XPERI CORP XPER
February 25, 2020 - 11:31am EST by
Shooter McGavin
2020 2021
Price: 18.30 EPS 0 0
Shares Out. (in M): 49 P/E 0 0
Market Cap (in $M): 916 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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Description

 

Xperi is an R&D house and IP licensor for the tech industry focusing on semiconductor packaging and interconnect, audio encoding/decoding, as well as digital photography/computational imaging.   I wrote it up in 2017, as did specialk992 in early 2019.  Those should provide a good background of the company's FCF potential, though it's important to note that for all intents and purposes, the company’s a black box.  That said, the following is why I think it’s a fairly interesting setup today.

In December the company announced it would merge with TiVo in an all-stock deal, whereby XPER shareholders would end up owning 46.5% of the company and TiVo shareholders would own 53.5%.   Given the company’s respective unaffected enterprise values and operating cash flows, it seemed lopsided in favor of TiVo.  Feedback from other XPER shareholders was mainly concern over re-leveraging the balance sheet in a deal that basically just gets them a video content programming guide business.

As a result, the stock fell 19.4% from announcement of the TiVo deal to the day of Q4 earnings.  During Q4’s call the following Q&A took place (the pasted transcript is not of any particular importance on its own, but highlights why the market collectively shrugged here and decided XPER would move to the “too hard” bucket after the TiVo deal was announced):

Richard Cutts Shannon Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst

Okay. I'll ask one more question and jump out of line here. In your prepared remarks, you talked about your thought process on the TiVo acquisition. Appreciate the detail there. Maybe if you can give us a sense of what you're hearing from investors since you announced this in late December. And part of the reason I ask, Jon, is that we've seen the stock prices from both participants in this central acquisition come down here in a reasonably good market. So there's clearly some difference between your views and what you're hearing from others. Maybe if you could highlight a couple of things that you think are the biggest misperceptions of this deal. 

Jon E. Kirchner Xperi Corporation – CEO & Director

Well, I think first and foremost, I think there has been a big information gap around just how the businesses were expected to perform. And I think part of the importance of today is that we've both been able to give 2020 guidance. And then secondarily, I think in the course of -- as one looks at the proxy and we share information about how we both think about our respective businesses over time, I think one of the things that will show through that maybe isn't completely well understood is really the benefits of size and scale and profitability is further optimized in the -- under the IP business and under the Product business and how we believe we can take these businesses to very successful outcome as independent companies.

 So I think perhaps the information gap had a lot to do -- I think naturally there are concerns maybe from one set of investors or another depending on who they're invested in about the other business. But our belief, after a ton of diligence and a lot of discussion as we think about the best way to set up and create value for the respective IP business and the Product business is through this combination. And I think as the information gets out there and we have a chance to talk now more specifically and openly about how we drive that value, I think we believe that it will be very value-enhancing and value-creating for all of our shareholders. 

In that earnings announcement and call, (2/18/20) the company: 1) introduced 2020 guidance for XPER standalone which was better than feared (and is lower than the guidance provided in the deal’s S-4, basically because the company is attempting to set expectations low); 2) announced some tangible progress in its machine learning endeavors; 3) spoke in more detail about the deal merits that management sees; and 4) for the first time discussed preserving TiVo’s $900mm NOL (worth +$200mm) as part of the deal.  Lastly, management reiterated that once the TiVo deal closed, it would work to split the company in two, spinning off the combined businesses’ IP licensing units (BadCo) and introduced a 12 month timeline from deal close to the spin.  IP licensing businesses are hard to value, but it's worth mentioning that the BadCo spin will be the largest of its kind, with decent diversification.  I'll note that InterDigital trades at >10x this year's consensus EBITDA.

In addition to the above, on February 6th, XPER announced that it entered into an IP licensing agreement with SK Hynix.  The agreement includes access to XPER’s portfolio of semiconductor intellectual property (IP) and a technology transfer of Invensas’ DBI Ultra 3D interconnect technology focused on next-generation memory. This is important because it shows their R&D efforts can actuall yield some fruit once in a while.  And given Micron has historically been a follower in terms of what IP it adopts (and pays for), it bodes well for MU to re-sign with Xperi sometime in 2020 without a drawn out legal process (as was the case with Samsung).

In summary, I believe there is a lot to like about the go-forward prospects of the combined business.  However, that is not the reason I am writing it up.   Instead, I think there’s a more actionable trade hiding out here.

On 2/24 (yesterday for those reading in real time), Metis Ventures, an entity associated with Xperi’s former CEO, Tom Lacey, made a non-binding proposal to acquire XPER for $23.50 in cash share (a 28% return from today’s price).  Xperi’s Board, which is only able to explore unsolicited bids that are reasonably likely to yield bona fide superior offers, naturally told Lacey to piss off.  Analysts agree, with B Riley FBR saying the bid “meaningfully undervalues” the standalone value of Xperi.

What I find fascinating here is that Lacey knew what the Board’s reaction would be.  But I surmise he also knows the TiVo deal is subject to a shareholder vote among XPER shareholders (as >20% of new shares are to be issued on the deal).  So I find it hard to comprehend that Metis won’t up its bid and plead its case directly to shareholders, which I think will lead to share price appreciation.

With upside of 28% to Lacey’s first (but in my estimation, not final) bid, plus the prospects of owning something with a ton of shots on goal in areas such as 3D interconnect and packaging, plus an upcoming spinoff of BadCo—all while trading at a reasonable multiple of FCF, I believe XPER shares today are actionable.  I am happy to discuss specific questions in the messages section.

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Metis ventures upping their offer and going directly to shareholders.

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