Note: As of 9/15/11 Nick Lee no longer manages a Covestor model
Author: Nick Lee
Covestor model: Event Driven
Disclosures: None
At the end of June we witnessed the near-parabolic rise (recovery) in many of the leading market indices. Companies like Porsche, Volkswagen, and Siemens continue to do well, mirroring an enviable German unemployment rate as the current weakness in the Euro proves a boon for exporting manufacturers. Despite the trouble, it is in Germany’s interest to continue “saving” lesser Eurozone members. The Euro is acting as a wealth transfer mechanism from poorer PIIGS nations to savvier/most fiscally responsible powers such as Germany, and to an extent, France. While this may come at the expense of Greece, Ireland and Portugal’s economic development, it makes Germany an enticing place to park some capital – at least in the interim. Dips in the DAX may provide many attractive buying opportunities in the months to come.
Likewise, I am still bullish on the U.S. equity market. Things are on the upswing – we’re not letting the summer slowdown shake our confidence. Sell in May? Maybe, but we’re prepared to buy approaching August.
Recently I had the opportunity to meet with Robert King, managing partner at Baskerville Capital, a hedge fund that specializes in deep value situations (e.g. when a company’s stock is fundamentally mispriced – think Warren Buffett’s style of investing). We discussed some ideas, and one potential opportunity he mentioned (and I give him full credit for the discussion below, which I am paraphrasing) was Tix Corp. (PINK: TIXC) – a company you may be familiar with if you frequent Vegas. I do not currently have a position in TIXC.PK in the Covestor model.
The company operates Tix 4 Tonight (Tix). Tix has agreements to buy extra tickets from Las Vegas shows/events that have excess capacity (i.e. not all the seats sold) and sells them via physical booths in and around Las Vegas. For reference, think of what Expedia.com does for hotels. So basically it’s a business that requires little capital, and theoretically should have good margins. By this metric Tix would seem “cheap” and we might be inclined to buy it, but unfortunately the company also owns a merchandise business, also based in Las Vegas. They thus also market/sell souvenirs and baubles, which as you can imagine is a business requiring a lot of capital, with bad margins. This segment of Tix is a crappy business.
Since the beginning of 2011, the company traded for approximately $1.25 then gained traction when hedge fund Baker Street Capital expressed interest in buying the company outright. Baker Street Capital offered $2.10 per share.
Now, because TIXC.PK currently (as of 7/1/11) trades at $1.70-$1.80 there is a potential opportunity to capture a significant spread if this deal proves successful. Looking closely at the company’s financials, I can easily agree with a valuation well north of $3.00 per share. Management is intent on refusing the buyout offer, which suggests that management must also value the company at more than the offered $2.10. This leaves the possibility that Baker St. Capital will have to up their offer. So what are the possible outcomes here?
- Baker St. Capital buys out the company at the offer price – an investor gains the difference between the current purchase price and the buyout price of $2.10.
- Management refuses to sell and doesn’t divest the merchandising segment. Stock stays where it is, or could trade lower or higher.
- Management takes the company private (they have expressed an interested in doing so). This would most likely also be for a premium, because they would have to outbid Baker Street Capital. An investor at current levels would gain the difference between the purchase price and the go-private price.
- Baker Street and Management get into a bidding war. Shareholders gain.
- Management divests/spins off the merchandising segment and the stock appreciates because it is undervalued.
There is of course always a “non-zero chance” that something could happen causing unintended consequences, but these are my current foreseeable outcomes for this stock, and why I’m considering an investment for the Covestor model.
Sources:
“Baker Street Issues Open Letter to Tix Corporation Stockholders“ 6/27/11, press release on MarketWatch https://www.marketwatch.com/story/baker-street-issues-open-letter-to-tix-corporation-stockholders-2011-06-27
