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I manage a portfolio of arbitrage and distressed ideas
  • USAT - A Chicken Play 1 comment
    Mar 6, 2012 9:29 AM | about stocks: USAT

    USA Technologies (NASDAQ:USAT) has done nothing if it has not tried investor patience for the last 10 plus years. The concept is good but profits have been elusive, the company converts vending machines to cashless with their EPORT device so that they accept credit cards and debit cards in addition to coins and paper money. That makes a lot of sense as consumers use less and less cash. USAT leases the eport to vending machine operators after installation and makes money from renting the machine to the operator and they get a piece of each transaction that uses their cashless transaction system.
    In their most recent quarter they had 6.9 million in revenues and a 1.9 million dollar loss that was due largely in part into an investigation of the former CEO who was engaged in some message board posting scandal. While the company has consistently bled red ink there is a new CEO in charge and he has stated his commitment to getting the company proftable, while this is not a shocking thing for a CEO to pledge Im willing to give him the benefit of the doubt and see how he does. I am not interested in the common shares of this company, I do however think that real value can be had in the companies illiquid preferred shares that are qouted under the symbol USATP. These shares trade hands at around $16 and there are 442,000 of them outstanding. What makes these shares interesting is that accrued and unpaid dividends on these shares make the shares worth over $35 per share (as detailed in company 10q) if the company were to come current on them.
    If and this is a big if USAT starts to make profits all cash has to go to preferred holders first and common shareholders second. Being the only piece of debt outstanding on this company, one can see that in a bankruptcy scenario the company would be valued at $7 milliion dollars, 442k prfd shares * $16 share price =$7 million. This company is on a $25 million dollar revenue run rate this year, if the preferred shareholders took over the company a 7 million dollar market cap would be in control of $25 million in revenues - seems pretty cheap to me. Right now the common has a market cap of $35 million. Its pretty simple, this preferred is a cheap shot either way, if the company succeeds you have 100% plus upside and if it goes into BK you will control the company at a very low valuation.

    Stocks: USAT
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  • pone
    , contributor
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    In a normal chapter 11 valuation is done as an EBITDA multiple, and USAT has no positive EBITDA yet. Let's assume they could get a $15M valuation in Chapter 11.


    You are forgetting that they would need to be recapitalized to exit Chapter 11. Who is going to make that investment, and isn't that person going to demand most of the equity to make that investment? Look what just happened in the Great Atlantic bankruptcy, where subordinated debt holders that should have been made at least 50% whole were crushed to 0% recovery by an investor who came in and offered to recapitalize just enough to avoid needing to pay anything to debt holders.
    2 Apr 2012, 01:26 AM Reply Like
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