And They’re Off – Filings from June 9-15, 2014

This week’s filings hold some promise of good returns and some disappointments. Here is the quick view of what was filed.

Spin Offs:

Rightside Group, Ltd (NAME) is being spun off from Demand Media, Inc. (DMD). Demand Media creates content online that they sell advertising on. For example, they outsource writers to create articles, infographics, GIFs, etc. who are reviewed by outsourced editors. That content then has advertising, which is their source of revenue. They also contribute to sites like YouTube, who shares ad revenues. Some brands DMD owns include: eHow, Livestrong, and Cracked. Rightside Group is the internet registration business within this internet content company, which they claim is the largest wholeseller of domains and second overall register. They say Rightside Group brings in half of the revenues of DMD. Looking at the DMD history, revenues has been increasing with negative net income. Positive cash flow from operations is partially due to deferred revenue and partially a result of non-cash expenses. If you remove the intangible amortization as the expenses to maintain the intangibles are already being recognized in the product development line, then sporadically you have positive income in DMD. It makes sense the revenue stream and up front content costs would result in a difficult to model income stream. Rightside, however, shows strong declines in this adjusted operating income. It appears service costs have been increasing at a greater rate than revenues, which they comment on in the Form 10. Additionally, G&A expense have been increasing. This will most likely need to be maintained for compliance reasons as a public company. The return on investment is declining along with cash flow from operations. The parent has hard to model value. Even if they could get higher margin clients for Rightside and one would assume they will, it would take a dramatic increase to make this offer more attractive as a business.

Chesapeake Oil (CHK) is spinning off Seventy Seven Energy Inc. (formerly Chesapeake Oilfield Operating, LLC), as the Icahn activities continue. Seventy Seven Energy provides services and equipment to well sites. CHK is keeping the more profitable Marketing, Gathering and Compression along with Exploration and Production. The oilfield operations is SSE is 11% of the revenues of CHK, who contributed 95% of SSE revenues. The margins on SSE doesn’t look great and if you look at cash flow from operations minus the division’s capital expenditures then you see a cash drain. Then the debt that is being issued and sent back to CHK makes this spin off very unattractive. You could buy the stronger CHK and sell SSE as a dividend. That said, it’s not dramatically cheap and has a low return on assets, equity, etc.

Automatic Data Processing (ADP) is spinning off their Dealer Management System division creatively known as Dealer Services Holding LLC. Both are solid companies with good growth, margins and return on capital. It doesn’t look particularly cheap at first glance, but it might be like Buffet’s Coke buy or Greenblatt’s Moody’s buy. This spinoff is worth further consideration and will have its own post in the coming weeks.

The Tribune Company (TRBAA, TRBAB, and TRBNW) is spinning off Tribune Publishing, which is all of the newspapers owned by the Tribune Company. They are retaining the other media  companies, such as the Food Network, Careerbuilder.com, and WGN Network. The Tribune Company came out of bankruptcy, but is only on the OTC currently. It’s major creditors are the majority shareholders along with the employees. The filing just came through, so proformas are not finished. The other key element is what the major shareholders will do. Depending on the final financials and price for this “dying” industry, this might be interesting. Something to consider.

Mergers:

To be clear, this is not about risk arbitrage, but about merger securities that may be overlooked.

Mediabistro, Inc. (MBIS) and PGM-MB Holdings entered into an asset purchase agreement for cash.

Booz Allen Hamilton Holding Corp (BAH) is filing due to the ongoing consideration with Carlyle. No securities to be considered here.

Petrologistics LP (PDH) is being merged into a partnership with GP Holdings and Flint Hill Resources LLC (Koch Industries). It appears to be a cash transaction to take the shares off of NYSE.

JTH Holding, Inc. (TAX) is changing its legal structure to become Liberty Tax, Inc. No securities to be considered.

Equal Energy Ltd (EQU) and Petroflow will merge in a cash consideration with a dividend and will purchase all options. Nothing exciting here for the casual merger consideration security hunter.

Astrotech Corp (ASTC), specifically the Astrotech Space Operations, and Lockheed Martin (LMT) in an asset sale for cash. Nothing for consideration here, but stockholders should read the golden parachute information as well.

R. G. Barry Corp (DFZ) and MRGH Holding Co enter into a merger for cash.

IPOs are being excluded this submission. There were 41 submissions, which is time prohibitive at this point for even a preliminary look. A more efficient strategy is needed and will come in the next several weeks to be included going forward.

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