Minds + Machines (MMX.L) – Liquidation – 20%+ Upside

Current Price: £0.086/share

Liquidation Value: £0.104+/share

Upside: 20%+

Expiration Date: 21st of Feb

This idea was shared by Kensr.

 

This is a tiny liquidation idea on the London AIM market that involves holding delisted stock for a few months, so probably this is a skip for most. However, I think the idea is quite quirky and has a high chance of working out, so maybe some SSI subscribers will find it interesting.

Minds + Machines used to be a top-level domain registry (.miami, .fashion, .fit, etc.), that completed the sale of the majority of its assets to a much larger peer GoDaddy in Aug’21. Consideration was US$120m, including US$13.3m in escrow. Management has promptly launched a large £58m tender offer for 69% of shares at £0.096/share (estimated NAV then) and started a strategic review. In Jan’22, the board has decided to wind up the company and to return cash to shareholders. Yet another tender was launched for 67% shares (£19m) at £0.104/share, which expired on the 28th of Jan. The offer was, of course, oversubscribed as 93.3% of total shares tendered. The price was higher than the first tender as due to certain cost savings the estimated liquidation NAV had increased. Additionally, in order to save cash, the company will delist from AIM, which will take effect from the 22nd of February (the last trading day is the 21st of Feb).

Since the asset sale, the US$1.4m escrow amount has already been released (contingent on certain domain transfers), while the remaining US$11.9m is expected to be released on the 31st of March’22. The board expects to return the remaining cash to shareholders shortly after the escrow is released. The latest management’s estimated NAV (after liquidation expenses) stands at £0.104/share, offering 20% upside in probably a few months. The only caveat is that by buying MMX now you will have to hold the delisted shares and hope that management promptly returns the full amount. The risk is obviously that once the shares are delisted and the company no longer reports with regulators anymore, management will somehow siphon some/all of the remaining cash away.

The current spread to liquidation value is likely driven by the sell-off after the expiration of the most recent tender (unaccepted shares were returned on the 7th of Feb) and investors unwilling to hold delisted securities.

Here’s why I think this risk is limited and the idea itself is still attractive:

• The liquidation has been progressing very smoothly so far. After the majority asset sale, the company has quickly disposed of the remaining assets, terminated most operating contracts, wound-up or dissolved its subsidiaries, and terminated most of the employees. As of Jan’21 the company had only 4 employees, including some of them responsible for the transition to GoDaddy (expenses covered). So now there should be even fewer employees left. Moreover, the estimated NAV has actually increased from £0.096 (in September’21) to £0.104/share most recently, which is definitely a good sign (although some of that was probably due to positive FX impact as most of the cash is held in USD).
• A large amount of MMX shares are held by institutional investors – London & Capital Asset Management (19.73%). Harwood Capital (7.88%), Lombard Odier Asset Management (9%). I am guessing that right from the beginning, the whole MMX asset sale and liquidation show have been orchestrated by these institutional investors, which reduces the likelihood of any unexpected events going forward and increases the chances that the remaining cash will be distributed orderly. MMX management holds only 2% (one independent director).
• The whole saga started in Oct’20, when the company had an accounting scandal, that resulted in the resignation of the CEO/CFO and the start of the strategic review. Lombard Odier Asset Management’s representative has been sitting on the MMX board and also was a chair of the MMX audit committee. The asset sale was announced in Apr’21 after the company decided that despite its stable cashflows, the growth prospect is limited without multi-year transformation.
• Unlike some other liquidation cases (e.g. TSL.L) MMX management has expressed numerous times that it intends to return the maximum possible amount of cash to shareholders and expects the remaining distribution price to be similar to the recent tender offer price (£0.104/share):

If the Cancellation Resolution is approved, the Board will seek to wind-up the Company in an orderly fashion following the de-listing and distribute the remaining available cash to Shareholders. At this stage it is not clear what the net asset value of the Company’s assets per Ordinary Share would be at such future date, and the likely timing of such distribution cannot be confirmed at this time, but it is expected (after payment of winding-up costs and taxes due by the Group) the future distribution would be at a price similar to the Tender Price.

[…]

Directors shall take such steps as required to solvently wind-up the Company as early as possible in 2022 and return the remainder of the Company’s Net Assets to Shareholders in 2022.

• The remaining margin of safety seems quite wide – after the recent tender, MMX had about £12.3m or £0.138/share of cash, which leaves a £3m cash buffer to £0.104/share. Given only few remaining employees and no listing expenses further on, management’s estimated NAV might even turn out overly conservative and there is a chance that the eventual final distribution will be larger than £0.104/share
• The release of the remaining US$11.9m escrow is contingent on any asset buyer’s (GoDaddy) claims to MMX. As of Jan’22, the escrow amount was still at $11.9m and management hasn’t mentioned any claims yet. Given that there were no claims in the first 5-6 yet since the sale closed, the risk of any unexpected material claims in the remaining few months is extremely low.