Geoff Gannon

Topps Shareholders Should Reject Eisner's Offer

Amit,

Thanks for the excellent explanation regarding your views on valuation. I am certainly looking at it from the perspective that the business will improve. It has already improved considerably if you look at the last quarter or so. The entertainment business has been a very poor performer. You are also getting Bazooka – which at this point is really a brand name without a product behind it. The current management more or less concedes this point.

I think there is a lot of potential in Topps. I don't own shares and it would not be the first company I would think of if I were hunting for LBO candidates. The good points are the high unlikelihood of consuming meaningful amounts of cash under even the worst circumstances, the brand names, the extremely low cap-ex requirements (because it’s an intangibles business), and the market structure of the card business – especially now that Topps has managed to push some of its competitors out through lobbying the leagues to alter the market structure.

But, on the other hand, the company has underperformed for years. The card business has been declining for years if you look only at sports cards and exclude the Pokemon craze that made so much money for Topps (but ended as quickly as it began).

I don't fault Eisner or Madison Dearborn here. The offer, while only providing a small premium over the recent share price, is not by any means outrageously cheap relative to past performance. A buyer shouldn't be faulted for trying to get a good deal.

I only wish to educate shareholders on the deal and to draw some attention to it. Obviously, the buyers are well aware of the cash on the balance sheet. The cash really provided the opportunity to make an offer at these levels. I'm less certain that shareholders have fully considered the possibilities offered by having that much cash on the balance sheet (for a company that certainly doesn't need it).

While sales are not the traditional method for evaluating these buyouts, I do think it is the best measure in this case, because that is the only way you can assess the potential for the business if there is an improvement – in this case, an improvement that is brought about by two factors: the removal of a largely unsuccessful and clearly complacent manager, and the benefits of the "turnaround" plan already implemented.

Regarding the last point, I recommend the company's most recent conference call (available at the corporate website). It should lead to meaningful improvements. I hope that shareholders fully understand the potential there as well as the potential uses of the cash on the balance sheet. Part of the underperformance for shareholders has been due to poor capital allocation decisions by the company.

However, I agree with you as far as comparing the offer to the company's past performance. I am not advocating playing hardball with the buyers as much as I am advocating taking a serious look at alternatives such as removing Mr. Shorin, using the cash to buyback shares and/or pay out a large special dividend, and taking on an acceptable amount of debt.

As for Eisner and Madison Dearborn, I an LBO really does put constraints on them that would make a deal at a higher price difficult. That isn't to say that a deal at a higher price wouldn't be "fair" or that the company isn't worth a higher price, it's merely to say that a highly leveraged offer can not value the company at much above its demonstrated cash generating ability (of past years), because it has to be financed with that cash. In many ways, an active management team running the company while it remained public would be in a better position to run the company in the ideal manner in the years ahead, because it could (and should) make use of an appropriate amount of debt – but, it would have no need to take on a potentially troublesome burden.

And for the record, while I'm quite happy with Seeking Alpha and the care they've taken with my posts, it's worth noting that they choose the titles for the posts as they appear on this site – I do not. The post they entitled "Is Michael Eisner Stealing Topps" was simply "Topps to be Acquired by Eisner and Others" when it appeared on my blog. Likewise, this post entitled "Topps Shareholders Should Reject Eisner's Offer" was simply titled "Against the Topps Deal" on my blog. So, the posts as they appear on Seeking Alpha do give a bit more of a sense that I'm writing with Eisner in mind, when really I'm just trying to encourage shareholders to take a serious look at the company they own and to agitate for change if they feel such change is necessary.

Thanks again for the great response. It's by far the best comment I've seen in response to one of my posts on Seeking Alpha.