Pendrell (PCOA) – Reverse Split and Odd Lot Cash Out – 3% or $5,000 Upside

Current Price – $669

Odd Lot Cash Out – $689

Upside – 3% or $5,000 for odd lots

Expiration Date – TBD

 

This is the third time that PCO is published on the site (see here and here). Company just did a reverse 100-1 split at the end of last year and now is carrying another 250-1 reverse split. Fractional shares will be cashed out at $689/share. After the split one PCO share will cost c. $167k, making this company uninvestable for majority of investors with smaller than $1m portfolios. On top of that PCO has already lowered its reporting requirements after the last reverse split, so no recent public information is available, including any details on the currently proposed reverse split.

The only place I am getting info is this Twitter feed, which has an extract of the document:

Reverse Split

Transaction is subject to shareholder approval, but executive chairman has c. 67% of voting control, so I take this approval as given.

 

Why is management doing this?

Chairman is literally buying $1 for $0.85 as cash stands at $758/share and BV/share at $804. Moreover, during 2017 PCO generated $128/share in cash (albeit part of this might be lumpy and and driven by patent litigation settlements). The official purpose is to reduce shareholder count below 100, so that PCO is not classed as an ‘Investment Company’.

 

Risks to take into account

  • I do not have access to reverse-split docs and I am basing this on the document posted in the Twitter feed only.
  • Timing is uncertain. The first reverse split was cancelled and then reinstated and eventually took almost 8 months to close.
  • In case transaction is cancelled I would expect the downside to be limited – shares always seem to trade at rather stable discount to cash and have remained at similar levels since the annual result announcement in mid-Feb.
  • Liquidity is low and there might be limited opportunities to acquire shares.

15 COMMENTS

  1. Benjamin Shannon

    Potentially very attractive, but how is it possible that they don’t have to file anything with the SEC to do this? Any chance of a shareholder lawsuit, since this is pretty much a forced tender for less than cash-on-hand?

  2. Federico Flom

    Thanks for the idea, not entirely clear if you need to own less than 250 shares or less than 100, as the typical odd-lot size.

    Would appreciate clarification.

    1. FM W

      In this case there’s no risk involving beneficiary holder by brokers right? If I hold 249 shares via IB, they will recognize me as odd-lot for sure?

  3. Alex Rackwitz

    Anyone know why the previous reverse split (approved in June) was not carried out until November?

    For the currently proposed reverse split, the timing section of the doc says “we expect to implement the Reverse Split promptly after the General Meeting”

  4. Austin

    IMO this is a really good idea. The only real risk here is that the IRR is destroyed by a delay in implementing the reverse split. Given that the vote is fait accompli and they are no longer registered with the SEC, I bet they get this done fast.

  5. Thinley w

    Does one need to be a shareholder of record?

    1. dt

      The doc clearly states: “whether such shares are held in record or in street name”.
      So beneficial ownership should be ok.

      Also company aims to reduce the number of beneficial shareholders rather then record holders only, so that gives a hint as well.

  6. Jim Rivest

    I ​ read the SZ note on CEO Mikles’​ ​excellent investment record, but I’m having a hard time ​independently ​verifying how good it is. ​ He ran Future Fuel for 8 years and co-managed a dedicated short fund for 13 years, both were tough ways to make money.

    think-3.blogspot.com/…

    Since taking over as interim CEO in 2014 and then permanent CEO​ in 2015, expenses have come way down and it looks like they are phasing out of the patent troll business. He hasn’t pulled the trigger in buying an operating business in almost 4 years. Granted, it’s not a cheap market, and unlike a SPAC, there is no time limit to buy an operating business​, but ​what’s next?

    I get the impression passive investments may be in the cards. The proposed reverse split gets rid of all the small shareholders and this essentially become a quasi public family office for billionaires, McCaw and Gates.

    I’ve never seen a public company reducing their ‘beneficial shareholders’ below 100, so they don’t have to file as an “investment company”. Most of these type of reverse splits are followed by a forward split, but if Pendrell doesn’t want any more beneficial shareholders, keeping the stock price around $170K post RS will very likely do the trick.

    So in reading the tea leaves here, they want the flexibility to buy whatever they want, and my guess is they buy cheap public businesses (stocks) until they find the right operating business. They estimate spending $20M taking out small shareholders and at an accretive price to remaining shareholders since it’s well below NAV. The results of these buybacks and reverse splits though means less cash on the balance sheet, and for most companies would mean limiting potential targets to smaller operating companies. But with 2 smart billionaires backstopping any financing needs, I see few limitations to what they can buy. If more funds are required, it’s not hard seeing a rights offering in the future to best utilize massive NOL’s.

    So the NOL’s are likely more valuable than one would assume based on current assets. The patents in runoff are also worth something (I’ve read estimates of at least $25M from patent experts).

    Last week, I bought 245 shares for my wife and the same for me. So my dilemma is do I buy a few more shares to get to 251 to remain a shareholder or just take the money and run. This unusual investment vehicle has a lot of potential, but I’m likely to be treated as an unwanted guest at the party. How much will they disclose and how transaparent will they be going forward? Also it’s very likely this high priced stock trades down with <1K shares post deal, so if I like it, I may be able to pick it up cheaper in the future.

  7. Eldar Brodski

    Jim: why not do both…profit from odd-lot and then buy after reverse split?

  8. Jim Rivest

    Hi Eldar,

    That’s what I was leaning towards, because I do want to own this post deal, but it’s been my experience that these sell off in the subsequent years and I will likely be able to buy it cheaper. I don’t think this will be the exception because one very illiquid share will cost $172K post deal and someone will likely want liquidity at some point in the future at a lower price.

    I also wonder how transparent this company will be. We’ve seen non-SEC filers all over the board with how much information they are willing to share. You can still do quite well if the value is there, but they require more work!

    https://seekingalpha.com/article/4185059-vulcan-international-epitome-dark-company

  9. dt

    The spread has been almost eliminated and I have closed the position – 2.5% gain in 2 weeks.

    Shareholder meeting was supposed to take place last week, where the transaction was supposed to be approved. Timing of the reverse split is still uncertain (potentially those who were in the meeting have more info).

Comments are closed.