We have removed Tollgrade Communication Inc. (TLGD) from our High Cash Stock Review portfolio. We first published our Tollgrade report on August 26, 2010 with a stock value of $6.50 per share; one can read our initial review here.
While continually monitoring Tollgrade, material information arose last week and a full review ensued. The reason for Tollgrade’s removal is due to the board off directors agreeing in principle to a cash sale to Golden Gate Capital, a private equity firm with $9 billion in assets. The all-cash offer was $10.10 per share and below where the company was trading just before the announcement (as high as $10.20). There is little to no evidence that Golden Gate Capital will be paying a control premium, which is often the case when firms go private.
Tollgrade’s current cash holding after removing all long-term debt is about $5.52 per share. This equates to Golden Gate Capital purchasing the entire company for about $4.58 in out-of-pocket funds. The enterprise value of $4.58 per share is quite low for a company that in the last three quarters had $0.45 per share of operation profit. Our estimate, based on the last three quarters, is that Golden Gate purchased the enterprise for only 7.6 times operational profit, or at a substantial discount compared to the S&P 500.
Management could and should have tried to attain a higher price. The only way for shareholders to realize the possible higher value is by means of costly litigation. Many are claiming Tollgrade’s board of directors breached its fiduciary duty to shareholders. Since our duty and focus is to our clients, we believe these ongoing legal issues are not in the best interests of clients or provide the best current opportunity for their investments. Since the firm is trading at $9.99, we have exited with over a 50% gain for the six-month holding period.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.