Description

IRICR presents a long-dated call option on a significant piece of anti-trust litigation. The range of outcomes is $0 to $29/share. While obviously binary, we think it is an interesting risk/reward to pay $1 for a $1 down vs. $28 up situation.

Description

In December 2003, Information Resources, Inc. (IRI) sold itself to a private equity firm. IRI had two assets – its market data analysis business, and a significant piece of antitrust litigation against its largest competitor, AC Nielsen (Nielsen). Shareholders in the IRIC deal received cash plus contingent value rights (CVRs), which enable them to share in the ultimate proceeds from the litigation. The CVRs are held in trust form through IRICR. IRICR has no business or assets other than the CVRs.

The Litigation

The recent 10-Q lays out a detailed history of the anti-trust litigation. By way of brief summary . . . Nielsen used to have near monopoly position in the retail tracking business in the US, Canada and parts of Western Europe. Nielsen employed a manual, audit-based service. In 1986 IRI developed a competitive automated way to capture and analyze data based on the use of scanner data. IRI went on to gain nearly 50% of the US market. IRI alleges that Nielsen subsequently engaged in anti-competitive behavior (e.g., unlawfully tying/bundling services at massive discounts, entering into exclusionary contracts with data providers, predatory pricing, etc.) aimed at reducing IRIC’s domestic market share, and preventing IRI from gaining significant market share outside of the US. IRI sought redress in Canada, Europe and the US.

In 1994/95, the Canadian Competition Tribunal found that Nielsen had “unlawfully excluded Information Resources from the market” and that several of the provisions in Nielsen’s contracts with data suppliers were “anticompetitive” and thus, unenforceable. In 1996, following an 18 month investigation, the European Commission found that Nielsen “had engaged in abusive practices to exclude Information Resources from European markets.” Nielsen entered into a “formal undertaking” with the Commission and agreed to abandon its “abusive practices.” The DOJ had entered into a “cooperation agreement” with the EC whereby the EC took the lead in the investigation. Once Nielsen entered into the “formal undertaking” the DOJ closed its investigation.

In 1996 IRI also filed a civil anti-trust complaint in the US seeking monetary damages (currently $650mm), which would be trebled if the defendant’s actions were found to be willful. Over the past 8.5 years the case has had numerous developments (summarized on pp. 15-16 of the 9/30 10-Q). The most significant developments are: (1) the court ruled that the findings from the Canadian Competition Tribunal and the European Commission would be admitted as factual evidence at trial, (2) the court ruled that IRI could seek damages in the US for Nielsen’s foreign conduct, and (3) the court scheduled a jury trial for 4/18/05.

We don’t pretend to be anti-trust legal experts, and thus don’t profess to have anything more than a layman’s insight into the merits of IRI’s case. What makes this case intriguing to us, however, is that unlike most cases where all you have is a plaintiff alleging anti-competitive behavior and a defendant saying no, here you have two independent legal authorities, in Canada and Europe, that reviewed the facts and both came to the same conclusion in favor of IRI. (Whether their conclusion rises to the necessary standard to merit recovery under US anti-trust law is a matter that will obviously have to be resolved by a jury at trial.) Additionally, three “real” law-firms (including the infamous David Boies of Boies Schiller, and Hagens Berman, see www.hagens-berman.com) all agreed to work on this case on a contingency basis, suggesting they see real potential.

The Defendants

At the time this lawsuit was filed, Nielsen was owned by Dun & Bradstreet. D&B subsequently split itself into 3 companies: D&B, Cognizant and Nielsen. These 3 companies entered into an Indemnity and Joint Defense Agreement. Nielsen was subsequently acquired by VNU, the Dutch media conglomerate. D&B subsequently split again into D&B, Moody’s and R.H. Donnelley. Cognizant split into IMS Health and Nielsen Media Research, which was subsequently also acquired by VNU. Thus, there are effectively 5 defendants: VNU, D&B, IMS Health, Moody’s, and RH Donnelley.

In July of this year, the Indemnity and Joint Defense agreement was modified such that VNU is now solely responsible for running the litigation and any settlement negotiations, as well as paying any amounts that become due from either activity. The other defendants are only on the hook if VNU is unable to make a payment it is required to make. VNU currently has > EUR 1B of cash on its balance sheet from the sale of its directories business earlier this year. Moreover, with a EUR 5B equity cap, VNU appears to have sufficient capability to handle whatever judgment/settlement might ultimately arise. If adverse change were to befall VNU, the collective financial resources of DNB, RX, MCO and RHD would prove more than sufficient.

The Value of IRICR

There are 32.1mm shares of IRICR. Holders are entitled to 68% of any proceeds up to $200mm, and 75% of any proceeds in excess of $200mm, subject to adjustment for taxes (assumed to be 34%) and contingency based fees. (There are 3 law firms involved, each with different contingency fee arrangements that vary based on whether a settlement is reached before trial starts or after.) At today’s price of $1.00, you are buying into an $82mm pre-trial settlement or $86mm post-trial. A $2B settlement (approximately IRI’s $650mm of claims trebled) would yield $29/share if pre-trial or $25 post-trial.

For most of 2004, IRICR was trading in the $2.50 - $3.00 range, implying an anticipated settlement of $200mm+.

Recent Development

On December 3, the judge hearing this case issued a seemingly fatal ruling for IRI. Basically the court said that it would apply a “predatory pricing” standard to its analysis of whether Nielsen illegally “bundled” contracts to eliminate IRI as a viable competitor. This would require IRI to prove that Nielsen priced bundled contracts below short-run average variable cost, a standard that IRI is concerned it would not meet. According to IRI’s subsequent press-release, IRI is “not aware of any other federal court” that has ever applied this standard. Moreover, “the most recent circuit court decision considering such a practice has rejected this approach.” IRI is so confident the court’s ruling is flawed that it volunteered to have the court enter a final judgment against IRI so that IRI can make an immediate appeal to the Second Circuit. (IRI has appealed prior rulings from this judge and succeeded on many of those appeals.)

The news of this ruling took IRICR from ~ $3 to ~ $1. The appeal process will undoubtedly lengthen the timeline here – perhaps by as much as 12 months. However, it also creates the opportunity to buy this security at a much more favorable risk/reward.

Conclusion

While obviously a binary situation, we think this is a compelling risk/reward. The weight of public evidence in this case (e.g., Canadian and European rulings) favors IRI. If IRI succeeds in appealing the recent adverse ruling, which seems likely given that no other court has ruled in this way, and IRICR returns to its previous level you stand to make 3x your money. If VNU ultimately decides (or is forced) to pay more than $200mm you can make up to 29x your money.

Catalyst

- Appeal of recent ruling
- Settlement negotiations with VNU
- Jury trial