Description

Wish as a business has been an unmitigated disaster.  The company was rumored to have turned down a $10 billion acquisition offer from Amazon, reached a peak a market cap of ~$14 billion, and just agreed to essentially give away the business for less than its estimated book value as of 12/31/23. 

If it is of interest, the company’s downfall is chronicled fairly well in “How Wish Built (and Fumbled) a Dollar Store for the Internet” and “The Future of Ecommerce That Wasn’t: An In-depth Look into What Went Wrong with Wish”

But this idea is unrelated to Wish’s e-commerce business, and Wish’s shortcomings as a business will soon be behind it, leaving behind a shell with ~$6.50 per share in cash and NOLs that are worth a multiple of the current stock price if ContextLogic can find a transaction that will enable them to monetize the value of the NOLs.

Qoo10 Merger Background

On Nov 7, 2023, ContextLogic Inc. (d/b/a Wish) announced that it had initiated a process to explore strategic alternatives for Wish to maximize shareholder value, and retained J.P. Morgan to assist in the process.  They contacted ~40 potential partners and evaluated a variety of potential outcomes and transaction structures.

On Feb 12, 2024 ContextLogic announced that it had agreed to sell substantially all of its operating assets (including cash on the balance sheet) and liabilities and its Wish ecommerce platform to Qoo10, an ecommerce platform operating online marketplaces in Asia, for $173 million in cash, subject to certain purchase price adjustments.

Qoo10 entered into separate voting and support agreements with funds managed by GGV Capital, General Atlantic, and Altai Capital, each of ContextLogic’s directors, and ContextLogic’s CEO, COO/CFO, and General Counsel (collectively they own ~6.78% of the combined voting power of the outstanding common stock).

Following the transaction closing, ContextLogic will continue to be publicly traded, and they believe the transaction will reduce the cash burn in the remaining business to near zero, the balance sheet will be debt-free, with the $173 million in net cash proceeds, ~$2.7 billion in U.S. Federal NOL carryforwards, and other retained tax assets.  ContextLogic also has >$8 billion of state NOLs.  ContextLogic will begin trading under a new ticker symbol within 30 days of the transaction closing.

ContextLogic intends to use the proceeds from the transaction to help monetize its NOLs, and they intend to explore the opportunity for a financial sponsor to help ContextLogic realize the value of its tax assets. If ContextLogic does not identify opportunities that will allow it to effectively monetize the value of its NOLs to benefit the shareholders, it intends to promptly return all capital to shareholders.

In order to preserve ContextLogic’s ability to utilize fully its NOLs and other tax attributes (capital loss carryovers, general business credit carryovers, AMT credit carryovers, foreign tax credit carryovers, any loss or deduction attributable to a “net unrealized built-in loss” within the meaning of Section 382 and any other attribute the benefit of which is subject to possible limitation under Section 382) in the future, ContextLogic adopted a “Tax Benefits Preservation Plan,” essentially a poison pill to prevent an acquiring person or group from acquiring ≥4.9% of its outstanding shares.

ContextLogic expects to complete the Qoo10 transaction in Q2 2024, subject to the approval of shareholders and other customary closing conditions. The transaction is not subject to any financing contingency.  ContextLogic agreed not to directly or indirectly solicit competing proposals or to enter into discussions concerning any unsolicited competing proposals, but they may consider unsolicited bona fide written competing proposals. If closing has not occurred by June 30, 2024, either party may terminate the Purchase Agreement.  The termination fee is $5.2 million.

If ContextLogic’s cash and cash equivalents immediately prior to closing is (i) ≥$320 million and (A) the Closing Date is on or before May 31, 2024, the Purchase Price shall be adjusted by an amount in equal to the full amount of such surplus and (B) the Closing Date is on or after June 1, 2024, the Purchase Price shall be adjusted by 50% of the amount of such surplus; and (ii) is <$320 million and (A) the Closing Date is on or before May 31, 2024, the Purchase Price shall be adjusted by an amount equal to 50% of the amount of such deficit and (B) the Closing Date is on or after June 1, 2024, the Purchase Price shall be adjusted by the full amount of such deficit.

ContextLogic’s cash and cash equivalents at 9/30/23 were $445 million.  In Q3’23, ContextLogic’s cash flow from operations – Cap Ex was -$86 million.  At that burn rate, cash and cash equivalents at 12/31/23 would have been $359 million.

Valuation

The $173 million purchase price represents ~$6.50 per share (26.65 FD shares as of 10/31/23)—higher than the current stock price—so any monetization of the NOLs represents upside for the stock.  There is currently no value being assigned to the potential for monetizing the NOLs.

There is an opportunity for shareholders to directly benefit from the value of the NOLs as ContextLogic targets profitable operations for the continuing business (~$2.7 billion in U.S. Federal NOL carryforwards, and other retained tax assets, and >$8 billion of state NOLs).  ContextLogic is pursuing a long-term aligned capital partner, which could potentially include General Atlantic, which invested in ContextLogic privately, has never sold a share, and still has a Director on the board.

With the Federal corporate tax rate at 21%, the ~$2.7 billion in U.S. Federal NOL carryforwards undiscounted are worth $567 million, or $21.27 per share.  At this time, it is not yet feasible to value the NOL tax shield separately or to include the NOLs in a FCF/FCFE valuation due to the uncertainty of magnitude and timing for being able to utilize the NOLs.  But together with the cash from the purchase price ($6.50 per share), the undiscounted Federal NOL and post-acquisition cash represent 4.43x today’s closing price.

For the >$8 billion of state NOLs, ContextLogic files income tax returns in various U.S. state jurisdictions in which it conducts business.  I have contacted IR for additional information about the breakdown of state NOLs, and will update this post when I hear back from them, but any value realized from state NOLs would be additional gravy on top of the value increase mentioned above.

ContextLogic is headquartered in CA.  With the CA corporate income tax rate at 8.84%, ContextLogic’s state NOLs would be separately worth $707 million undiscounted, or $26.54 per share (an additional 4.23x today’s closing price), for a total potential value of $54.30, or 8.66x today’s closing price.

As of 12/31/22, ContextLogic’s federal NOLs were $886 million that begin to expire in 2030 and continue to expire through 2037 and $1.7 billion that have an unlimited carryover period, and state NOLs of $6.2 billion that begin to expire in 2026 and continue to expire through 2042 and $1.8 billion that have an unlimited carryover period.

Although it is not yet feasible to value the NOL tax shield separately due to the uncertainty of magnitude and timing for being able to utilize the NOLs, if we assume the Federal NOLs are able to be used ratably over the 10 years following closing of a transaction, $56.7 million of federal tax would be avoided each year (($2.7 billion * 0.21) / 10). The NPV of this tax avoidance stream discounted at 9% equals $364 million, equal to $13.65 per share.  Together with the cash from the purchase price ($6.50 per share), that represents value of $20.14 per share: 3.21x today’s closing price, not including any value for the state NOLs.

Similarly, the value of the state NOLs used ratably over 10 years would be $454 million, equal to $17.03 per share: an additional 2.72x today’s closing price.

Risks and Mitigants

Failure to Complete the Qoo10 Asset Purchase

If ContextLogic is not able to complete the Qoo10 transaction due to failure to secure the approval of shareholders or other closing conditions, the stock price will likely decline.  However, due to Wish’s deteriorating business and cash position, I believe shareholders are likely to approve the transaction.

Failure to Consummate Transaction(s) That Will Monetize the NOLs

The transaction will reduce the cash burn in the remaining business to near zero, but ContextLogic may not be able to find a transaction that will allow it to realize the value of its tax assets in a reasonable timeframe.

If ContextLogic does not identify opportunities that will allow it to effectively monetize the value of its NOLs to benefit the shareholders, it intends to promptly return all capital to shareholders.  So the downside in that case should be close to $6.50 per share.

Board / Management Focus

Wish management and employees will transition to Qoo10, and while the board of ContextLogic will continue to work to monetize the value of the NOLs, they all have other full time jobs, so how much time they will be able to devote to ContextLogic is not clear.

Catalyst

Merger / Acquisition Announcement

If ContextLogic is able to find a merger / acquisition that will allow it to effectively monetize the value of its NOLs, the stock price should increase to reflect the value ascribed to the NOLs in the transaction.