Lessons from BriteSmile's Acquisition (BSML)

| About: BriteSmile Inc. (BSML)

After I wrote this post, BriteSmile issued this press release. Now this is getting really interesting. (See also Finding Alpha: BriteSmile)

After the close on Friday, Futuredontics, the parent company of 1-800-Dentist, announced an acquisition offer for BriteSmile at $4 per share. In my original write up of the stock, I mentioned the SEC filings from last Friday, which suggested the prospect of a management buyout at a higher price. So I was quite surprised at this offer from an outside company, which I suspect was made public after other shareholders hinted at the imminent go-private transaction in the SEC filing. It was of course refreshing to score a quick profit on this investment, particularly since I usually am quite early to an investment story and find myself averaging down on almost all my investments.

As regards to the acquisition, it is worth noting that the premium mentioned in the press release by Futuredontics is quite misleading. The valuation is really only 50% or so above the proposed price offered for these same assets of the company earlier this year and 50%+ below prices paid by public investors a mere two years ago. So overall, long-term minority holders of the stock, if there are still many left, are not getting much of a premium here.

Additionally, the price also appears rich against the backdrop of what was in retrospect an irrational bout of selling by investors in late April that ultimately led to a ludicrously undervalued equity. The selling was primarily related to uncertainty surrounding the future business of the company and a possible delisting of the stock. However, BriteSmile's termination of a proposed sale of the remaining assets of the company in early May, and the filing of the 10Q on May 23rd, offered attentive investors a green light to get back into the stock, given the extremely low valuation.

In fact, after the 10Q was filed, I made a quick visit to one of BriteSmile's stores in New York City and after witnessing a steady amount of foot traffic and confirming strong appointment booking numbers, I started to buy the stock, confident in my judgement that the remaining $20 million+ business was in solid shape and should not have be valued at less than $2.60 per share. If that wasn't enough, the SEC filings last Friday from the largest shareholders, should have been enough to convince any thoughtful investor to jump on board, even if it would take patience for value to be realized.

Finally, I personally believe that the price offered by Futuredontics is actually quite low considering BriteSmile's large cash position, strong growth propects and $150 million in tax loss carryforwards. It seems to me that the company's stock price can be far higher in a 3 to 5 years assuming good management execution of the current business, coupled with selective acquisitions to reap the benefits of the tax loss carryforwards. It is still unclear to me whether the largest shareholders of BriteSmile will or should accept this recent offer. I definately don't think the story is over here yet, and I expect a lot of volatility in the stock in the weeks ahead, providing the opportunity for additional profits.

The lesson from BriteSmile: The best investments are usually in those companies that you have followed for a significant amount of time.

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