With the announced sale of assets to Encompass yesterday, ASCMA has divested the majority of its operating assets, its value becomes much easier to pin down compared to the opaque collection of assets before. (For my previous articles on ASCMA, please see here and here.) Of course, if the initial valuation wasn’t at least a little hard to pin down in the first place, there wouldn’t have been an investment opportunity. Below, I’ll run through the recent sales to arrive at what I think is a reasonable final value.
Before the recent sales, according to the latest 10Q, ASCMA had $279M of cash, $97M of marketable securities, and $173M of property and equipment. The current assets basically offsets the total liabilities, and I’ll assume they net out to zero. This means ASCMA had $376M of cash-like assets, and $173M of long term assets. The sale to Deluxe involved selling the post-production assets for $68M, as documented in the SEC filing. This moves the cash position to $444M. The sale involved selling 11 assets, and left ASCMA with some 45 assets, many located overseas, especially in the UK, with only about 10 assets left in the US.
The sale to Encompass yesterday involved the content distribution assets of ASCMA, which was sold for $120M. The final breakdown of the sold entities has not been revealed yet, so we do not know how many of the 45 entities are left. However, the press release states that after the sale, Ascent would have sold “the substantial majority” of its operating assets, with the exception of its systems integration (SI) consulting business, which the Company “continues to pursue strategic alternatives for”, i.e. is still shopping around. The $120M sale moves the cash position to $564M.
How much is left of the $173M of long term assets, and how valuable are the remaining assets? The most valuable assets have probably already been sold. And Ascent has begun shutting down some of the remaining businesses, such as the GMX Exchange, which presumably cannot be run on a profitable basis. For simplicity, let’s assume that the remaining small cash expense due to administrative personnel will exactly cancel out the value of the remaining businesses. That means that ASCMA should be worth $564M, the value of its cash, or $39.45 per share. ASCMA is still currently trading at a good 15% below that, even after the 10% jump in price yesterday.
Are there any remaining risks to this valuation? There should be a discount for the lack of control over the cash, as well as for a small risk of the deals not going through. Still, it is probably unreasonable that cash should be trading at as large as a 15% discount, even after accounting for those risks. Finally, there is the Malone factor. Investors who are able to locate good investments on their own will probably prefer that Malone dividend out that cash, while others who believe in Malone’s investing prowess may prefer that he invest it on their behalf. I think that once the discount narrows to, say 5%, we are out of value investing territory, and it becomes an argument on how good Malone is.
Disclosure : I own ASCMA shares.
{ 6 comments… read them below or add one }
What do you think about tax consequences of the sales? Have you accounted for these?
An excellent point. I had forgotten about the tax issue. As the book value of the sold assets was not disclosed in any of the sales, the following is a GUESS. Since the assets sold account for most of ASCMA’s operational cash flows, I will assume that they make up the bulk of the long-term assets as well, say, 95% of $173M, or $164M. The assets were sold for $188M, or a pre-tax gain of $24M. At a 40% tax rate, that will be about $10M in taxes, which will bring the valuation down to $554M, or $38.75 per share.
I tried the same guess, but unfortunately the tax basis of an asset is not the same as the GAAP value reported on the balance sheet. So a company has to maintain two sets of books: one for tax accounting and one for GAAP accounting. I thought about looking at the Chiswick Park sale for reference, which the company sold for 34.8M, recorded a pre-tax gain of $25.4M, and $4.7M in income tax expenses.
In other news, it looks like they are bidding for Monitronic.
If you’d like to discuss this further, please email me at the email address in my comments.
Wouldn’t the NOL’s more than offset the gains on sale?
Operational gains/losses and capital gains/losses are considered separate categories in terms of taxation, and even NOLs are split between domestic and foreign pools. The use of losses from one pool to offset gains in another pool is governed by complex rules that take professional accountants days to figure out even with full access to tax returns. As investors, I think its best to assume that all gains are fully taxed at the normal corporate tax rate, and be pleasantly surprised if and when the actual tax rate is lower than expected.
You are right that the tax treatment is fuzzy for an outsider. But since they already sold off the UK piece, most of what is left is probably in the US (with some left over in Singapore). Even if they are not directly applied to the sale, they would be carried forward with any new business that gets acquired. Malone is well known for his “no tax shelter left behind” policy. I agree with the conservatism, but I think there may be more upside in the tax loss carry forwards than you are giving credit for.
{ 1 trackback }