Where's the Value in ValueVision Media?

Includes: EVLV, HSNI, QVCA
by: TMT Analyst

ValueVision Media (VVTV) is the number three player in the domestic television home shopping industry behind QVC and HSN (NASDAQ:HSNI), with the ShopNBC channel. The company has a 10% share of the domestic industry and has historically focused on the upscale end of the market with ASPs greater than $200, compared to ASPs for its two competitors in the $40-$60 range. However, the company has been the least profitable of the three in part due to the fact that they pay the same carriage fees over a much smaller revenue base (this also explains why HSN's margins are half that of QVCs).

The shares are trading hands at $0.20 and the company has a market capitalization of roughly $7 million. The shares are down over 95% over the past year and could likely face a NASDAQ delisting notice based on the bid price. The company failed to successfully find a buyer over the past year after soliciting 137 potential buyers and signing confidentiality agreements with 39 of them. With the current economic environment forcing several large retailers to go out of business, one has to wonder whether Value Vision is headed in that direction soon. The shares are indeed pricing in that scenario.

The company has outlined several strategies to grow profitability including: 1) expanding Internet distribution; 2) optimizing the product mix to appeal to a broader set of customers; 3) reducing emphasis on high ticket items; and 4) focusing on repeat usage. In strategy 1, the company faces intense competition for online dollars and would have to increase online marketing spend, which would pressure their profitability goals. In strategy 2, they would be pitting themselves up against QVC and HSN's target segment and gaining share would be difficult. Strategy 3 is prudent given the current economic climate but there are likely to be execution challenges. Both QVC and HSN have had difficulty in the past whenever they have tried a product shift. Point is that this strategy caries significant risks. Lastly, on strategy 4, driving repeat usage would require an immediate investment in retention marketing initiatives, which would pressure near-term margins. The time required to implement these set of strategies is not on the side of management.

In the latest quarter, revenues were estimated down 35% YoY to $142 million, EBITDA was projected at a loss of $15 million compared to EBITDA of $5 million in the prior year, and net loss was projected at $40 million compared to a net loss of $1 million in the prior year. The net loss included a $9 million non-cash charge related to their TV station in Boston and a $6 million impairment charge due to illiquidity of the Auction Rate Securities.

It is difficult to arrive at a value for this company. They do have a business generating significant revenues but profitability on those revenues are uncertain, and given the current economic climate, which our president has dubbed the worse since the Great Depression, it is hard to peg a turnaround in profitability for the company. They have announced headcount reductions and are in the process of negotiating carriage agreements with the cable and satellite companies, which are hopefully favorable. However, both are unlikely to be enough to offset the pressures on profitability.

The company ended 2008 with $75 million in cash, but according to management, $20 million of that figure is Auction Rate Securities, which are not liquid. So let's reduce the company's cash availability to $55 million. That's $1.62 in cash, which is significantly above the current share price. However, the company has $185 million in "contractual" obligations over the next five years relating to their cable and satellite agreements and operating leases, with an average annual cash commitment of $44 per year from 2009 to 2012. In addition, GE has the right to convert its preferred stock in Value Vision on March 9, 2009 at a redemption price of $8.29 per share or redeem the shares for the redemption price (cost at $44 million).

The company is in a difficult position, potentially facing $88 million in cash payments in 2009 when they only have $55 million in the bank and the business is unlikely to generate cash to cover the payments. Management stated that they are in the process of renegotiating with GE to extend the terms of the Series A Convertible Preferred Stock. Assuming that they are successful and that burden is temporarily lifted, the are still on the hook for $44 million, while the business is burning cash. They could presumably go to the markets to raise money but the chances of them being successful is slim, in my view. Anyway you twist this, Value Vision is in a bad position and the market knows this, as reflected by the price of the shares.

So that leaves only the assets to value. I am estimating $4.85 per share in value for Value Vision's assets including cash, working capital, buildings and other property, and licenses. I am also writing down by 50% the value of the Auction Rate Securities to $0.29 per share, for total assets of $4.85 . However, the cash obligations total $6.74 per share, leaving a negative $1.89 per share of value.

click to enlarge

Thus, using the liquidation valuation approach, the shares are essentially worth zero, assuming they are on the hook for those obligations. In the event of bankruptcy, it would be up to a judge how these assets are spread across owners (investors) and the parties Value Vision is obligated to make payments to. It's possible that in bankruptcy those obligations are substantially reduced. In that event, investors could walk away with some cash value although I have never seen precedence of this. But this is a risky situation and I prefer to stay on the sidelines.