5/07/2017

Deep Value Opportunity for Patient Investors



Warning: Illiquid, closely held, de-registration (suspending SEC reporting) susceptible towards an unfriendly shareholder environment. The negatives are significant and is only suitable for patient longer term investors.

But I'm embracing the words of Mohnish Pabrai's, "Heads I Win, Tails I Don't Lose Much".








During the prior 5 years, Pendrell (PCO) acquired and monetized IP (Intellectual Property) rights. The company continues to monetize existing IP assets. But today's main focus is on deploying and leveraging its cash, and NOL by acquiring new business opportunities.

To optimize its new business strategy management aggressively reduced expenses, headcount and simplified operations. Further, the board recommended and approved de-registration/de-listing as the next step in further reducing overhead expenses and improve strategic focus. Additionally, de- registration concentrate management's efforts on purchasing and leveraging NOL assets with new acquisitions, continued IP monetization, and further license their existing patents.

Near $2.5 billion in NOL (net operating losses) created when PCO was ICO Global Communication. ICO Global filed for chapter 11 bankruptcy August 1999 after their satellite was destroyed during its launch attempt. Then telecom billionaire Craig McCaw's steps forward to acquire in 2000. McCaw has controlled PCO ever since and is Executive Chairman. More importantly this large NOL creates advantages when competing to find a profitable company.

This talented equity compensated management team is uniquely qualified to allocate the large balance of cash, NOL and remaining hidden assets to increase the company's market value. Management has deep expertise in finance, taxes, mergers, acquisitions and technology licensing with proven entrepreneurship success. Today the total number of employees are 14. SGA annual expense was 30.078M in 2012 reduced 75% to 7.508M for the year ending 2016. This drastic reduction of SGA expenses supports their commitment towards value enhancement.

Pendrell's CEO Lee Mikles served as Future Fuel (2005 to 2013) CEO. He has extensive experience in corporate finance, chairman of Mikles/Miller Management. Pendrell CFO Steve Ednie has 20 years' experience in senior finance, accounting and tax roles. He served as Director of Tax at Expedia, Chief Tax Officer for XO Communications and Clearwire Corporation. Pendrell's Corporate Counsel is Timothy Dozois. Securities law compliance, mergers, acquisitions, divestitures, and technology licensing are his areas of expertise. Executive Chairman Craig O. McCaw's experience; founded Clearwire in 2003, director at Nextel Communications acquired by Sprint in 2005 and XO Communications. Further, he was the Chairman and CEO of McCaw Cellular Communications which he built into the nation's leading provider of cellular services in over 100 U.S. cities. It sold in 1994 for 12.60 billion to ATT. Lastly, McCaw is the CEO of the venture capital firm Eagle River Investments. The firm's focus is on strategic investments in telecommunication and technology companies.


Pendrell sits on valuable patent assets. I admit knowing nothing of the fair value or the uncertain outcome of pending litigation. The trial against ScanDisk is set on October 2017 for importing patent infringing products. They continue to discuss their digital rights licensing with motion picture studios and theater operators.  In addition, PCO continue to pursue appeal of two adverse jury decisions against Apple,Google and manufacturers of Android devices. For a more informed analysis  of Pendrell's patents check out  http://ujinv.blogspot.com/search/label/Pendrell




Valuation:












A few repetitive but notable comments on the table below.
Current net cash per share at $5.79 and current AR of $.61 for a total of $6.40 per share. This compares favorably to the current market price of $6.00. In addition, large net operating losses to leverage with the purchase of a profitable acquisition. During the most recent quarter, Pendrell smartly allocated its capital by purchasing 2,232,293 of its own shares at $6.55 per share for a total of $15,935,465. The existing patents generated positive 2.23M operating income and 3.44M net income for 2016.































Ownership

































In conclusion, I understand the risk and its not suitable for all investors. But, I purchased after last year's writeup and consider the current price an opportunity. The net cash, NOL, capable equity incentivized management, optionality from patent litigation and the ultimate new acquisition to leverage corporate assets are reasons for my interest.  



Long PCO

2 comments:

HTT said...

Hi, Very interesting. I recently sold all my stocks in Pendrell just because of the announcement of the de-registration. WHat are your thoughts regarding it? Are you comfortable owning a stock gone dark or are you thinking that there is opportunity before it does?

ShadowStock said...

HTT, I’m not happy but okay with holding shares when they go dark. I’ve made the mistake selling shares that deregistered to avoid SEC reporting only to see the stocks move substantially higher,+ double. Years ago, DVLN, BWTL, and others are personal examples.

It’s not like the company is liquidating. Management owns most of the stock. They will need the markets to fully monetize their investment and grow the company with cheap market financing down the road after an acquisition.Just my guess. It will take time. So, it’s more of a hold and forget about the idea for me.