ACME Communications is in slow motion liquidation. In 2002, ACME owned 11 TV stations. Since, the company has been gradually selling off its stations and paying special dividends with the proceeds. On September 10, the company announced the sale of its final three station broadcast licenses and associated station assets for $17.3 million.
License transfers for the three stations requires FCC approval. The company expects to receive the go-ahead for the license transfer in late 2012 or early 2013. (I view the risk of any delay as extremely low, given the small size of the buying and selling parties. There is no market concentration or monopoly issue at hand.) After the transaction is completed, ACME “plan[s] to distribute virtually all of our cash to our shareholders,” said CEO Doug Gealy.
ACME Communications has 16.047 million shares outstanding with a current price mid-point of $0.86. Assuming the company dividends the entire $17.3 million to shareholders, the dividend will be $1.078 per share, or 24.5% higher than the current market price. (While the tax status of this dividend can’t be fully determined in advance, previous special dividends from station sales have been treated entirely or almost entirely as returns of capital due to the company’s accumulated losses and minimal current profitability.)
This dividend calculation ignores possible frictional transaction expenses like legal fees, but also ignores the $528,000 in cash on hand the company reported in its June 30, 2012 quarterly report. Taxation will not be an issue for the company as it had over $33 million in net operating loss carryforwards as of December 31, 2011.
A buyer of shares at the current price stands to realize a handsome rate of return when the special dividend is received, both in absolute and annualized terms. But the story isn’t over. ACME Communications has one remaining asset, its live morning news show The Daily Buzz which it produces and distributes to 200 TV stations nationwide. The company is presently seeking to sell this asset and finish the long liquidation process. Fisher Communications owns an option to acquire The Daily Buzz which was set to expire on September 30, 2012. The company has not yet disclosed whether or not Fisher exercised its option. Whether Fisher Communications or another company acquires The Daily Buzz, any amount received will represent value for shareholders above the already substantial dividend expected from the stations sales.
Risks to the scenario include the possibility that the FCC will delay or block license transfers or that the buyers will renege on the agreements made. I view these risks as minimal, due largely to the company’s historical success in selling its assets smoothly and without issue. The current market discount to a the conservatively estimated size of the upcoming special dividend can likely be explained by the company’s tiny market cap ($13.8 million) and limited liquidity. What’s more, this opportunity is too small to be exploited by arbitrageurs in the hedge fund community, leaving a nice opportunity for individual investors or smaller funds.
Disclosure: No position, may initiate soon.
Thanks for this post…but what about the $9.9M in liabilities on the balance sheet at 6/30/12? The press release on the transaction didn’t mention anything about the buyer assuming any of the liabilities, which presumably would have to be paid before the equity gets their hands on any of the value. Has the company mentioned elsewhere that the other liabilities have been paid off or assumed by buyers of their other stations?
Great questions. Would love the hear the author’s thoughts.
Also, how much of the intangible assets on the balance sheet will disappear with the sales and how much will be left and what is it composed of?
Hi Matt, please take a look at my reply to PSD Financier for my thoughts on the effects of the sale on the company’s balance sheet. I cannot foretell with much confidence what effect the transaction will have on intangibles. I am reasonably confident that all programming rights and liabilities will go, as well as all broadcast licenses. Goodwill is less certain, as is deferred income taxes.
What I can predict with a great deal more confidence is that when the sale completes, ACME will have at least $17.3 million in cash and the CEO has committed to distributing “virtually all” to shareholders.
You raise an interesting question. Looking at past transactions indicates that certain liabilities do transfer along with station sales. When the company sold KUWB and WTVK in 2006, it listed “programming liabilities” in the “liabilities held for sale” section in the amount of $1.612 million. Deferred income taxes in the amount of $2.121 million also are listed in “liabilities held for sale.” You can find this info in note 3 of the June 30, 2006 quarterly report.
When a station sale occurs, it appears that broadcast licenses, broadcast rights and programming rights transfer as assets as well as goodwill. Since the three remaining stations account for all of these assets currently on the balance sheet, I think it’s safe to assume the future balance sheet will not have these assets or liabilities.
Let’s assume for a moment that all of these assets are attributable entirely to the TV stations and that The Daily Buzz has de minimus assets. Present total assets of $22.974 will be reduced to $4.513 million after removing broadcast licenses, broadcast rights and programming rights. Assets will simultaneously be increased by $17.3 million for the cash inflow from the sale. The end result is assets of $21.813 million.
Liabilities will be reduced for the departing programming liabilities and deferred income taxes which together total $5.569 million, resulting in ending liabilities of $4.365.
Assets of $21.813 million less liabilities of $4.365 million leaves $17.448 million , or $1.087 per share. This ignores the fact that The Daily Buzz probably does have a small net asset base. However, if this base is a positive number, it raises the remaining equity per share.
Now, that’s an extremely rough estimate. The major point is that ACME’s liabilities will be reduced at the sale’s completion. Further evidencing the company’s ability to support the large dividend is the fact that the company was historically able to devote virtually all sales proceeds to debt reduction or dividends. When the sales of WTVK and KUWB finalized, the company used the total proceeds of $63.5 million to pay down debt by $55.7 million and pay a special dividend of $8 million for a total of $63.7 million. No funds were needed to satisfy station liabilities after they had been sold.
It seems to me that not always are libilities related to the station are sold. From: http://www.acmecommunications.com/pages/news_releases.html?d=222738
Quote: “Additionally, upon consummation of the sale of the stations, ACME repaid deferred programming payment obligations for the three stations in the aggregate amount of $2.2 million to four of its program suppliers.”
The explanation for $2.2 payment is a little complicated, but is revealed in the 2009 and 2010 annual reports. In the midst of the recession in 2009, ACME found itself strapped for cash and negotiated deferred payments on its programming rights payable to certain suppliers.
From the 2010 annual report:
“In 2009…we negotiated program license fee restructure deals with our top five suppliers (Fox, Warner Bros., Sony, Casey-Werner and CBS/Kingworld), allowing us to push out payments from the fourth quarter of 2008, 2009 and 2010 to later years. These deferrals are reversing in 2011. In June 2011, we have a balloon payment of $1.5 million due to Fox.”
The $2.2 million payment associated with the station sales in May, 2011 was the final payoff of these deferred programming payment obligations.
Interesting find. Thanks for the great post. I have to agree with alpha vulture though, it’s not that clear which assets and liabilities are part of the deal. Otcadventures – you bring up a good point that this argument might be a moot one, but given deals in the passed it seems like there stall are some open questions regarding workout NAV. Maybe the FCC application will shed light on the terms of the deal. Also, maybe if someone can request docs as a shareholder then maybe you see where the deferred taxes are, the accounts receivable, etc.. although this stall doesn’t get us any closer to the terms of the deal.
No one has mentioned it yet, but take a look at the executive comp in the proxy statement (wow!), one has to worry of the cash burn with this one. Not sure why big owners (Wynnefield Capital Management and GAMCO) haven’t kicked up a stink yet.
All and all, interesting article. Thanks Otcadventures. I always love reading your posts.
We’ll see how this one plays out. Now that the stock is up to 95 cents or so, I would not be buying in. I appreciate the kind words and I hope you will keep reading!
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