IMAX Accounting and Legal Woes Make It a Sell

Everyone knows what went wrong with Imax Coporation (IMAX) yesterday: they offered the company up for sale, they didn't get a buyer at the price they wanted ($12-14), their accounting is in some dispute with the SEC, and, as a result of those first two, the class action lawyers are circling like sharks.

Which just goes to show you how bad a company can perform even when their business is on track and their profits are growing. And that's why I'm selling some shares today as part of my overall margin reduction initiative.

I don't like that I sold IMAX . I'm still holding the shares that I purchased for a retirement account at $6.20 following the disappointing no-buyout news. I thought those shares were a bargain then, and I still think that's well below a fair price for the company.

But given the confusion about their accounting and the risk that their accounting problems will actually develop into something signficant (at this point, it's just a question of recognizing revenue during construction of their theaters, which is a timing issue that I don't much care about), I can't justify borrowing money to hold the shares in my margin account any longer.

The fact that the CFO resigned adds a little more urgency to the situation, and may explain why the shares remain in freefall, but I think it's as likely that he was a sacrificial lamb or that he made a simple mistake as that there was any real chicanery going on.

I sold a bit less than half of my overall IMAX holdings, and cleared out all of the shares that I held on margin. This sale brought a loss, of course, so at least it will help me to write off some of the profits I'm taking in other positions. The Imax shares I sold yesterday were purchased at an average price of $7.30, and were sold yesterday morning at $4.99 for more than a 30% loss.

Comments

[Zack Miller:]

I've been following your take on IMAX and have liked what you have said. I agree -- I think there is an underlying company definitely worth more than what it's trading for right now. Clouded in an array of bad news, it's like the perfect storm with no short-term catalyst to make it stop going down, let alone go up. I've puked it and am just getting out of the way until it settles. Once it does, I think you have a very interesting value play.

2006 Aug 24 06:28 AM

[Philip Davis:]

It is possible (and I'm the suspicious type) that the insiders wanted to take a $8 cash deal that was very unpalitable to the shareholders - until now!

I'm a buyer at $4.50 based on the fundamentals of the business and my total distrust of the timing of this "scandal."

What better way to turn angry shareholders who would have blocked a low buyout into relieved sharholders who praise you for finding a buyer for this turkey?

For the executive team, there is cash on their low basis shares and options plus continued employment at Sony (oops - forget I said that) with additonal options and incentives going forward. For the common shareholder, a 20%+ haircut off the 2 year average.

The insiders only hold 11% of this company, not enough to push a deal through and not enough to make them rich this decade waiting for the stock to appreciate without dillutive and risky financing so a sale to a studio or theater chain is a must. They couldn't have gotten a better situation to pull it off than if they had somehow made it happen...

2006 Aug 24 06:05 PM

[Travis Johnson:]

Philip, I love your conspiracy theory ... but would a pair of friendly Canadians do that? In all seriousness, I think Imax probably overshot and demanded either too much autonomy or too much money from investors -- if they really set the bar at $14 that was a significant reach.

But I think you're right, the company's worth much more than it's selling for today ... the only question is how long it will take for that worth to be realized. I think, truthfully, that even an $8 takeover would be a bargain for any acquirer, assuming that the lawsuits and accounting inquiries are as unimportant as they seem to me.

2006 Aug 25 12:19 PM