A screen of stocks trading below their net current asset value ("NCAV"), which is defined as current assets less total liabilities, recently turned up Pendrell Corporation (NASDAQ:PCO). Pendrell is an intellectual property monetization firm, similar to Network-1 Technologies (NYSE:NTIP) and Quarterhill Inc. (NASDAQ:QTRH). Pendrell sues technology and media companies that allegedly infringe upon one of its patents. The company owns patents in the areas of memory and storage technologies, digital media, digital cinema and wireless technologies.
With $199 mm of current assets as of June 30, 2017, and $18.5 mm of total liabilities, Pendrell's NCAV is $180.5 mm. (Source: Pendrell's latest 10Q)
The capital structure consists of 19.3 million Class A shares, and 5.3 million Class B shares. The Class B shares have identical economic rights to the Class A shares, but ten times the voting rights. Furthermore, no market exists for the Class B shares, which are owned by two shareholders and can be converted to Class A shares at any point in time. Finally, the company has 1.24 million options vested and expected to vest as of June 30, 2017. Consequently, investors can use 25,899,716 outstanding shares as the denominator in the NCAV calculation. The result is a $6.96/share NCAV.
As a kicker, the company has another $16.5 mm of non-current accounts receivable, which will be collected from the Toshiba Memory Corporation in 2018 and 2019. This is an incremental $0.67/share of value. Additionally, the company announced a licensing agreement with Disney (NYSE:DIS) in September. The amount was undisclosed, but presumably represents additional value to shareholders.
With the stock closing at $6.68 on October 6, the stock is trading at a 4% discount to NCAV. This is not a particularly exciting discount for a company that has lost $5.04/share in cumulative net income over the past 5.5 years.
However, a deeper dive into the company's filings indicates that management intends to delist the shares via a 100-1 reverse split. The company will issue cash in lieu of fractional shares, effectively repurchasing shares from odd-lot shareholders while reducing the number of expected shareholders to below the SEC's 300 shareholder threshold, which is required in order to stop filing financials with the SEC. Following the reverse split, which will occur November 30, 2017, shares will trade over the counter ("OTC").
Pricing of the Reverse-Split Repurchase:
In the first quarter, the company repurchased 2.4 million shares from a major shareholder at $6.55/share. This transaction gave the board a market-based anchor point that it used to set the bottom end of the price range so as not to disadvantage small shareholders. To capture the upside, the company determined that the final price will be determined by the greater of $6.55/share or the 20-day trailing average prior to the November 30, 2017, reverse split. This trading period should run from November 1 through November 29. (Source: Pendrell's 2017 Proxy Statement)
Shareholders and investors should keep an eye on the situation. Firstly, if you're a Pendrell shareholder and don't want to own a delisted company, you may want to sell before November 30. Brokerages typically charge higher commissions for OTC stocks.
For retail investors, there will probably be a very small arbitrage opportunity on positions of 99 shares or less. Anyone wanting to take advantage of the situation should fully vet the details with their brokerage. You may need to make sure the shares are held in your own name to be assured of getting a cash payout.
For investors willing to own an unlisted stock, I expect share prices will decline as November 30 approaches due to selling pressure from shareholders who do not want to own a delisted stock. Furthermore, I expect a drop in price once the shares are delisted as OTC stocks generally suffer an illiquidity discount.
Finally, I wouldn't be a buyer above $6.55/share until after November 30, but Pendrell shares could pose an opportunity for deep value investors willing to trade in the OTC markets.
Disclosure: I am/we are long DIS, NTIP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.