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RealNetworks (NASDAQ:RNWK) represents an exceptional value at current levels. The founder and CEO, Rob Glaser, was arguably operating too many business units. This resulted in a lack of focus and sub-optimal profitability. On January 13, Glaser stepped down in favor of Robert Kimball, who has been brought in to maximize shareholder value. Glaser will remain involved as the Chairman of the Board.

RealNetworks' new mission will start by divesting some of its business units. Specifically, RNWK and MTV (VIA and VIA.B) have agreed to spin off Rhapsody, their digital music joint venture. This transaction is expected to be completed by the end of this quarter. RNWK also plans to shed its gaming business, along with any other unprofitable activities.

When the restructuring is complete, RNWK should be profitable, with a lot more money in the bank. As a result, I would expect the company to issue a large cash dividend, which would help to maximize shareholder value. As it stands, the company already has $3 per share in cash. Plus, it has business operations which could be acquired for anywhere between $3 and $6 per share. Meanwhile, the stock is only trading in the mid-$4 range.

A special dividend would do more than just pad investors’ pockets. The tax implications of a large dividend are very favorable. For example, the following scenario assumes that the company sells all of its businesses at the low end of its takeout value ($3):

With $3 per share already in the bank, a $3 per share divestiture of its other units would boost RNWK's cash reserves to $6 per share. In order to maximize shareholder value, I believe they would distribute that $6 to investors as a special dividend. If this happened two things would result:

1) The stock price would drop to $0 (or close to it), giving investors a capital loss of $4.33 (based on RNWK's current price). This would offset gains on other stocks, which are taxed at upwards of 35% on a Federal level. So, the post-tax benefit would equal $4.33 x 35%, or $1.52.

2) The $6 dividend would only be taxed at 15% on the Federal level (dividend tax rate). So, after-taxes, investors receive keep $5.10 per share in cash.

Adding it up, for a $4.33 investment today, the above scenario would result in $6.62 in after-tax cash and tax-benefits. Depending on the state, the result would be higher to varying degrees, but the minimum profit would be $2.29 per share, a 53% return on investment. To get that post-tax return from a typical investment, you would have to generate a 88% pre-tax profit (88% minus 40% tax = 53% post-tax profit).

With RNWK now focused on maximizing shareholder value, the above scenario makes the stock a very compelling value.

Looking at the stock's risk-to-reward ratio --

At the high-end of RNWK's break-up value range, the total post-tax return would approach $5.00 per share (again, based on a current price of $4.33). Conversely, if things go horribly wrong and the stock's value drops to its cash level of $3, the post-tax loss would be less than $1.00 per share. So, I calculate that the risk-to-reward ratio for this investment is roughly 5-to-1.

One last thing -- Wall Street's estimates call for a 17-cent loss in 2010 and a 39-cent loss in 2011, but these numbers belie how the company is really doing. These are accounting losses. In reality, RNWK has been generating cash, which is the most important measure of real profitability. This is further demonstrated by the increasing value of its balance sheet. In my opinion, its expanding book value is happening at a fast enough clip to justify its valuation on a standalone basis. This further limits investors' risk, even if my scenario doesn't come to pass.

Disclosure: I have a long position in RNWK.

Source: RealNetworks: Exceptional Value at Current Levels