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Worthless Paper

|Includes: Valence Technology, Inc. (VLNCQ)

I've always enjoyed following bankruptcies, mainly for the learning process they can represent and - for a limited part of my portfolio - as a risky but potentially very rewarding investment. It takes a lot of patience, but it may be well worth it. Failing is somehow part of the process - one decent story out of a few followed is actually a great score.

Valence Technology (OTCPK:VLNCQ) may represent an interesting situation for further digging. No smoking gun, but a few hints at developments which may change the expected course of action.

When Valence filed for bankruptcy, it looked like Berg, its major shareholder and owner of more than 90% of the company's debt, was going to use bk to wipe out shareholders (including himself) and take full control of the company. A request for an equity committee was denied. The company expected to re-emerge by year's end (2012).

Then A123 (OTC:AONEQ) (competitor in the battery sector) filed for bk, too.

JCI acted as the stalking horse in a 363 sale of that company, but ended up losing against Wanxian. The price offered doubled to roughly $250 million. Hot bidding war. JCI wasn't happy about the result and tried to block the deal even after losing it. Unsuccessfully.

The selling price was still not enough to repay creditors in full.

Back to Valence.

The company hasn't re-emerged yet - the opposite. It filed in court to hire two investment banks looking for equity financing. May be it was something due after A123 showed there might be more value than expected for key IP in the battery sector. However, it is interesting the investment banks will get only half commission if a deal is closed with JCI and a few other companies (that might have already expressed interest in Valence?).

Speculation time.

May be Valence (Berg) has now realized that post bk the company will have a different kind of competitor, giant Wanxiang rather than a relatively small and probably still financially weak A123. A tougher competitor for scale, financial strength and production capacity, market opportunities (China), etc. etc. A new ownership willing, according to A123 bk documents, to invest quite a lot to support the "newA123".

May be in the long term a plan B can be now more rewarding both for the company (its management) and its major lender/shareholder: a sale/partnership to/with a big guy, who can take also advantage (in part) of its large NOLs. Berg might just get as much money as possible back (first as creditor and lastly as shareholder, in case of a complete sale of the company at a decent price), or opt for remaining as a major shareholder with a strategic partner investing fresh money and bringing know how (for example in litigation) to the table (a more likely outcome?)

Here are the names of companies included in the "reduced commission" list for the investment banks: Berg, JCI, SAIF, Enertech Capital, Via Motors.

Accumulated NOLs are impressive, but could probably only be used in part.

This is a key part to understand how the situation might evolve.

Section 382 limitation are quite complicated - to resume, following a "more than 50%" ownership change, corporations ability to deduct pre-ownership change NOL's is limited. If an ownership change occurs in a bankruptcy case, the calculation of the annual limitation is based on the value of the corporation immediately after the ownership change. Since this calculation is usually after significant debt relief, the equity value is higher, more NOLs.

Any help from SA readers with experience in this field will be highly appreciated.

I am not, at this stage, really getting into an analysis of the financials of the company, as this brief post is mainly meant to give some food for thought, and check if there could be any feed back from readers. The MORs show that the company is doing decently, and is not burning much cash right now (especially excluding ch11 costs).

A decent message board to discuss the situation is available at this link - look for finbar99 posts.

Court docs are available at this link:

Shares trading at about 2 cents, assuming (as it is always safe to assume in bk) shareholders will be wiped out.

Disclosure: I am long OTCPK:VLNCQ.