Description

MRV Communications ("MRVC" or the "Company") is an overcapitalized, undervalued company with a bloated corporate overhead which, in response to many activists, has apparently finally started a path of creating value for shareholders.  The Company has a market cap of $200 million and $144 million of net cash and is cash flow positive.  The company has 2 subscale businesses and recently (and very quietly) announced it was exploring strategic alternatives for one of those businesses.   The stock currently trades at 4.3x LTM EBIT (including Corporate Overhead expense) and only 2.3x LTM EBIT excluding Corporate Overhead.  However, a sum of the parts analysis, as illustrated below, is probably a better way to value the Company.

You can trace the history of 13d filings (which goes back a while), but at present there are 3 different groups of 13d filers who collectively own approximately 20.7 %. We believe the various activists are seeking some combination of 1) the return of excess capital, 2) the sale of one or both segments, 3) more Board representation, 4) Re-initiation of quarterly earnings conference calls, 5) relisting of the stock on the Nasdaq and 6) no new acquisitions.  The filers include Boston Avenue/T2/Prescott/Shubin-Stein (some of whom are board members) with 9.5%, Karen Singer & Lloyd Miller with 5.4%, and Raging Capital with 5.8%.   Insiders, (excluding the 13d filers above) own only a couple percent of the shares outstanding and most people would agree they have failed to create shareholder value.  Wells (Fargo) Capital Management holds a 10% position and Sun Capital owns 5.3%, but neither has filed 13ds.  Update: a few days ago the Boston Avenue/T2/Prescott/Shubin-Stein group disbanded.  We note that Boston Avenue said that it would (we are paraphrasing) continue to push for a return of capital, etc. We believe T2 and Prescott will do the same.   We note that several parties to this (former) activist group are on the Board (Boston Avenue is a member, Shubin-Stein is Chairman), which may have complicated certain matters. 

On Sept. 2, in an 8k filed on Friday after the close of the market and without a press release, the Company (quietly) announced it had hired Oppenheimer to explore strategic alternatives for the Network Equipment segment.  Since the news was not widely publicized, we suspect many investors may not have seen the news.  However, we view this as a very important step in the process of creating shareholder value and may indicate that the various factions are reaching some compromises which could lead to further value creation and the avoidance of an expensive proxy fight (the company is long overdue on holding its annual shareholder meeting).

FINANCIALS

-We believe all appropriate costs have been allocated to the individual segments, so the Corporate Expense could be largely eliminated if the company were liquidated.  

-We have added back to the Equipment's 2011 results a one-time charge of $0.9 million related to the exit of OCS's free-space optics product line.

-We have not added back the non-cash stock compensation to the below figures, which would only make the stock look even cheaper.

CAPITALIZATION

                Stock price                          $1.27

                Shares                                  157.5

                Equity Cap                           200.0

                Cash                                      158.0

                Debt                                          9.7     

                Legal payable                         4.6

                Enterprise Value                56.3

VALUATION

You can value you the company assuming no asset sales (an unlikely scenario) or on a sum of the parts basis.  Assuming no asset sales, the stock is currently trading at 4.3x LTM EBIT and 2.3x LTM EBIT (excluding corp. overhead).  We think either multiple is very cheap and further note that corporate overhead should decrease overtime (in part because it has expenses related to non-recurring  items such as litigation and compensation).

A more likely scenario involves the sale of one or both businesses, so a sum of the parts valuation may be more appropriate.  We very conservatively believe the segments can be sold for at least 5.5x EBIT .  For illustrative purposes, we have also shown the valuation assuming the segments are sold for 7.5x EBIT.  

The company has NOLs of $175mm federal, $157 mm state and $88 mm foreign.  These NOLS can obviously be used to shelter future cash taxes from existing operations or potential assets sales.  We have not assigned any value to the NOLs or attempted to determine the tax consequences of any asset sales.

BUSINESS DESCRIPTION

MRVC is a global supplier of communications equipment and services to carriers, governments and enterprise customers worldwide. We conduct our business along two principal segments: (a) the Network Equipment group; and (b) the Network Integration group. We evaluate segment performance based on the revenues, gross profit and operating expenses of each segment.  Our Network Equipment group provides communications equipment that facilitates access, transport, aggregation and management of voice, data and video traffic in networks, data centers and laboratories used by telecommunications service providers, cable operators, enterprise customers and governments worldwide. Our Network Integration group operates primarily in Italy, France, and Scandinavia, servicing Tier One carriers, regional carriers, large enterprises, and government institutions. The Network Integration group provides network system design, integration and distribution services that include products manufactured by third-party vendors, as well as products developed and manufactured by the Network Equipment group. We market and sell our products worldwide, through a variety of channels, which include a dedicated direct sales force, manufacturers' representatives, value-added-resellers, distributors and systems integrators.  For the three months ended June 30, 2011 foreign revenue constituted 71% of our total revenue.

Catalyst