Recently, there’s been quite a bit of activity in the net-net space as both Adam’s Golf (ADGF, Financial) and Parlux (PARL, Financial) have agreed to takeovers at massive, massive premiums. I had checked both of them out in the past at prices much lower than where they were trading at both pre- and post-takeover, so I thought I’d write a quick post about what the takeovers have taught me.
First, the takeovers should reaffirm for everyone that there is value to be found in these net-nets, and, most of the time, the value is not in liquidation value. Rather, the fact that net-nets often sell below liquidation value gives you downside protection, but the real upside and value comes from the business turning around (reversion to the mean in profits and return on assets) or someone buying them out in hope of turning them around. In other words, the real value comes from the business simply returning to a normal operating business!
Second, it serves as a reminder to think of them as businesses and look for strategic assets that might not be on the balance sheet but that could be valuable to the right buyer. Make no mistake, Adam’s is getting bought out for their brand name. PARL is getting bought out for their licenses. A core piece of my investment in Dreamworks (which I exited but have considered re-entering at today’s prices) was that their franchises would be incredibly valuable to a strategic buyer but were on the balance sheet for basically nothing. A net-net is no different- if they have a valuable franchise, that should be included when assessing their value. I had been ignoring that in valuing net-nets.
Obviously, it’d be rare to find a net-net with as much value as DWA’s franchises, but there was no doubt there was at least some value for a strategic buyer to having ADGF and PARL’s brands, as a strategic buyer could immediately run the new brands through their old sales channels to increase sales and earnings (there’d be huge synergies between ADGF and PARL and strategic acquirer’s businesses). I haven’t been factoring that type of potential synergy and brand value into my valuation of net-nets, mainly because it’s very qualitative determining the value of brands, and it’s somewhat strange introducing something very qualitative to a quantitative process like investing in net-nets. However, in the future, I will be sure to consider it and, if possible, tilt my net-nets towards companies with that type of “brand value” boost.
Unfortunately, I don’t think any of my current net-net holdings have that type of brand value. MRINA, discussed yesterday, could potentially have that value, but I don’t think so. The difference would be that MRINA brand boots aren’t a “must have” brand and doesn’t seem to have that much name power. Golfers I know generally liked the Adam’s brand and it was definitely the name that came to mind when thinking of their niche (hybrid woods), and PARL’s brands (like the Rihinna license) are definitely sought out, though their economics can be questionable. In other words, these two companies had key positions in their niche and national recognition. I doubt MRINA has that in the work boot niche.
Still, even though none of my current holdings have it, it’s definitely worthwhile to keep brand value in mind when looking at net-nets, and I will certainly be looking for it in the future.
Until then, I will keep hoping for a buyout of my own net-nets!!!! Congrats to the ADGF and PARL longs.
First, the takeovers should reaffirm for everyone that there is value to be found in these net-nets, and, most of the time, the value is not in liquidation value. Rather, the fact that net-nets often sell below liquidation value gives you downside protection, but the real upside and value comes from the business turning around (reversion to the mean in profits and return on assets) or someone buying them out in hope of turning them around. In other words, the real value comes from the business simply returning to a normal operating business!
Second, it serves as a reminder to think of them as businesses and look for strategic assets that might not be on the balance sheet but that could be valuable to the right buyer. Make no mistake, Adam’s is getting bought out for their brand name. PARL is getting bought out for their licenses. A core piece of my investment in Dreamworks (which I exited but have considered re-entering at today’s prices) was that their franchises would be incredibly valuable to a strategic buyer but were on the balance sheet for basically nothing. A net-net is no different- if they have a valuable franchise, that should be included when assessing their value. I had been ignoring that in valuing net-nets.
Obviously, it’d be rare to find a net-net with as much value as DWA’s franchises, but there was no doubt there was at least some value for a strategic buyer to having ADGF and PARL’s brands, as a strategic buyer could immediately run the new brands through their old sales channels to increase sales and earnings (there’d be huge synergies between ADGF and PARL and strategic acquirer’s businesses). I haven’t been factoring that type of potential synergy and brand value into my valuation of net-nets, mainly because it’s very qualitative determining the value of brands, and it’s somewhat strange introducing something very qualitative to a quantitative process like investing in net-nets. However, in the future, I will be sure to consider it and, if possible, tilt my net-nets towards companies with that type of “brand value” boost.
Unfortunately, I don’t think any of my current net-net holdings have that type of brand value. MRINA, discussed yesterday, could potentially have that value, but I don’t think so. The difference would be that MRINA brand boots aren’t a “must have” brand and doesn’t seem to have that much name power. Golfers I know generally liked the Adam’s brand and it was definitely the name that came to mind when thinking of their niche (hybrid woods), and PARL’s brands (like the Rihinna license) are definitely sought out, though their economics can be questionable. In other words, these two companies had key positions in their niche and national recognition. I doubt MRINA has that in the work boot niche.
Still, even though none of my current holdings have it, it’s definitely worthwhile to keep brand value in mind when looking at net-nets, and I will certainly be looking for it in the future.
Until then, I will keep hoping for a buyout of my own net-nets!!!! Congrats to the ADGF and PARL longs.
