Description

New Media Spark plc (Spark) is a London based VC fund selling at a discount to NAV. The company is small and does not trade much, so investors with liquidity issues should skip to the next idea. However, enough stock does trade for a small fund or personal investment. A foreign traded micro cap VC Fund with a portfolio of technology investments is not normally the kind of thing to get a value investor excited, but the investment thesis for Spark is very straight forward: There is a window of opportunity to front-run Spark’s long planned share buy-back. Spark’s management has stated that they intend to use the company’s hefty cash position to buy back shares in the market, which are trading below NAV. The problem is, they have not been able to do this because the cash was trapped in a German subsidiary until recently, when Spark was able to overcome the repatriation challenges via a financial restructuring of the sub. The buy back will be approved at the AGM this fall, at which point the discount to NAV should disappear. The opportunity for return is in the range of 25% to 40% depending the price you pay. The time horizon is relatively short (maybe nine months) and management’s intentions are clear.

Business Overview
NewMedia Spark is a quoted venture capital organization based in central London, focused on early stage investments in the technology, media, telecoms and financial services sectors. Spark’s portfolio has a particular emphasis on software applications, technology and communications and digital media. As an investor, Spark expects to add significant value to its investments through active support and strategic direction. The Company is listed on London’s Alternative Investment Market and has operations in London and Berlin. It has a holding of 37% of Spuetz AG, which is listed on the Frankfurt exchange.


Company Background

New Media Spark was founded as New Media Investors (NMI) in 1996 by Tom Teichman. NMI quickly established itself as a leading technology corporate finance and investment house. In 1998, Lord Rothschild Family Interest made an investment in NMI, and in 1999 Spark was formed to make early stage investments in technology companies; later that year Spark was floated on the AIM and the company began its investment activities. Subsequently, two rounds of institutional placements raised an additional ₤35.4m in November 99, and ₤50m in March 2000.

With the bursting of the technology bubble, Spark had little choice but to focus its efforts on the existing portfolio and operational restructuring, in order to shore up the balance sheet, reduce operating costs, increase its cash position and write down its disappointing investments. After a struggle with these issues over the last two years, Spark appears to be emerging from this process in a strong financial position. Management has taken a conservative approach to the book value of its investments (The Company exited one of its larger investments – Tullets – in January 2003 for ₤22.2mm, nearly 3x its book value of ₤7.2mm, and exited PriceRunner for $14.4m on August 4th, 2004, approximately 7x to 8x its book value of ₤1.1m.). Also, the company has down sized operations considerably from over 130 employees in 2001 to 7 employees currently. As part of the general restructuring, the Company was faced with an eleven-year office lease liability of ₤1.3m/year for its 18,000sf office in Soho. However, Spark signed an agreement with Corpnex to convert the excess office space to serviced offices. To date the company has over 75% occupancy and lease expense has been reduced substantially.

Spark stands to benefit from a generally improved investment climate and more specifically from the maturing of certain companies in its portfolio. Although details have not been made available yet, Spark reported that in the second half of 2004, several smaller investments were sold above book value, and one or more of the more substantial portfolio companies are currently at a fairly advanced stage of negotiation for trade sales, also above book value.

Spuetz dividend and Share Tender - On March 8, 2004 NMS announced that the Management and Supervisory Boards of Spuetz AG ("Spuetz"), in which Spark at the time held a 68% shareholding, had resolved to distribute a dividend of €23.2m (€4.65 per entitled Spuetz share). As a result, Spark received approximately €15.7m post close of the balance sheet (31/03/04). In addition, Spark agreed to sell 1,524,350 Spuetz shares ex-dividend for a total consideration of €10m. The combination of these events will result in Spark receiving cash of €25.7m (₤17.1m, or 3.6p/share based on 472m fully diluted shares), which has been remitted to the UK. Spark retains a holding in Spuetz of 1,861,092 shares, representing 37% of Spuetz's voting stock, valued at approximately €10m.

Portfolio
Spark takes a conservative approach to its portfolio valuation, whereby it only re-values its holdings when a third party valuation event takes place, being when there is a new investment into the portfolio company at a higher level or a disposal of shares.

Overall, Spark’s portfolio has a standard Venture Capital portfolio profile. It is well diversified both in terms of sectors and in terms of maturity. The portfolio comprises of 16 active investments. Most of the companies are based in the UK, however some operate internationally. The value, as in most Venture Capital funds, is concentrated within less than half of the companies of the portfolio. In Spark’s case, the 5 top companies account for over £13 million in value (as per most recent data available), namely:

• Aspex Technology (£4.2 million in book value) - a fabless semiconductor company designing powerful programmable microprocessors. It is NMS largest investment to date, with a $10mio financing during Q2-2004.
• Synaptics (£2.8 million) - a Software company focused on the Financial Services industry with a large client base
• Footfall (£2.4 million) - Europe’s largest provider of counting solutions for the measurement of pedestrian traffic in the retail sector.
• Mergermarkets (£2.3 million) - a provider of business and financial information for advisers and corporations active in M&A.
• PriceRunner (£1 million) - an Internet price comparison and consumer data collection services for Western and northern Europe. Note: PriceRunner was sold to Valueclick Inc. on August 4th, 2004 for $30m to $36m (subject to reaching performance targets). Maximum proceeds to Spark will be $14.4m. Spark’s return on PriceRunner was approximately 7x to 8x.

Most of these companies are well funded and have grown their top and bottom line. Several of the portfolio companies, such as Footfall, Mergermarkets, and Firebox are at a more mature, profitable stage and have continued to make good progress. In addition, many of the portfolio companies operate in market where consolidation is on-going, increasing opportunities for future exits.

Numbers

As of March 31, 2004 Spark’s NAV was 11.4p/share. This figure does not include the sale of PriceRunner which will add as much as 1.5p to 2p/share to Spark’s NAV. As management re-purchases shares in the open market up to Spark’s adjusted NAV of 12.9p to 13.4p/share, investors can realize a return of approximately 35% to 40% over today’s bid price of 9.50p/share. Note – the bid/ask spread is large. It is best to remain parked near the bid and wait for sellers. Disclosure: I own it.

Catalyst

Share repurchase to close the discount to NAV.