The Topps Buyout: Harder to Swallow Than Stale, Old Bubblegum

Remember the good old days, when a pack of baseball card cost $.25? I’ll never shake the memory of that day in 1973 when as a 7 year old, I had the good fortune of getting two Willie Mays cards in one day. That memory is part of why the news that Baseball card pioneer Topps (TOPP) recently agreed to a $385 million buyout by former Disney CEO Michael Eisner’s private equity firm, Madison Dearborn Partners LLC, is difficult to swallow. The other reason is that the price is simply too low.

While Topps stock jumped on the news of the $9.75 per share offer, representing a 9.4% premium, this offer was simply not representative of the company's value, in our humble Cheap Stocks opinion. In fact, three out of 10 Topps directors voted against the buyout, and there is growing resentment within the ranks of the larger institutional shareholders.

We've owned Topps several times. Overall, the company has been disappointing to a lot of shareholders, save for the late 90's, when shares could be had for a buck and change--that's less than a pack of Topps baseball cards sells for these days. Here's where the true deep value devotees swooped in, and those who held on, were rewarded with a six bagger in two years.

Topps, unfortunately, has never lived up to its potential. The Topps brand name is synonymous with baseball cards, but the company has not been able to recapture the magic it once had with young collectors. Time was, you could go into almost any store, put a buck on the counter and walk away with a few packs of cards. The industry went "premium" several years ago, and now you can't find a pack for less than two bucks--many go for much more. That's if you can find them at all. The company had a golden opportunity to turn back the clock, and deliver a basic product that would bring kids back into the fold. But instead of providing a "Chevy," cheap for all, abundant, and easy to find, Topps went with a "Cadillac."

Topps also owns Bazooka, another formidable brand name. They have attempted to update the image of this product with today's youth, but the jury is still out on this one.

Unopened Topps packs from 1952

The Numbers
Here is what bothers us most about this deal. Historically, Topps has always carried a relatively large amount of cash and short term marketable securities on its balance sheet. (This was one of the reasons we've owned shares in the past.) As of the the third quarter (ended 11/25/06), Topps had $85 million in cash and short term marketable securities, and no debt. With 38.7 million shares outstanding, thats the equivalent of $2.20 net cash and ms (net of debt, that is). So, in our value oriented minds, the real price of this deal is $300 million ($385 - $85 cash and ms), or $7.55 per share. Why? Because theoretically, the acquiring company can do whatever they want with this cash. They are paying $385 million for Topps, but immediately (theoretically) being handed $85 million, along with the other assets of the company. Hats off to Eisner. If you can pull this one off, you are getting quite the deal.

We also happen to believe that there is still plenty of value in the Topps and Bazooka brand names. The right management team/owner could reinvent and reinvigorate this company. Maybe we're just jealous that we couldn't come up with the $300 (oops, I mean $385 million) to acquire Topps ourselves.

Disclosure: the author does not have a position in this stock.

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