I came across the story a few days ago via Whopper Investments, and it struck me as so odd, that I felt compelled to learn more. The math laid out by the bulls is straightforward and compelling. PRXI has two things of value: 1) an operating business in the "museum exhibitions" business that did $40M of revenue and ~$7M of EBITDA last year (FYE Feb); and 2) a non-operating subsidiary (RMS Titanic, Inc or RMST), which holds a large quantity of assets and salvor-in-possession rights related to the Titanic wreck. These assets have been under LOI since October 2012 for a purchase price of $189M. The company has ~49M shares outstanding, a share price of ~$1.65, and near 0 net debt, for an enterprise value of ~$80M.
To state the obvious, it appears there is a large discrepancy here between value and price. Take the $189M sale alone and you're at ~$4.00/share, or almost a 2.5x return on today's price. Maybe there is some tax on the sale to consider, etc, but at these levels, who needs precision? It seems like a clear buy. That said, most people are not buying. The stock price is down considerably, and it appears nearly the entire shareholder base is either sitting at break-even or down on their investments today.
Here's my take on the bear case:
1) It is not obvious a sale of the Titanic assets can be completed. In May '13, management announced that they were exploring hiring an investment bank, as they recognized the uncertainty in the current (anonymous) buyers' bid. Past auctions have failed. These artifacts have been in the market for a long time.
2) This is not a typical business asset. Without a credible bidder, it's not immediately clear that these artifacts are worth much at all (of course you can charge to display them, but the company is also under a court order to adequately maintain them). It feels a bit like investing in baseball cards or beanie babies.
3) The bulls tend to value the operating business and the Titanic assets separately, however the Titanic assets generate ~50% of the operating revenue & profit of the operating business today, and that business is already small and sub-scale. They have some interesting rights to other exhibits (in particular the Bodies exhibit), however in the event of a sale, it is highly likely that the remaining entity would generate operating losses without a significant restructuring. It is not clear that it is appropriate to apply any meaningful value to the operating business if they are not continuing to exhibit the Titanic assets.
4) The Chairman of the board and 46% holder (Mark Sellers) does not have a lot of credibility. His hedge fund pitched the stock in the Financial Times at a $13.50 share price in 2007 (with a target price of $50), and he's since had to live through a nightmarish 6 years trying to claw that money back out. Talk about embarrassing. He recently wrote a letter to his investors, saying he would finally (after 2.5 years), allow them to withdraw their shares and liquidate if they so choose. While this may create an attractive opportunity to buy, it is not a bullish sign for the share price... The publication of this letter may have caused the recent dip in the stock price, but this selling has not yet begun (begins July 1).
So, would you invest? The stock has fallen from it's prior range of ~$2.50-3.00, down to ~$1.65 since management made announcement #1. At these levels, it's pretty clear the upside takes care of itself. So what's the downside?
Let's start with the obvious: I think you have to assume the current buyer falls through. We don't know a lot about this crew. We know from the public disclosures that it is a collection of individuals purchasing the assets for "for educational, regional economic development and cultural purposes." $189M is a lot of money to raise... Unless they are working with a large museum or university, they might have to raise more than that to house the assets, etc. They submitted an LOI in November, and they still are not confident enough in their bid to allow management to disclose their identity.
If the current buyers do pull out, investors would be faced three obvious questions:
1) Who is willing to buy the assets?
2) What price could they pay?
3) Would Mark Sellers and the board be willing sell at this (presumably lower) price?
I'll take these in order:
1) Possible buyers:
If you were PRXI's bankers, who would you call? The board is going to be hearing sell-side pitches if they really hire a bank. I'd love to see the names they'll get on the potential buyer list... I can only imagine how wacky some of them probably are. Since this is an opportunity to speculate wildly with little chance I could be definitively proved wrong in the future, I figured I throw a bunch of names out there, to try to better understand what the board might be grappling with today.
a) The Smithsonian - their mission is to "preserve our heritage." The Titanic is clearly an important piece of American history. They already have a small collection of Titanic artifacts in their american history collection, none of which (obviously) is actually from the wreck. They have federal support, a very significant ability to raise private money, and a ~$1B endowment. This is a large enough collection to be significant, even to them. That said, unless they will be the receiving entity from the current, "group of individuals" bid, it is clear they are not interested at $189M.
b) The British National Maritime Museum - saw it mentioned here. The Titanic obviously sailed from the UK, so sure, makes sense. They also have an existing collection related to Titanic survivors personal items and other ship-related memorabilia.
c) A Vegas casino and/or a pure financial buyer - A permanent exhibit is currently up at the Luxor. Anyone who could have a thesis of foot traffic = cash is a possible buyer here. This list is very long, but any given buyer is quite unlikely. Still you never know when a long-odds call to an empire-building CEO with a fancy for Kate Winslet might result in a profitable sale...
d) A smaller museum - New York makes a lot of sense as a destination, but their history and maritime museums seem pretty small to bid. In fact, when the Titanic exhibit came to New York, it went to a traveling display room instead.
I can only imagine rest of the list...
2) Possible Price:
So it's fairly obvious that no more than 1 of these buyers could be interested at $189M, and likely none of them are and instead the anonymous individual bidders represent themselves and/or a smaller museum.
What is an attractive price for our potential buyers? For starters, I think it likely varies by buyer. Let's leave aside the large museums, since although I think they are most likely to bid if the price falls, I'm not sure how they would think about the purchase, exactly. My guess is they look at it based on: 1) capital available to deploy; and 2) the ability for a collection to attract donations from private donors (Even the largest of museums could not afford this on their own. I assume even the Smithsonian would need to raise well over 50% of the price through private donations to complete a purchase). That said, I am not an expert in evaluating these factors. Others may feel more confident about these institutions' ability to bid.
What would a purchase look like to a financial buyer like a Vegas casino? My guess is either of these parties would staff up an M&A team and see if the transaction hits their cost of capital... This is a somewhat high risk transaction, so let's say they need to earn at least 12.5% p.a. to make it worth their while. assuming they pay cash and this business is relatively stable, this assumption means they can pay ~8x EBITDA (this is a gross over-simplification intended for illustrative purposes only).
So what is PF EBITDA for these assets assuming they are acquired by some type of financial buyer hoping to monetize them?
This is a relatively difficult question to answer, as they do not have a robust reporting format for each of their exhibitions. We know that PEM (Exhibitions business) pays RMST a royalty equal to 10% of exhibition and merchandise sales. For the last fiscal year, the collective Titanic exhibits (9 exhibitions in all), did $23.5M in revenue (see financial backup exhibit below). This works out to ~$2.6M of revenue per exhibit, and assuming Titantic prices do not vary substantially from the other exhibits, it implies ~1.3M visitors annually. You can see the history below, but these numbers have not varied too substantially in the past.
PF margins are more difficult, but it's probably safe to assume most buyers would have comparable gross margins to PRXI, and maybe better EBITDA margins (since they likely will have considerably more scale). 25% Would be quite good, I think, given the gross margin profile of the business, and implies EBITDA of ~$6M. My illustrative ~8.0x implies a purchase price of $48M. There is no science to that, but changing the multiple isn't going to help get too much higher here.
Now, a buyer may have further synergies here that allow them to bid higher. For example, The exhibit itself currently generates $18.82 per visitor, but for a Vegas casino, it could be 2-3x as much, since many people will likely stay to gamble, etc. This benefit is offset by the fact that to generate the current $6M of PF EBITDA, the PRXI needs 9 different exhibitions (6 of which tour around the world). Revenue synergies don't tour. At least not any I can think of. You might be able to round up on a valuation due to synergies, but I don't think anyone has any that are "game-changing" to the total consideration here. If not, then no reasonable multiple on these earnings nears the current market cap for this company.
Now, even if you believe in some of these synergies, that the post-sale RemainCo entity has value, and that the Titanic assets should command a higher multiple than 8.0x, I think you would stretch to get back to a $80M valuation for the combined entity. This is, of course, logical, since PRXI is attempting to monetize the Titanic assets as best they can already, and the financial performance of this company does not justify its current market capitalization.
So where does that leave us on possible purchase price? I am admittedly at a bit of a loss. I think it is very likely that the company will be able to sell the assets for substantially more that $48M. If I were a betting man, I might even take the "over" on a price that's double that, and closer to the appraised values that are floating around out there (I've seen between $110-$189M, depending on which appraisal and whether you count just the hard assets, or if you include the media and other IP). Regardless, I think it is hard to argue that banking on a price in that range is anything other than betting.
Conclusion:
I'll handle my third question (would Mark Sellers / the board sell at a substantially lower valuation), in a future post. Given the letter I posted above as well as some of the recent news in the company releases, I do have some thoughts (i.e. totally uninformed speculation), that I would like to get off my chest. Before I do that though, I have a question: What am I missing?
A number of very intelligent investors seem to be in this stock. At the most recent earnings call, analysts from some of these funds called in and rather than ask questions, they simply told management it would be nice if they disclosed more, and openly speculated that the stock is undervalued.
On the call, we heard from Glenn Tongue, who was named sole PM for a Tilson fund last summer and Arup Das, of Loeb Capital. Mark Sellers, per my note above, has obviously not had a great recent run, but he is also a serious investor who had apparently done quite well in the past. I don't know much about Greggory Schneider, but he also wrote a very bullish letter on valuation last year, and put his money where his mouth was, buying up 6% of the company at ~$2.75/share. Further, as linked to above, we have bull cases from Whopper, Chris DeMuth Jr., and Jonathan Heller.
How can all of these people be so sure? Are they that confident in the current LOI? Or that another buyer will come forward at a comparable price?
To my mind, there are only two reasons a buyer would purchase these assets. 1) Financial gain, or 2) Sentimental/Mission driven reasons (i.e. preserving history, etc). PRXI is currently trying #1 and the results are not impressive relative to their current market cap. Thus, for a sale to be consummated at a price exceeding the current market cap, it will likely be from a buyer who is buying for a sentimental reason. There are numerous reasons to think this may happen, but it is like buying a baseball card for $25 because it was appraised by an "expert" at $100. Sure, you might be able to sell it for $100. Of course if you can't, you basically have a piece of cardboard or, in this case, a rusted hull and some broken plates.
Financial Backup:
Here are the notes and math I used for the above analysis. I'm happy to share in excel if helpful, please just leave me an email in the comments....
NOTE: I may or may not have or initiate a position in this stock. This is intended to be purely for entertainment and is not financial advice of any kind. All my analysis could be completely incorrect. Do your own work / make your own decisions.
