On December 4, Acorn International (ATV) – China’s leading TV direct-sales marketer – announced a buy-back initiative. James Hu, Chairman and CEO, remarked that the $30 million program reflects the Board’s “ongoing commitment to increase shareholder value”. But the 10b5-1 plan, which was put in place one month after the insider lock-up period ended, seems more likely to benefit the board-members themselves. Including the 10% drop on Nov. 1, the day the lock-up ended, ATV has shed 40% since insiders have been free to trade, closing Dec. 11 at 10.05, its second-worst showing to date.
Initially, the market responded well to the buy-back plan, but a closer examination in recent days may have persuaded investors otherwise. How exactly is it in shareholders’ interest? We have the usual possibilities: the shares are cheap, or the company has cash to spend. Only the first of these makes sense, since what cash Acorn has on hand comes from its IPO in May. Nov. 28th’s third-quarter results were dismal – ATV was the NYSE’s worst performer of the day, and despite the buy-back rally, it is back to all-time lows.
Did the market overreact? Are the shares cheap? Acorn missed the Street’s estimate of .23 by 40%. The bad Q3 results were attributable to poor performance by the company’s “Ozing” learning-device, whose revenues peak at the beginning of the school-year. Since the product is Acorn’s top-seller, and one of a handful which generate the majority of its revenues year-to-year, the results were not just bad news, but bad news to come. Management admitted that poor returns were due “to increasing competition in the electronic learning product market.” Their planned co-operation with a major insurer has been shelved. Investors were no doubt also unsettled by the $5 million of “Other Income” on the balance sheet, whose mysterious apparition audibly discomfited analysts on the conference call. Without this money, which comes from unspecified investments approved by the Board, earnings would have been a further 30% lower (.09 instead of .13). The 20% loss in share-value since then scarcely seems excessive, considering that analysts halved their FY2008 estimates on Dec. 5, the day after the buyback was announced.
Who does benefit from the buy-back? ATV’s prospectus stipulates a 180-day lock-up for insiders, expiring on Nov. 1. Since that date, the stock has fallen consistently, without considering the 20% drop on earnings day alone. ATV has already been downgraded to a Sell by at least one analyst (First Call), and future earnings expectations are depressed. It was in this environment that the Board, whose members own a large number of the locked-up shares, initiated the buy-back. The plan is one that redistributes risk.
If insiders on the Board (two of whom hold 40% of outstanding shares) sell their stock back to Acorn, they will effectively borrow other shareholders’ cash to eliminate their exposure both to the market and to future earnings. They are thus shifting this risk onto the other shareholders, leveraging their position, whether they realize it or not. As with any buy-back, the remaining shareholders will have greater upside potential, and greater downside as well. ATV’s historical volatility is down from it recent highs of 120%, and is now merely in the 80% range. And all the signs at the moment point downward.
Acorn International has no track-record and bad financials. The stock has outrageous volatility and a pps at all-time lows. The float may well double if insiders dispose of their positions, and the only thing holding that off is the new buy-back, which transfers risk from insiders to shareholders, further weakening the stock. Far from supporting it, the buy-back will most likely accelerate ATV’s decline.
Disclosure: Author has a short position in ATV