Assessing Recent Sale Announcement: Is DGT Holdings Cheap Enough Yet?

| About: DGT Holdings (DGTC)

I’ve written about DGT Holdings Corp (OTCPK:DGTC) several times, most recently noting that the company’s massive cash balance ($22.8 million versus a current market cap of $32 million) was unlikely to be distributed to shareholders given management’s desire to complete an acquisition.

In a recent filing, the company announced that it had reached an agreement to sell its Italian subisidiary, Villa Sistemi Medicali, representing the final step in the company’s exit from the medical systems industry.

DGT Holdings Corp today announced that it has entered into a definitive agreement to sell its wholly-owned Italian subsidiary, Villa Sistemi Medicali, S.p.A., in a management buy-out to management and certain employees of Villa and several other investors. In consideration for the sale of the shares of Villa, DGT is entitled to receive Euro 16,500,000 (approximately US $22,500,000 as calculated using current exchange rates) in cash, an unsecured promissory note in the amount of Euro 500,000 and excess cash at closing.

The full agreement can be found here. For clarity, Article 3 states that the purchase price is Euro 16.5 million, and Article 4 states that DGTC as seller receives all excess cash held by Villa Sistemi Medicali at closing.

Unfortunately, DGTC does not break out segment assets on a quarterly basis, so the most recent information we have is from last year’s 10-K. At that time, the company showed its Medical Systems Group (which included only VSM) as having $30.6 million in assets (though the sale does not include the Italian real estate) and generating on average of about $2.25 million in operating income for the last two years of operations, suggesting that the subsidiary is being sold for a P/E of 10x. The bulk of its assets must have been cash, as the remaining assets of the Power Conversion Group and “Other” are less than the cash on hand. This is a good thing, as any excess cash held by VSM will be sent (via dividend) back to DGTC as seller. Given that DGTC retains the real estate and net cash, it appears to be getting a fair on the assets being sold.

One more thing: DGTC has a “go shop” period in which it can try to get a higher price up until five days before the transaction completes (scheduled for sometime in November). The situation could improve further!

Post-sale, I think this is roughly how DGTC will look:

First, the resulting company will now have around $45.3 million in cash (though we don’t have the most up to date figures) and around $3.5 million (removing the portion attributable to VSM) of debt.

Second, DGTC will include only the Power Conversion Group which generated average operating income of $2.127 million over the last three years. Corporate overhead has been slightly under $1 million over each of the last three years. Interest expense and “other income” have roughly net out in each of the last three years as well, suggesting that even if corporate overhead does not decline (one would expect it to decline dramatically), the resulting company should be profitable. Additionally, DGTC will be the beneficiary of some rental income, as it is leasing the Italian real estate to the purchaser of VSM.

Given that the company is currently trading for less than the expected net cash value and should be profitable, this certainly seems to be an interesting situation. The only concern is the one I noted in my last write-up, in that management’s desire to make an acquisition could result in a poor use of shareholder cash. However, at some point the discount becomes so large as to compensate sufficiently for this risk. What do you think of DGTC? Is it cheap enough yet?

Disclosure: No position.