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VTech Acquires Leapfrog At A Discount

|Includes: LeapFrog Enterprises Inc. (LF)

I have been looking at the news coming in for Leapfrog all day Friday, and I am scratching my head as to whether a $1 tender offer was fair offer. It is really hard to tell without knowing the Q3 2016 results (if you have been able to find out what the results are please let me know), so I was forced to look at a few financial statements published by the company.

First, let's consider PPE which should reflect fair value, seeing that LF has charged long-term asset impairments in the past few quarters. If you strip out, Computers and software, and leasehold improvements, you will find $28 MM. That's not to say that computers and software cannot be liquidated, but I'll be conservative, and assume that they are worthless scrap metal.

Subtotal: ~ $28 MM

Secondly let's consider cash, this was one of the main reasons I initially purchased LF; I was foolish enough to think their cash assets, and no debt would have helped them weather out their prolonged slump, I was wrong but I digress. Cash and Short-Term investments represent $52.6 MM in Q2 2016. When looking at Q2 2015 (Sept 30 2014) you have $111 MM in cash, advance one quarter (Dec 31 2014) you have $94 MM in cash a $17 MM reduction in current assets. Let's assume they bled 50% more on top of that between Q2 to Q3 2016, all guessing here, resulting in Q3 2016 estimate cash of $27 MM.

Subtotal: ~$55 MM

Thirdly, let's look at accounts receivables, between Q2 2015 to Q3 2015 Account Receivables remained flat, so let's assume the same happened for Q2 2016 to Q3 2016, putting AR at around $60 MM (removing $1.8 MM for doubtful accounts).

Subtotal: ~$115 MM

Fourth, inventory, Q2 2015 to Q3 2015 we saw inventories go from $108 MM to $78 MM a 27% reduction, applying that 27% reduction to the $76 MM Q2 2016 inventory we might expect $55 MM in inventories at the end of Q3 2016, and for conservatism's sake let's cut that by more than half in case a deep discount is required for liquidation, $20 MM.

Subtotal: ~$135 MM

Fifth, total liabilities, we'll take that at face value, Q2 to Q3 2015 saw an approximate 30% reduction in total liabilities, applying the same concept to Q2 2016 to derive Q3 2016 should result in approximately ($54) MM in Total Liabilities

Subtotal: ~$81 MM

What about the LeapFrog brand, what is that worth? Apparently based on my estimates (see methodology below), VTech values the LeapFrog brand at ($8) MM, and we know that the brand has at least a neutral, but more likely positive value. VTech states that they are purchasing LeapFrog at a huge premium over 2/4/2016's market close, but I contend that they are purchasing LeapFrog at a deep discount to its liquidating value; unless Q3 2016 was a catastrophic quarter. Management and the Board of Directors should put forth strong reasons why they believe $72 MM was the best deal that the Shareholders could have received.

Methodology, I believe my estimates are conservative, I relied on Q2 2015 to Q3 2015 trends in assets/liabilities to derive Q3 2016 assets/liabilities from Q2 2016 and in many cases discounting the assets as I assume Q3 2016 broke the bank. If I have missed anything, please let me know, I'll take this as a learning opportunity!

Disclosure: I am/we are long LF.