Seth Klarman Bought Into RHI Entertainment (RHIE), But Why?

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Feb 12, 2009
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For the premium members of GuruFocus, by now we should all know that our Investment Guru Seth Klarman likes movies, the kind of movies made for TV’s to be exact.


RHI Entertainment is a joint that develops, produces, and distributes new made-for-television movies and miniseries and other television programming worldwide. It went to public in June 23, 2008 with13.5 million shares at $14 per share.


According to GuruFocus Data, Seth Klarman’s hedge fund, Baupost Group LLC, now controls 4.5 million shares, or 33.06% of the company. See the holding history at the end of the article.


But why?


RHIE is a new IPO so there is not much of public history. It filed its third quarter, 2008 10-Q on November 6, 2008, only the second quarterly report it had to file. Quarterly revenue came at $53.5 million and Operating income is at $5.1 million. What was killing the company is the heavy debt ($568.8 million) and high interest expenses ($9.9 million third quarter, 2008) to service that debt. The company realized an income of $2.6 million from its 42.3% “non-controlling interest” in RHI Entertainment Holdings II, LLC, still its third quarter net loss was $3.5 million, or $0.26 per share. Cash flow did not warrant a more favorable review, in the period from June 23 (IPO) to September 30, 2008, the company burned more than $30 million cash in operation. And on September 30, 2008, the company had mere $6.7 million cash in hand, that is about two months of G&A expenses.


In summary, RHIE is a small cap company just issued an IPO. It had a heavy load of debt, very little cash in hand, no proven earning or operating cash flow to count on to service the debt. I will be worried about the survival of the company in this econimically difficult time, let alone invest in it. Yet Seth Klaman bought it and bought more of it. Now he has about one third of the company.


Seth Klarman has an undisputable track record and reputation. His hedge fund, Baupost Group has averaged returns of nearly 20% annually since inception in 1983. His book, Margin of Safety is being sold on Ebay for close to $1,000 a piece, in used condition. But in the case of RHIE, one has to wonder: where is the “Margin of Safety”?


Ticker Guru Name Portfolio Date* Current Shares % of Shares Outstanding
RHIE 2009-02-06 4,463,534 33.06
RHIE 2008-11-26 3,661,699 27.12
RHIE 2008-09-30 3480299 25.78