Classic Buffett Partnership Liquidation Opportunity: EDCI
Synopsis
This investment operation presents an attractive opportunity for an enterprising investor. EDCI is being liquidated with the help of its largest shareholder, Chapman Capital, an activist hedge-fund run by Robert Chapman. The economics of the deal have the potential to achieve a 2-4 year compounded return of 11-20%, with a wide margin of safety.
The company has been looking to use its cash reverses to make an acquisition but has recently turned sour on the idea given the rising market and other related factors. As CEO Clarke Bailey states in the Q2 09 conference call on August 3rd 2009: “With regard to an acquisition, it goes without saying that the factors impeding our ability to identify and successfully consummate a transaction not only continue but gain force. Those factors include excessive valuations, unpredictable earnings streams and severely limited availability of credit. Obviously it is anybody’s guess, but it is more likely than not that this situation will not markedly improve in the next twelve to twenty-four months. Given this risky and strained merger and acquisition marketplace, the EDCI board of directors has instructed the management team to explore the possibility of recapitalizing EDCI resulting in a distribution of cash.”
On September 14th the Company Filed an 8-K announcing the liquidation process of the company: “EDCI Holdings, Inc. (NASDAQ: EDCI) (“EDCI”), the holding company for Entertainment Distribution Company, Inc., the majority shareholder of Entertainment Distribution Company, LLC (“EDC”), a European provider of supply chain services to the optical disc market, today announced that its Board of Directors unanimously determined that it would be advisable to dissolve EDCI and all of its wholly-owned subsidiaries, excluding EDC. The ultimate goal is to effect a distribution of the maximum available cash of EDCI to its shareholders while retaining sufficient reserves to maximize the value of any remaining assets and manage down both known and unknown liabilities in accordance with state law requirements. ”
Summary Financials as per 10-Q Q2 2009
The number of shares outstanding of the Registrant’s common stock, par value $.02 per share, at July 27, 2009 was 6,703,436 shares.
..................................................................Per Share
Cash and cash equivalents: $51,000,000............$7.66
Restricted Cash: $ 51,000,000..........................$7.66
Working Capital: $66,000,000......................... $9.84
Shareholder Equity: $76,000,000....................$11.33
Estimated Liquidation Value : $46 Million........ $6.86
Market Cap (Sept 22 09): $40,000,000..............$5.96
CATALYST
As per the 2009 Proxy filed on April 3rd 2009:
Robert L. Chapman, Jr; age 42; Chief Executive Officer of the Company and Entertainment Distribution Company, LLC, a majority owned subsidiary of the Company (“ EDC, LLC ”) since January, 2009; Director of the Company since November 2007; Founder and Managing Member of Los Angeles, CA-based Chapman Capital L.L.C., an investment advisor focusing on activist and turnaround investing, since May 1996; Co-manager of the Value Group within Scudder Stevens & Clark from 1993 to 1995, which followed employment with NatWest Securities USA from 1991 to 1993, Junction Advisors from 1990 to 1991, and Goldman, Sachs & Co from 1987 to 1989.
At the time of the proxy, Chapman owned 14% of the public stock.
DEAL ECONOMICS
From the Sept 14th 8-K:
“ If the dissolution is approved by the shareholders, EDCI expects to make an initial distribution of cash to its shareholders of up to $30 million. Additional distributions will be made as the required reserves, discussed below, may be released over time. In addition, EDCI is also considering using a portion of the initial distribution of up to $30 million to effect a tender offer in conjunction with the dissolution process. Such an approach would afford additional flexibility to shareholders who prefer a fixed amount of cash and immediate recognition of any tax-losses, to so elect for a portion of their shares.”
Assuming the shareholders approve the liquidation, an investor can receive a return of capital of $30 million ($4.47 per share) on his/her $40 Million (6$ per share) investment, leaving him/her with a net investment of $10 Million ($1.53 per share) in the position. Taking the liquidation value and removing the distributed cash, we get a revised liquidating value of $16 Million ($2.38 per share).
CONCLUSION
Thus, an investor can make $0.85 for every $1.53 invested in EDCI. If the liquidation occurs over 2 years, the compounded rate of return is 24%, 15.86% if it takes 3 years and 11.67% if it takes 4 years. In the event the liquidation does not occur as anticipated, a non-negligible scenario, and asset values are eroded, the returns will fall. However, in my estimation, there is enough of a margin of safety in the current return to compensate for any revision to the rate of return figures to make this investment worthwhile to an enterprising investor.
In my next articles, I will discuss several other components involved in this type of investment, such as increasing the complexity of the analysis by introducing the cash burn, risk analysis, pension considerations and scenario planning amongst other decision-drivers.
DISCLOSURE: HOLDING A POSITION AT TIME OF WRITING
LIQUIDATION VALUE CALCULATION (in millions)
Cash @100% =.......................80
A/R @75% =..........................9
Inventories @50%=..................2
Prepaid Expenses @ 100%= ..11
Assets held for sale @ 50%= 3.5
Restricted Cash@ 100%=.......24
PPE @ 50%=.............................9
Other Assets@ 50%=...............2
Total Assets=...........................140
Total Liabilities=......................94
Liquidating Value=..................46 Million ($6.86 per share)
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Synopsis
This investment operation presents an attractive opportunity for an enterprising investor. EDCI is being liquidated with the help of its largest shareholder, Chapman Capital, an activist hedge-fund run by Robert Chapman. The economics of the deal have the potential to achieve a 2-4 year compounded return of 11-20%, with a wide margin of safety.
The company has been looking to use its cash reverses to make an acquisition but has recently turned sour on the idea given the rising market and other related factors. As CEO Clarke Bailey states in the Q2 09 conference call on August 3rd 2009: “With regard to an acquisition, it goes without saying that the factors impeding our ability to identify and successfully consummate a transaction not only continue but gain force. Those factors include excessive valuations, unpredictable earnings streams and severely limited availability of credit. Obviously it is anybody’s guess, but it is more likely than not that this situation will not markedly improve in the next twelve to twenty-four months. Given this risky and strained merger and acquisition marketplace, the EDCI board of directors has instructed the management team to explore the possibility of recapitalizing EDCI resulting in a distribution of cash.”
On September 14th the Company Filed an 8-K announcing the liquidation process of the company: “EDCI Holdings, Inc. (NASDAQ: EDCI) (“EDCI”), the holding company for Entertainment Distribution Company, Inc., the majority shareholder of Entertainment Distribution Company, LLC (“EDC”), a European provider of supply chain services to the optical disc market, today announced that its Board of Directors unanimously determined that it would be advisable to dissolve EDCI and all of its wholly-owned subsidiaries, excluding EDC. The ultimate goal is to effect a distribution of the maximum available cash of EDCI to its shareholders while retaining sufficient reserves to maximize the value of any remaining assets and manage down both known and unknown liabilities in accordance with state law requirements. ”
Summary Financials as per 10-Q Q2 2009
The number of shares outstanding of the Registrant’s common stock, par value $.02 per share, at July 27, 2009 was 6,703,436 shares.
..................................................................Per Share
Cash and cash equivalents: $51,000,000............$7.66
Restricted Cash: $ 51,000,000..........................$7.66
Working Capital: $66,000,000......................... $9.84
Shareholder Equity: $76,000,000....................$11.33
Estimated Liquidation Value : $46 Million........ $6.86
Market Cap (Sept 22 09): $40,000,000..............$5.96
CATALYST
As per the 2009 Proxy filed on April 3rd 2009:
Robert L. Chapman, Jr; age 42; Chief Executive Officer of the Company and Entertainment Distribution Company, LLC, a majority owned subsidiary of the Company (“ EDC, LLC ”) since January, 2009; Director of the Company since November 2007; Founder and Managing Member of Los Angeles, CA-based Chapman Capital L.L.C., an investment advisor focusing on activist and turnaround investing, since May 1996; Co-manager of the Value Group within Scudder Stevens & Clark from 1993 to 1995, which followed employment with NatWest Securities USA from 1991 to 1993, Junction Advisors from 1990 to 1991, and Goldman, Sachs & Co from 1987 to 1989.
At the time of the proxy, Chapman owned 14% of the public stock.
DEAL ECONOMICS
From the Sept 14th 8-K:
“ If the dissolution is approved by the shareholders, EDCI expects to make an initial distribution of cash to its shareholders of up to $30 million. Additional distributions will be made as the required reserves, discussed below, may be released over time. In addition, EDCI is also considering using a portion of the initial distribution of up to $30 million to effect a tender offer in conjunction with the dissolution process. Such an approach would afford additional flexibility to shareholders who prefer a fixed amount of cash and immediate recognition of any tax-losses, to so elect for a portion of their shares.”
Assuming the shareholders approve the liquidation, an investor can receive a return of capital of $30 million ($4.47 per share) on his/her $40 Million (6$ per share) investment, leaving him/her with a net investment of $10 Million ($1.53 per share) in the position. Taking the liquidation value and removing the distributed cash, we get a revised liquidating value of $16 Million ($2.38 per share).
CONCLUSION
Thus, an investor can make $0.85 for every $1.53 invested in EDCI. If the liquidation occurs over 2 years, the compounded rate of return is 24%, 15.86% if it takes 3 years and 11.67% if it takes 4 years. In the event the liquidation does not occur as anticipated, a non-negligible scenario, and asset values are eroded, the returns will fall. However, in my estimation, there is enough of a margin of safety in the current return to compensate for any revision to the rate of return figures to make this investment worthwhile to an enterprising investor.
In my next articles, I will discuss several other components involved in this type of investment, such as increasing the complexity of the analysis by introducing the cash burn, risk analysis, pension considerations and scenario planning amongst other decision-drivers.
DISCLOSURE: HOLDING A POSITION AT TIME OF WRITING
LIQUIDATION VALUE CALCULATION (in millions)
Cash @100% =.......................80
A/R @75% =..........................9
Inventories @50%=..................2
Prepaid Expenses @ 100%= ..11
Assets held for sale @ 50%= 3.5
Restricted Cash@ 100%=.......24
PPE @ 50%=.............................9
Other Assets@ 50%=...............2
Total Assets=...........................140
Total Liabilities=......................94
Liquidating Value=..................46 Million ($6.86 per share)
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