Q: When might a company's reported EBITDA not be a good reflection of its true profitability?
A: When its CEO is secretly attempting a management lead buyout and thus may be motivated to downplay reported results.
In its recent earning release, Tix Corp. (TIXC) reported 2010 EBITDA of $3.8 million. Its been alleged that the company's CEO had been secretly attempting a management lead buyout (read the April 4th letter from Baker Street). If this is true, it might explain why in the earnings release TIXC failed to add back or even mention several one-time items that significantly depressed and distorted 2010 EBITDA (note: in earlier quarters the company had highlighted such items in their earnings releases). As illustrated below, we conservatively believe Pro Forma EBITDA is really closer to $8.0 million and should be even higher in 2011. Based on $8.0 million of EBITDA, TIXC trades at 5.4x EBITDA, requires minimal capex (but has high d&a), has a strong competitive position, minimal inventory or a/r risk, an $18 million NOL that minimizes cash taxes, is unlevered, and recently got a takeover bid of at least $2.10 per share (which we consider to be too low).
TIXC has 2 simple businesses that are described well on its website and in SEC filings. The largest business, which represents a vast majority of total EBITDA, is Ticketing Services which operates 11 stores in Las Vegas that sell discounted (25%-50% of face), day of tickets to shows (such as Cirque du Soleil) and other events. It is similar to TKTS in NYC. This is a great business because it has no inventory risk, maintains a very strong market presence with minimal direct competition, and will continue to benefit from an increasingly cost consciousness consumer (who is increasingly willing to spend time standing in TIXC's lines to save significant amounts of money). As discussed below, we believe this business could also further increase its pricing, which would have a significant impact on profitability. The second and much smaller business is Exhibit Merchandising which provides retail specialty stores with branded merchandise for touring museum exhibitions such as "Tutankhamun and The Golden Age of the Pharaohs." This business has few synergies with the ticket business and we believe eventually will be sold.
Over the past year, the company has bought back a significant amount of stock, sold a non-core business (Live Entertainment) and settled a major lawsuit.
Below reflects our estimate of the current capitalization:
Stock Price $1.72
Shares Outstanding 24.8
Options/warrants 3.0 includes in the $ outstanding options/warrants
Total Shares 27.8
Equity Market Cap 47.8
Cash (12/31/10) 8.8
Live Ent. Receivable 0.5 See PR on Nov. 22, 2010
Vegas.com Settlement -2.0 See PR Feb. 24, 2011
Options/warrants Proceeds 3.8
Pro Forma Cash 11.1
Buyback Obligation 4.0 Payable thru January 2013. See PR on Nov. 22, 2010
Vegas.com Payment 2.0 Payable over 8 years. See PR on Feb. 24, 2011
Pro Forma Debt 6.0
Enterprise Value 42.7
Note: we conservatively hit the company for a $4 million Vegas.com settlement that was agreed to at the end of February, but did not give the company credit for cash TIXC likely generated thru February.
Below is our analysis of 2010 EBITDA:
Reported EBITDA 3.8
Non-recurring legal expense (a) 1.0
Non-recurring bad debt expense (b) 0.9
Non-cash warrant compensation (c) 0.5
Non-recurring consulting fee (d) 0.2
Vegas.com contribution (e) 0.5
Egypt startup expense (f) 0.5
Adjusted EBITDA 7.4
Incr. delisting/deregister saving (g) 0.6
Pro Forma EBITDA 8.0
- a) Relates mainly to Vegas.com litigation which has now been settled. See SG&A on page 21 of annual report.
- b) Bad debt write-off from atypical business transaction. See SG&A on page 21 of annual report and 2nd quarter 10Q and PR.
- c) See page f-7 of annual report.
- d) See page f-14 of annual report.
- e) See press release on February 24, 2011. As part of the agreement, TIXC acquired additional ticket selling locations, including one whose location had been hurting an existing TIXC location. TIXC can now sell its inventory of tickets into these acquired locations, further enhancing their historic profitability. It is difficult to quantify the exact benefits of this transaction. However, the estimate we have used we believe is conservative and it is also significantly less than the estimate management has verbally communicated. As a reminder, TIXC agreed to pay $4 million (less on an NPV basis), and even though the agreement brought other benefits to both parties, paying $4 million for only $0.5 million of our assumed EBITDA is a far higher multiple than the company has paid for other ticketing acquisitions, which is another reason we believe our EBITDA estimate is conservative.
- f) See page 23 of annual report which indicates the company incurred $0.5 million of start-up expenses related to the opening of a new exhibit in Egypt in the middle of December of 2010. The Egypt exhibit did not generate material income in 2010 nor is TIXC expecting any material income or expenses in 2011.
- g) The company deregistered/delisted its stock in late 2010 and publicly stated it would save $1 million annually as a result. Since this occurred late in 2010, TIXC did not reap all the benefits in 2010 and should generate additional savings in 2011. In the earning release the company states that in 2010 it saved approximately $315,000 related to this process. (Note this may somewhat contradict language in the 10k which suggests to us the savings in 2010 were not that high). We conservatively estimate the company can save an incremental $0.6 million in 2011.
The above EBITDA analysis does not give any credit to the:
- 1) Full year impact of the increased transaction fee (charged to ticket buyers) TIXC implemented in mid- 2010. Obviously this is not reflected in the full year results and any incremental ticket surcharge largely falls straight to the bottom line as there is no material incremental cost. Furthermore, now that the Vegas.com lawsuit (which included charges of monopolistic activities) has been settled, the company may be able to further increase its transaction fees. However, we think the stock is undervalued even without adjusting for these increasing fees.
- 2) Significant revenue enhancements and cost savings a new management team or a financial or strategic acquirer could easily obtain. For example, corporate overhead was $4.0 million last year, CEO and COO made a combined $2.0 million last year, CEO's office is in California but the company has no operations there.
So what is to prevent the CEO from continuing to downplay the company's results and this stock being a value trap?
- 1) The CEO publicly stated on April 4 that management has "no current intention" of buying the company (although he did not deny that he had been attempting to do). This statement came after Baker Street's offer went public. This obviously does not preclude a future offer by management but it does provide comfort that he is no longer motivated to downplay reported results.
- 2) Baker Street and other shareholders have indicated they will not sit by idly and let him steal the company with a lowball MBO. TIXC's Board has formed a special committee and hired a financial advisor in response to Baker's bid.
- 3) We believe the CEO is feeling the pressure from various parties to create additional shareholder value. To his credit, he has given into shareholder pressure and sold a non-core business and bought back a lot of stock, which is something shareholders had been demanding.
- 4) The company's reported results in 2011 should look significantly better than 2010's and thus make it easier for investors to see the underlying value. In 2011, not only do we expect operations to be more profitable, but the company will not have the one-time items that depressed and distorted 2010 reported results. Therefore, we believe the stock will get on more peoples' radar screens as the strong results (and reduced share count) are reported. We believe many investors and data bases will not read the 2010 annual report and not recognize the EBITDA add backs we have presented here.
- 5) The CEO owns 3.6 million shares so he has an economic interest in creating shareholder value.
- 6) We would not be surprised to see other parties (besides Baker Street) express an interest in acquiring the company.
Anyone interested in additional background on the situation should read the complete letter issued by Baker Street on April 4 and various letters issued by Echo Lake Capital. This will provide insight into the stock's underperformance, poor management and Board performance, and opportunities to create shareholder value.
The company is no longer required to file a 10k, but its annual report can be found on its website at http://www.ir-site.com/tixcorp/annual.asp .
Stock Ownership: Baker Street owns approximately 5.4 million shares, the CEO owns 3.6 million shares and other insiders own 1.2 million shares. We believe a significant number of shares are owned by other parties who would not be supportive of the CEO but would be supportive of various value enhancing ideas (proxy fight, new management, buyback, dividend, etc). Importantly, we believe the table on page 12 of the annual report is deceiving and may not accurately reflect the current ownership structure because it gives management "control" over 6.2 million shares that they may not legally be allowed to vote.
- 1) Sale of the company to Baker Street - Baker's bid is for at least $2.10 per share. The bid is not yet fully financed but Baker Street states in their offer letter they are "highly confident" they can raise the necessary financing. Considering Baker's large ownership, TIXC's strong free cash flows and the favorable lending environment, we believe Baker Street will be able to obtain financing. We think the big question isn't whether Baker Street can get financing but whether they can get the company for only $2.10 per share or will they or someone else be forced to pay more.
- 2) Sale of TIXC to another party - we believe there any several strategic and financial buyers who would be interested in acquiring TIXC, especially if the company were to be put up for sale. There are many revenue enhancements and cost reductions a buyer could implement.
- 3) Return of capital to shareholders - if the company is not sold, we would expect management to return additional capital to shareholders via a buyback or dividend. We believe in recent months (but prior to Baker Street's bid) the company repurchased ~250k shares at ~$1.50 per share. We have not included this in our analysis. As a hypothetical example, if the company levered up to 2x EBITDA (not an aggressive level considering TIXC's strong free cash flow), the company could repurchase ~40% of its outstanding shares based on current pricing.
- 4) Proxy fight is waged and a new, shareholder friendly management is installed but TIXC remains public.
- 5) Even if none of the above events occur, as discussed above we believe new investors will buy TIXC's stock as the 2011 (improved and clean) results are released.