aggressively reduced expenses, headcount and simplified operations. Further, the board recommended and approved de-registration/de-listing as the next step in further reducing overhead expenses and improving strategic focus. Additionally, de-registration concentrates management's efforts on purchasing and leveraging NOL assets with new acquisitions, continuing IP monetization and further licensing its existing patents.
Near $2.5 billion in NOL (net operating losses) created when Pendrell was ICO Global Communication. ICO Global filed for chapter 11 bankruptcy August 1999 after its satellite was destroyed during its launch attempt. Then came telecom billionaire Craig McCaw's steps forward to acquire in 2000. McCaw has controlled Pendrell ever since and is executive chairman. More importantly this large NOL creates advantages when competing to find a profitable company.
This talented equity compensated management team is uniquely qualified to allocate the large balance of cash, NOL and remaining hidden assets to increase the company's market value. Management has deep expertise in finance, taxes, mergers, acquisitions and technology licensing with proven entrepreneurship success. Today the total number of employees are 14. SGA annual expense was $30.078 million in 2012 reduced 75% to $7.508 million for the year ending 2016. This drastic reduction of SGA expenses supports their commitment toward value enhancement.
Pendrell's CEO Lee Mikles served as Future Fuel (2005 to 2013) CEO. He has extensive experience in corporate finance, chairman of Mikles/Miller Management. Pendrell Chief Financial Officer Steve Ednie has 20 years' experience in senior finance, accounting and tax roles. He served as director of tax at Expedia (EXPE, Financial) and chief tax officer for XO Communications and Clearwire Corp. (FRA:CBV, Financial).
Pendrell's corporate counsel is Timothy Dozois. Securities law compliance, mergers, acquisitions, divestitures and technology licensing are his areas of expertise. Executive Chairman Craig O. McCaw founded Clearwire in 2003 and was a director at Nextel Communications – acquired by Sprint (S, Financial) in 2005 – and XO Communications. Further, he was the chairman and CEO of McCaw Cellular Communications which he built into the nation's leading provider of cellular services in over 100 U.S. cities. It sold in 1994 for $12.60 billion to AT&T (T, Financial). Lastly, McCaw is the CEO of the venture capital firm Eagle River Investments. The firm's focus is on strategic investments in telecommunication and technology companies.
Pendrell sits on valuable patent assets. I admit knowing nothing of the fair value or the uncertain outcome of pending litigation. The trial against ScanDisk is set in October for importing patent infringing products. They continue to discuss their digital rights licensing with motion picture studios and theater operators. In addition, Pendrell continue to pursue appeal of two adverse jury decisions against Apple (AAPL, Financial), Google and manufacturers of Android devices.
Valuation:
A few repetitive but notable comments on the table below.
Current net cash per share at $5.79 and current AR of 61 cents for a total of $6.40 per share. This compares favorably to the current market price of $6.00. In addition, large net operating losses to leverage with the purchase of a profitable acquisition. During the most recent quarter, Pendrell smartly allocated its capital by purchasing 2,232,293 of its own shares at $6.55 per share for a total of $15,935,465. The existing patents generated positive $2.23 million operating income and $3.44 million net income for 2016.
Ownership
I understand the risk, and it's not suitable for all investors, but I purchased after last year's writeup and consider the current price an opportunity. The net cash, NOL, capable equity incentivized management, optionality from patent litigation and the ultimate new acquisition to leverage corporate assets are reasons for my interest.
Disclosure: Long Pendrell.
Start a free seven-day trial of Premium Membership to GuruFocus.
