No Sale for ValueVision


Disappointingly, ValueVision (VVTV) announced today that they were unable to find any bidders for the company. Along with an expected bad Q4, the news caused the stock to end 44% down for the day but was at one point down over 50%.

With no sale in process, does this change my original thesis and catalyst? I’ll go through my thoughts later.

First I’ll provide some notes regarding the conference call and the press release.

The Failed Strategic Process

To sum up the strategic process that VVTV started in September 2008, they initiated contact with 137 companies, made confidential agreements with 39 companies and received preliminary interest by 13 companies. Of the 13, 4 were then invited to the next round, but ultimately, no party made a bid for the company after viewing VVTV’s operating history and debt to carriage companies.

Points from the Conference Call and Press Release

  • Wont be giving out special dividend because under “Minnesota law”, the company can not make distributions where the board considers it to affect the solvency of the company
  • Strategic alternative remains open
  • GE preferred is being renegotiated and they are confident that they can get good terms to the deal and delay it further
  • Cost structure will go down along with new cable negotiations, reduction in workforce and marketing expenses
  • Expect cost structure to be down double (~10%) digits in the next year with cable distribution savings
  • Want to get to HSN’s level of 8-10% percent of revenue for cost. Currently averaging high teens and low 20’s.
  • Cable companies don’t want VVTV to disappear as VVTV is a good paying customer. Cable companies are willing to negotiate as well as. They maintain their good channel placements next to competitors.
  • Internet sales make up 32% of revenues for full year results
  • The business has changed from 10 years ago and it is no longer just about footprint. They have to get the productivity from households and productivity per minute.

Points from the Q&A

This is where the conference call gets interesting as analysts start grilling management and frankly I wasn’t too pleased about their responses either.

  • The company even looked at a liquidation and determined that with the debt and the $185m it owes to the cable companies, shareholders will end up with nothing in a liquidation.
  • Q: If the board doesn’t approve a special dividend, will they commit to a stock buyback? A:The board will consider it but there was no enthusiasm or guarantee.
  • Q: What is your opinion of the stock price. Is it shockingly undervalued? A: “Oh, unbelievable. Yes, it’s incredibly undervalued.”
  • Q: If another company offered $1 in cash with no financing needed, would you accept the offer? A: That decision would consider the option. (Again not too convincing)

Personal Take from the News

The main story that the management kept putting forth was of their newly renegotiated carriage costs. As one analyst pointed out, “the problems were there before the market turned”. Although there were some good news, the bad far outweighed the good.

This now changes VVTV from a special situation category to a turnaround bet. It has gone from a short term position in my portfolio to a med-long term position.

It has left me thinking about my original investment thesis (1st post and 2nd post) as well as the risks I outlined. Did I make a mistake and should I sell? From what I have detailed in my writings, the current answer is no as I knew of the risks and what could happen.

I can feel the emotional side of my brain telling me to just sell and close it off, but my objective side is telling me to hold and wait it out. Rather than sell on the day of the bad news, I am taking more time to try and understand different scenarios which is why I am willing to make it a long term hold.

The one thing I did completely ignore was that as a business, ValueVision is currently terrible. If I knew this by looking at the operations of the business and its industry, obviously the potential buyers would have seen it as well.

Am I disappointed? Yes. Am I upset? No. The minute I get upset is when I know I have to sell. But the real important question I need to constantly ask is whether I am just being stubborn and do YOU think so?

Disclosure

I hold VVTV at the time of writing.

  • Andrei

    Hi Jae Jun,

    Don’t you think that if VVTV is able to renegotiate terms of their financing with GE capital that the stock for VVTV should see a bounce above the 55 cent level? It seems to me that there is a lot of concern about the payment that comes due later this quarter…

  • Even if they renegotiate, unless they can somehow cancel a portion of it, the preferred is still there and the liability remains. They still pay in the end. If they can get some good terms on it, that would be really good, but I’ve got to start thinking about how the business will be turned around. Now that there is no sale, it seems like we are heading towards the bottom of the trough in the turnaround. Probably another good 2-3 years before VVTV can reward shareholders at this rate.

  • MKL

    INOC and GSIC have cancelled their merger agreement.

  • Sam

    Jae,

    I don’t know a whole lot about VVTV’s valuation let alone the company in too much of a detail.

    But after a quick glance at VVTV’s key statistics, it seems very attractive!

  • Sam hyung which key stats are you referring to?

  • AJ

    Hey Jae,

    The question is really what will happen now. I see only 2 options:

    1. Liquidation
    2. Turnaround

    The first one would likely take 6-12 months; the second, much longer. Just see if the holding time fits your needs/horizon. Remember that most pro investors say that NOT selling and moving on is their biggest mistake …

    At least you have EMAG doing well with the payout only 12 days away ….

    By the way, I’d also look at BBEP – while they are not a Graham stock, they are an Oil&Gas LP, so they have to distribute most of their gains …. right now their yield is close to 30% with the next coupon paid in about 2 weeks to shareholders of record on Feb 9th …

    AJ

  • Hi AJ,

    I actually see the liquidation option to be far away. Probably not within 3-4 years due to their off balance sheet obligation.

    The turnaround will definitely take just as long as the current economy will prevent any sort turnaround. The quickest it can profit is when the economy booms again, but who knows how long this will last.

    The other option is a sale, but again, the credit markets have to ease up more and buyers will want to see the business running cleaner first.

    So lucky with EMAG as well. Bought it just before the recent jumps. Helps to offset losses from VVTV.

    I’ll take a look at BBEP. Thanks.

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