Friday Tidbits:
* Publisher John Wiley has sent me a copy of “The Little Book of Common Sense Investing” by the legendary John Bogle. I will try to get through it this weekend and if I decide to recommend it will post an Amazon link here for you if you then wish to purchase it.
Founded in 1938 as Topps Chewing Gum, and in its early years produced a popular penny “Topps Gum” from a factory in Brooklyn, N.Y. After World War II, the company developed Bazooka Bubble Gum, and in 1950, added trading cards to its product line. Baseball cards appeared in 1951 and quickly became a vital part of pop culture, a tradition that continues to this day, and includes football (both American and European) and basketball, in addition to entertainment cards and stickers and albums. In July 2003, Topps acquired WizKids, LLC a designer and marketer of collectible strategy games. Topps maintains offices in Canada, the United Kingdom, Ireland, Italy, and Argentina, in addition to the U.S. Topps also manufactures the popular lollipop brands marketed as Ring Pops, Push Pops, Baby Bottle Pops and other novelty candy and gum products. Now headquartered in New York City, the company has worldwide distribution, annual net sales for Fiscal 2006 of $293,838,000, and employs over 487 people worldwide.
Recently, Micheal Eisner lead group that offered $385 million for the company. In what might be the best and latest example of boardroom incompetence, Topps agreed to the buyout. This should be criminal. A cursory look reveals what I am talking about.
Topps
Cash on hand $81 million
Shares Outstanding 39 million
Debt – ZERO
Cash per Share $2.07
Offer Price $9.75
Closing Price Day Before Offer $8.91
Do you see where this is going? We have to subtract the cash on hand from the offer price because Eisner’s group will receive that cash (and have no debt to pay off) once the deal closes. We then take the offer price of $9.75 minus cash on hand of $2.07 and we have an answer of $7.68. What does that mean? If you are a shareholder your management just agreed to sell the company 13.8% BELOW the current market value! If you are one of those “lucky” shareholders you now know how Ned Beatty felt in “Deliverance.”
Here what it should look like, $8.91 closing price plus $2.07 in cash = $10.98 starting price for bids.
Fortunately there is a white knight: Topps director Arnaud Ajdler, along with the investment firm Crescendo Partners II, have launched a campaign to kill the deal. Crescendo owns about 6.6 percent of the company’s shares, according to filings with the Securities and Exchange Commission. Ajdler is also a managing partner of Crescendo. In his filing he says “Since the Board of Directors has decided to pursue this transaction over the significant concerns which I have continually and repeatedly voiced to the Board, I intend to actively solicit votes and campaign against the proposed transaction.”
Here’s hoping he succeeds………
Recommended Blog:
“Value investing blog and value investing podcast influenced by Benjamin Graham, Joel Greenblatt, and Warren Buffett’s value investing model. Built upon the value investor insights of intrinsic value, margin of safety, competitive advantage, and protection of principal.”
Basically, it’s a value investing blog with longer articles about investing concepts, specific stocks (analysis), and the market (at least insofar as my normalized P/E posts go). He has some stuff from three other contributors in the “Columns” and “Book Reviews” sections.
Some people might like the “Encyclopedia” section which links to and contain entries like this one:
Finally, there’s the directory of other investing sites. Also, there’s the podcast – new visitors might enjoy listening to the podcast episodes.
He does a “20 Questions” series with other bloggers that is something I enjoy (and will be features on soon)
Some of his best work is on “normalized PE ratios”, definitely worth checking out.
7 replies on “A Book, A Robbery & A Great Blog To Visit”
I diasgree with your analysis about the minimum required bid. The price a share trades us should already include the cash on hand. If anything you could argue the offer has a higher premium when you subtract the value of cash from both the offer and the price the share was trading at prior to the offer. The real question does the offer for the non-cash portion of Topps reflect the value of the on-going operation?
You are wrong, the current share price is what it is. Any offer to buy the company has to be at a premium to the current share price or there is no value to it for shareholders. Now, we have to take the cash he is receiving back when he buys it off his offer price. Think of it this way, if you buy a car for $20,000 and get $2000 cash back, your actual price was $18,000, correct. It is the same in this situation for Eisner. since he is in effect getting “cash back” on the deal, we have to deduct that cash from his price. This is unusual but has to be done because there is no debt. Normally there is debt to offset the cash on hand, not in this case.
Anon is correct. The share price already reflects cash on hand. The offer was at a 9.4% premium to the previous close. Whether the buyers get cash back is irrelevant; they still payed a premium for ongoing operations. Whether it’s an adequate premium is another question.
You are not thinking it through. What did eisner offer to pay? $385 million. For that he is receive all the assets plus $81 million in the bank. What is his cost? $385 minus the cash back, $81 million equals $304 million. His, cost is below the current market value. Normally this is not an issue because there is debt on the book to offset the cash, since there is not, we MUST subtract that from any offer price because it is in essence a “rebate” on the purchase price…
Theoretically, the price the business trades at does include the cash. This is obvious in cases where a stock has fallen so far it approaches the value of the cash alone. So, the issue isn’t whether it’s much of a premium over most recent stock price – by the way, it’s a small premium over where it had previously closed, but it’s even smaller to non-existent if you take an average price, its high for the year, etc. A 10% premium on a new high is one thing – a 10% premium that only gives you a few percent over where it was during the last month and nothing over where it’s been is quite another story.
But, getting back to the cash, it’s not an issue of the share price – but, then we shouldn’t be trusting the share price as if Mr. Market is a better arbiter of intrinsic value than we are. If we believe that, we shouldn’t be stock pickers – we should be indexers.
The actual cost for the business is only $300 million. This is precisely why investors often look at enterprise values instead of market caps. The market cap is a lie. The business is being sold for $300 million (a little less actually). It just happens that Topps has cash on hand – any business can have cash on its balance sheet, that has nothing to do with operations. Topps could pay a special dividend of $2.19 a share tomorrow and the operating business would still be what it is. So, really you have two separate parts to the deal – Eisner is buying the operating business plus the cash on hand.
Therefore, when evaluating the deal, you need to exclude the cash and look at operations separate from the structure of the balance sheet. Having said that, all this has nothing to do with the previous stock price. If investors were thinking clearly they would have included the cash. So, in that sense, the share price did reflect the cash on the balance sheet.
Here, there’s a catch though. Investors didn’t think they were getting that cash soon. At other companies, with a history of a real owner orientation demonstrated by special dividends, major share buybacks, or whatever might be appropriate cash will generally be viewed as more valuable, because investors believe it will be put to good use.
Topps is an egregious example of the misuse of cash – it is ridiculously overcapitalized and has been for years. At one point, it had over $150 million in cash! All this, for a business that’s operations are being valued at less than $300 million in the deal.
So, while I agree with the comments made about how the stock price did already reflect the cash, I have to say that in this case the cash would have been seen as less valuable. Eisner et. al will get all the cash right away – in fact, I’m sure their calculations were based on that cash (there’s nothing wrong with that, they aren’t the ones who let it sit idle for years and years).
For a good discussion of the deal in general and the cash in particular see:
http://stocksbelowncav.blogspot.com/2007/03/disappointing-offer-for-toppstopp-why.html
I’ll also be posting on Topps later today.
Geoff,
I agree / disagree with you. Typically in a buyout, there is also debt to consider and the debt offsets cash (which is not usually equal to 20% of the purchase price) that the new owners may receive. Since we do not have that here, we must give the cash on hand significant consideration. While that cash makes the “real” purchase price $300 million, the fact that the $300 million is below the market cap is irrelevant in that Eisner cannot say “well the business is really only worth this, it is overpriced so that is why my offer is low.” It’s value for this purpose is what it is based on its market cap. That # may change but he is offering to buy it today, so the multiple he must pay for it is based on today’s price. If he wanted it for less he should have bought it a year ago. The argument can be made as to the “true” value of the company but if you want the whole thing, today’s market price is it. I would argue that the intrinsic value is much more that his offer based on the shoddy management (meaning decent management could get more of a return for shareholders)and I am sure Eisner feels the same way which is why he made the offer. so, based on an intrinsic value argument, the offer is even more appalling.
I think we disagree a little but not a lot? I think we both agree current management should be strung up?
“I think we both agree current management should be strung up?”
I’m afraid that sentiment is also shared by the emails from Topps shareholders I’ve received since first posting on this topic. They are convinced new management will be good for the business – but, they’d like to participate along with the change. Here, they just get cashed out.
As for my feelings, I’m still working on a full post, but you can get some idea of what I’m thinking from my post on today’s developments.
By the way, here’s the post from Cheap Stocks.