Monthly Archives: October 2012

ACME Communications liquidation

OTC Adventures posted an interesting idea a few weeks ago. The basic thesis is simple: ACME Communications, an owner and operator of television stations, has been in the process of liquidating itself. It announced begin September that it had reached an agreement to sell the remaining three stations it owns for $17.3 million is cash. After the deal is completed the company will have just one asset remaining, the Daily Buzz program, and it will return the cash received in the station sale to shareholders:

Commenting on the transaction, Doug Gealy, ACME’s Acting CEO, said, “We are delighted to be in a position to sell our remaining television stations. This proposed transaction obviously puts us in the final phase of successfully completing our process of monetizing our assets, with only our Daily Buzz operation remaining. Upon the completion of this transaction, we plan to distribute virtually all of our cash to our shareholders. In the meantime, we will continue to pursue opportunities to monetize our remaining asset.”

If you expect that the company will be able to return the full $17.3 million to shareholders you are looking at a $1.08 dividend per share (16,047,000 shares are outstanding). With the stock currently trading at $0.94 the possible absolute return is 14.7 percent. The company expects to receive FCC approval at the end of 2012 or begin 2013 so the potential IRR is even higher, and this doesn’t even include the fact that one asset with presumably a positive value will remain. So the bull case is pretty clear and easy to understand.


It’s unfortunately never that easy, and there are a number of concerns, some bigger than others, that could stand in the way of this positive scenario unfolding:

  • Taxes
  • Deal risk
  • Cash burn
  • Remaining liabilities


The smallest risk are in my opinion taxes. The company had $33 million in net operating loss carryforwards and an accumulated deficit of more than 100 million. It should not have to pay any taxes on the proceeds of the sale and the cash could be returned tax-free to investors as a return of capital. This is also what happened in previous sales.

Deal risk

Because television stations are regulated the company needs FCC approval for the sale, but this is probably a formality. The stations that are being sold are small, and the buyer is also not a big player that could gain a monopoly in a specific area (it is in fact the first television station for the buyer). There are no details on how the buyer is financing the deal, so this could be a small risk.

Cash burn

Because it takes time to complete the deal there is a risk that the company will generate losses and burn through cash in the mean time. While it is obviously not possible to predict how the business will perform (both the television stations and the Daily Buzz unit) we do have some data points. The first one is the fact that ACME generated positive cash flow from continuing operations for the first six months of 2012, and positive operating earnings.

It’s not very useful to look at older statements to judge the cash flow generating ability of the business since it completed a sale of one station begin 2012 and in 2011 a total of three stations were sold. The business today is different, and way smaller, than the business in the past. But while the numbers look positive at first sight I think we should expect cash burn, to quote the second quarter report of 2012:

Net cash provided by operating activities was $317,000 for the first six months ended June 30, 2012, compared to net cash used of $3.5 million for the first six months of 2011. The cash flow usage during the first six months of 2012 mainly related to an income tax refund (including interest thereon) received in March 2012 of $520,000 relating to a State of Wisconsin tax matter dating back to 2007, net of the effect of seasonal working capital changes while the cash flow usage during the first six months of 2011 mainly related to the funding our $3.2 million litigation escrow in connection with our MMT litigation.

The cash flow from operating activities was +409K in Q1 2012 and -92K in Q2 2012. So think it’s fair to assume that the company will burn through roughly 100,000 dollar a quarter. Management expectations also point in the direction that this is not too optimistic: ACME expected in their latest quarterly report that their existing position of cash and equivalents is sufficient to stay in business for at least the next twelve months:

We believe existing cash and cash equivalents, will be sufficient to meet our operating cash requirements for at least the next twelve months. We have no debt obligations other than one capital lease. In the event that net cash provided by operating activities and cash on hand are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce operations cash uses, sell assets or seek financing.

The company had a $528,000 cash position as of June 30, 2012. If the company is able to operate at least break-even this could be another source of value. Presumably ACME would need less cash  for it’s day-to-day operations if it only needs to run the Daily Buzz. If that’s the case it could return some of this as well to shareholders, and this also fits with the CEO’s statement that the company plans to distribute virtually all their cash.


To save the biggest potential problem for last: it is not totally clear what liabilities the buyer will assume from the company. The September press release doesn’t contain a whole lot of details, and there isn’t a new quarterly report yet with a breakdown of the assets and liabilities held for sale. Since the company completed a number of station sales we can look at past transactions to see if a sale for $X million also results in a $X million cash increase. In most cases this seems to be true:

  • In 2007 it sold WTVK for $45 million and used the proceeds to pay down $37.2 million in debt (the company is currently debt free) and to pay a $8.0 million dividend.
  • In 2012 it sold WBUW and used the proceeds to pay a $3.5 million dividend. Approximately $1.2 million of this dividend came from an escrow account: a lawsuit was settled for less than what the company had put in the account.

When you check the cash flow statement you will also see that the amount of money that is coming in is nearly identical as the announced deal price. This year the company sold WBUW for $1.8 million and you do indeed see a “Proceeds from sale of assets – discontinued operations” in the cash flow statement for 1,798 thousand dollar. Transaction costs don’t seem to be a major issue.

A bit of an exception are the station sales in 2011. The company sold three stations for $17.1 million. Besides funding the litigation escrow account mentioned above some cash was used to repay deferred programming payment obligations:

Additionally, upon consummation of the sale of the stations, ACME repaid deferred programming payment obligations for the three stations in the aggregate amount of $2.2 million to four of its program suppliers.

If a similar payment is required after the current transaction is completed a possible positive return could turn negative. If the company would need to pay more than $2.21 million after the completion of the deal the potential dividend per share would be less than $0.94. So the question is: what was the reason for this payment last year, and could it be an issue again? The reason for the payment can be found in the 2010 annual report:

In early 2009, in an effort to provide the Company with more cash liquidity during the difficult economic and operating climate, management initiated discussions with several of its larger programming suppliers requesting them to amend underlying programming agreements to revise payment due dates. The Company was successful in reaching agreements with these suppliers and the revised terms generally provide payment relief in 2009 and 2010 with those deferrals being caught up in 2011 and beyond.

So since last year the company has been busy catching up on the payments:

In 2009, as discussed above, we negotiated program license fee restructure deals with our top five suppliers (Fox, Warner Bros., Sony, Carsey-Werner and CBS/Kingworld), allowing us to push out payments from the fourth quarter of 2008, 2009 and 2010 to later years. These deferrals are reversing in 2011. In June 2011, we have a balloon payment of $1.5 million due to Fox.

Combine this with the following from the 2011 annual report:

In addition to the above commitments, included in our program rights payable at December 31, 2011 is approximately $603,000 of deferred program payment obligations scheduled to be repaid by the Company through and including 2015 but which accelerate upon the sale of the obligated stations.

Since the release of the latest annual report the company sold one small station. The cash flow statement for 2012 shows $16,000 net cash used in financing activities for discontinued operations. My guess is that this is a repayment of program deferrals since the company only has one capital lease. For simplicity sake I will assume that the whole $603,000 is connected with the remaining three stations.

Some obligations have been already been repaid in the first half of 2012: in the cash flow statement for continuing operations we can find an item called “repayments of program deferrals” for 143,000 dollar. So I think ACME Communications will need to pay ~$460,000 after the completion of the deal. This will leave the company with 17.3 – 0.46 = 16.84M in cash that can be returned.


I expect that ACME Communications will receive $1.05 in cash per share that can be and will be distributed to shareholders. With the shares currently trading at $0.94 you are looking at a potential return of 11.6% in, what I would expect, a roughly six month period. The biggest risk is that the company burns through cash while the deal is being completed. I think the $528,000 that is currently sitting on the balance sheet together with the optionality of receiving additional value if the Daily Show is sold at some point in the future is sufficiently offsetting this risk.

The second source of a margin of safety is the return that the deal is offering. Instead of making ~12% in six months I would also be quite happy to make ‘just’ 5%. I obviously prefer the higher return, but it’s not the end of the world if I missed some costs (maybe some restructuring costs?) or if the deal takes longer than expected to complete. Things don’t have to go perfectly to make this work out.


Long some ACME shares

Exited Urbana Corp

Urbana Corp has been one of the first write-up’s on my blog. I initiated my position almost a year ago, and the thesis was simple: it’s a crappy closed-end fund, but it’s trading at a big discount and it has a buyback program in place that should easily generate more value than what’s disappearing due to management costs, trading costs and other expenses.

While Urbana announced a new share repurchase program at the end of Augustus it seems to me that it has stopped buying back shares after just a few weeks. Today the company has exactly 70,000,000 shares outstanding (10,000,000 common shares and 60,000,000 non-voting shares). The share count has remained at this level for the past few weeks, and while the repurchase program was paused in the past it’s a suspiciously round number. Combine this with the statement below from the CEO (made last year):

We do plan to build this company and our goal is significantly above its current size. I would not like to run our size down too much.

And it seems to me that the company has reached the number of shares they are willing to repurchase. Given the fact that a big part of my thesis was based on the value created by the buybacks it seemed like a good idea to reconsider my position in the company. Unfortunately the discount to NAV is back at the level of when I bought my position (~45%), and in the mean time NAV/share has been going down even though the company did reduce the share count from 75.5M to 70.0M. The result: a loss of approximately 9.1 percent.


No position in URB-A.TO anymore

Switched theme to responsive design

I have upgraded the theme used for my blog to the latest WordPress design. The biggest change is that the theme is responsive: the layout changes based on the capabilities of the device used to visit the site. This should create a better viewing experience when visiting the Alpha Vulture blog using a smartphone or tablet. Hope you like it!


Long one WordPress blog

Why monkeys are great investors

Burton Malkiel, a strong believer in the efficient market hypothesis, and known for his book “A Random Walk Down Wall Street” wrote that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” Based on this remark The Wall Street Journal started a dartboard contest in 1988 to see if professionals could beat the performance of a random basket. The experiment was stopped in 2002. While the Wall Street Journal didn’t declare a formal winner research indicates that the professionals were unable to deliver higher risk adjusted returns than the random basket.

At first sight this seems to support the notion of efficient markets where professionals are unable to generate excess risk adjusted returns. Ironically the outperformance of the darts versus the professionals (and also the S&P 500 index) support the view that markets are in fact not efficient.

The reason is that buying a random basket with equal weighted positions is a strategy that outperforms in an inefficient market. An overvalued stock has by definition a higher market capitalization than it should have while an undervalued stock has a lower market capitalization than it should have. If you buy stocks based on market capitalization you will automatically buy relative more of the overvalued stock and less of the undervalued stock. If you assume that mispricings will be corrected in time the random basket is expected to outperform the market cap weighted basket.

The WSJ experiment is of course not very scientifically robust with regards to evaluating the possible alpha of an equal-weighted strategy, but a recent paper titled “Why Does an Equal-Weighted Portfolio Outperform Value- and Price-Weighted Portfolios?” provides stronger proof. The equally weighted portfolio does not have the same risk as a market cap weighted portfolio, because it invests more in smaller and riskier companies. But also after adjusting for such differences there is alpha:

The higher systematic return of the equal-weighted portfolio arises from its higher exposure to the market, size, and value factors. The higher alpha of the equal-weighted portfolio arises from the monthly rebalancing required to maintain equal weights, which is a contrarian strategy that exploits reversal in stock returns; thus, alpha depends only on the monthly rebalancing and not on the choice of initial weights.

So my suggestion for an updated version of Burton Malkiel’s statement: “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do better than one carefully selected by experts.”

One caveat: just because monkeys were great investors in the past doesn’t have to mean that this is also going to be true in the future. A key assumption in using an equally weighted portfolio is that there is no systematic mispricing based on the ‘intrinsic value’ market cap. If small companies as a group are overvalued you would actually be hurt if valuations reverse to fair value since you are overweight small companies with an equal weighted portfolio. If equal weighted portfolio’s or ETF’s gain in popularity this is exactly what could happen, and maybe already is happening.


No position in monkeys, and no intention to initiate one

Solitron second quarter results

Solitron filed it’s form 10-Q today for the second quarter of fiscal year 2013. It’s mostly business as usual: earnings are positive, but far from great. The one noteworthy event is the fact that Solitron bought some shares back this quarter in a privately negotiated transaction. Unfortunately it seems a one time event:

On August 28, 2012, the Company repurchased 99,943 shares of its common stock from a stockholder in a privately negotiated transaction at a price of $2.75 per share. The Company has not adopted a stock repurchase program or plan.

The transaction reduced the total of basic shares outstanding with 4 percent. Its not a lot, but good to see that at least a bit of the cash on the balance sheet is put to use.


Long Solitron