Description

Long: Premier Exhibitions (NASDAQ: PRXI)

Current Price: $1.70

Fair Value: $2.71

Summary

Premier Exhibitions is no stranger to VIC. Now that the stock price has fallen significantly and irrational selling has taken/will take place, I believe it is worth another look. The current price offers a nice margin of safety in a broad range of scenarios.

Premier is a profitable international presenter of exhibitions that trades at a discount to the sum of the fair values of its two subsidiaries. This discrepancy should be resolved in time as the company is in the process of selling its most valuable subsidiary and has promised to direct the proceeds toward shareholders.

Background

Premier’s predecessor, Titanic Ventures, was formed in 1987 to explore the Titanic wreck site. When the company went public in 1993, it was renamed RMS Titanic (RMST). A year later, it entered the exhibition business by displaying recovered Titanic artifacts from its numerous dives. In 2004, RMST reorganized as Premier Exhibitions with RMST as a subsidiary, so the company could expand its exhibition business beyond the Titanic. In 1994, RMST was declared the salvor-in-possession of the Titanic wreck site by a federal district court, making it the only entity allowed to recover artifacts from the ship wreck. However, the court later restricted the sale of such artifacts, claiming Premier had to receive a salvage award. In 2010, RMST was awarded such a salvage award, equal to the fair market value of the recovered artifacts, to be paid via cash or title. On 8/15/11, the court made its decision to grant the salvage award in the form of title to the artifacts. Premier currently has two subsidiaries—RMST and Premier Exhibition Management (PEM). RMST contains the Titanic artifacts and the related intellectual property, and PEM operates the exhibition business of Premier.

Management

In response to a 95% drop in the stock price and missteps by management, the hedge fund Sellers Capital ran a proxy contest to replace a majority of the board of directors. After winning in 2009, Sellers replaced the management team and was responsible for placing eight out of the nine directors. Sellers committed to turning the company around and developing a plan to monetize the Titanic assets. Initially, the turnaround efforts fell flat, but recently, operations have begun to pick up steam.

Sellers Capital, which is now in liquidation, owns 44% of the company. Premier is the fund’s only position. The head of the firm, Mark Sellers, is a well-respected value investor who has spoken several times at the Value Investing Congress. The CEO of Premier is Sam Weiser, the former COO of Sellers Capital. After speaking with him on several occasions, Weiser appears very intelligent and capable. In addition, he has recently recruited a CFO/COO with significant experience in the live entertainment business.

Current Situation

In October 2012, Premier announced that it had entered into an LOI with a consortium of entities to sell the Titanic assets for $189MM. During the FQ4’13 earnings release on 5/28/13, the company announced that the consortium had still not been able to secure financing. Even worse, the consortium appears to be essentially begging for money from governments and charities. This information makes it seem like the consortium is not a serious buyer. The company recognizes the uncertainty with this deal and is now considering other paths to monetize the Titanic assets. The stock dropped significantly on this news.

Shortly thereafter on 5/31/13, Mark Sellers sent an update to his LPs explaining that he is accepting withdrawal requests for the end of Q2’13 for the first time in years. The majority, if not all, of the consideration for the redemptions will be satisfied in shares of Premier (see the letter here: http://www.princehenrygroup.com/Sellers%20Capital%20Fund%20Update%20May%2031%202013.pdf). Because Sellers Capital owns 44% of the company, this has put further pressure on the stock resulting in a drop of 27% from the day FQ’13 earnings were released. Premier may suffer further pressure as the LPs who requested redemptions sell their shares when they get them in the next few days. Given this, it may be wise to wait until July to purchase shares. To make matters worse still, Premier is being kicked out of the Russell 2000 at the end of June. The above events describe investors who are selling without regard to the fundamentals. This irrational selling and artificially low stock price offer a terrific entry point for levelheaded investors. Premier did announce a small share repurchase plan on 6/17/13. The stock initially reacted positively but has since retraced the move. This may be a sign the company agrees the stock is cheap down here; however, the skeptic in me wonders if it was orchestrated to help the LPs of Sellers Capital sell their shares.

Valuation

RMST

Given the uncertainty of the LOI and the difficulty in valuing the assets, I don’t think it is wise to hang your hat on a single number for the valuation. However, for the sake of simplicity and instructiveness, I will estimate a fair value. Below I present sensitivity tables with different sale prices of the Titanic artifacts. The highest number is the $189MM agreed on with the consortium. I assume RMST is worth $129MM or 68% of the original $189MM. My estimate of fair value before the auction process began (along with the estimates of others) is already posted in the comments of the last PRXI idea, so I won’t go over any of that again. In his 5/31/13 letter, Sellers commented: “The company remains in discussions with parties about a sale of the Titanic assets. While I expect a sale of these assets will occur, there remains uncertainty about the ultimate timing of a transaction closing.” The timeframe of a transaction is extended because the court has to approve any sale since the government wants to ensure the assets are properly preserved and publicly displayed. Before the company settled on the consortium, they mentioned they were “in discussions with multiple parties for the purchase of its Titanic artifacts collection.” Notably, Sellers is not withdrawing any of his own capital. He is committed to seeing the monetization through until the end. Some may think the company has exaggerated the amount of interest it has received for the Titanic assets. Although the fact that Premier chose to enter into an LOI with what seems like an implausible buyer hints at exaggeration, the company has no incentive to exaggerate. Sellers is seeing the process through, so he shouldn’t care what the stock price does in the meantime. If the company is being promotional, they surely aren’t doing it elsewhere. On the FQ4’13 call, at least four separate investors complained about Premier’s lack of communication and investor relations efforts.

PEM

Historically, Premier has only presented Bodies, Titanic, and Dialog in the Dark exhibitions. In April 2012, PEM acquired the right to exhibit four other exhibitions for five years. In this transaction, the seller received a 10% stake in PEM valued at $4.8MM, implying a $43MM valuation for Premier’s PEM stake. However, in a restatement of the acquisition announced on 5/2/13, PEM’s value was lowered to $30.180MM. This implies a $27.162MM valuation for Premier’s stake. Since the deal was executed, PEM appears to be performing better than expected. In FY13, PEM generated $6.698MM in Adjusted EBITDA (per the company’s definition) and $5.832MM in adjusted EBITDA after subtracting stock-based compensation. Premier disclosed a cash balance of $8.4MM on 4/30/13 vs $6.4MM on 2/28/13, which hints to a robust FQ1’14. Lastly, Premier is opening new exhibits in multiple locations this year. Given these points, it makes sense to add a 20% premium and thus value Premier’s PEM stake at $32.594MM, which is only 5.6X my adjusted EBITDA.

Adding together the values I assigned to the two subsidiaries, Premier is worth $2.71/diluted share. However, as I stated earlier, I believe acknowledging the range of possible outcomes is more important. You can see that only in certain scenarios where the Titanic assets sell for $69MM do you lose money. Even then, the downside is modest.

To get from the sale price of RMST to the stock price, I subtract 7.5% of the sale price for investment banking fees. Premier said they are likely to hire an investment bank in their last earnings release. I also subtract $4.85MM for the unfunded portion of the Titanic trust account Premier will fund. Lastly, I discount the proceeds from the sale of RMST at 15% for one year as I assume it will take some time for Premier to actually close on the deal. I also add a conservative $2MM for the PV of NOLs. All other assets and liabilities at the corporate level are immaterial.

I do not adjust for taxes because it appears that by selling the stock of RMST, Premier is somehow avoiding taxes. Management has said on multiple occasions that the deal is “tax-efficient” and has confirmed they understand the tax consequences. Taxes are an important consideration given the low basis of the Titanic assets. I assume that any other deals will follow this structure. Although I am not sure how they can structure the deal without taxes, if they couldn’t, it would make far more sense to sell the company’s stock or sell PEM and then the company’s stock. This is because the tax bill of selling the Titanic assets will be much higher than any discount the buyer puts on PEM or the tax bill on PEM. Because Premier is not taking either of these approaches and has confirmed they understand the two approaches are far superior if taxes are not unavoidable, I assume the current deal will not be taxable. Assuming management is not imbecilic, the worst case scenario would have Premier selling the company and the buyer not fully valuing PEM.

Risks

1. There are no buyers for RMST even at a price that is half the currently contemplated price.
2. Management does not complete a transaction in a tax-efficient manner.

Catalysts

1. Premier sells RMST and proceeds are directed toward shareholders. When asked on the FQ1’13 earnings call what Premier will do with the proceeds from a sale of the Titanic assets, Sam Weiser said, “…we do intend to direct substantially all of the net proceeds to shareholders.”
2. Cessation of and recovery from irrational selling due to Sellers Capital allowing LPs to withdraw their capital accounts for the first time in three years.
3. After the RMST sale, PEM will become a standalone company, making it easier for the market to fully appreciate its value.
4. After the RMST sale closes, PEM is sold. Mark Sellers is eagerly awaiting the appropriate time to exit his fund’s final position, and the ideal time to do so is quickly approaching. On 9/18/08, he announced that he would be liquidating his fund and retiring from the profession. He was quoted as saying, “…managing people’s money has taken a large toll.” Additionally, on 6/21/10, Sellers informed Premier that he was looking for a single investor to purchase his stake. But on 10/7/10, he announced that he would continue to hold until he could obtain a better price for his shares. The above actions make clear that Sellers wants to liquidate his fund as soon as practically possible and exit the investment management business. He has said that after he is done with Premier, he does not intend to ever invest in public equities again. Given it has been over three years since the dissolution announcement, Sellers and his LPs are undoubtedly eager to see their capital and move on. The most reasonable way for Sellers to exit his position in Premier is to sell the company. Since RMST is in the process of being sold, he only needs to sell PEM. Selling PEM after RMST makes sense because Premier will be able to sell it tax efficiently by selling Premier’s stock.
   1. Private investor Greggory Schneider filed a 13D on 11/14/12 disclosing a 6.0% position (which he has since increased to 6.33%) and urging management to initiate a formal process to privatize or sell PEM. He is even more bullish on the subsidiary, believing it could “easily fetch $75MM.”

Variant View

1. As a result of the disparate nature of the two subsidiaries and relatively small size of PEM, market participants are not fully appreciating PEM’s turnaround and value.
2. Market participants are incorrectly assuming taxes will be paid at the corporate level on the sale of RMST.
3. Market participants are incorrectly interpreting the lack of guidance concerning the company’s future after the sale of RMST as an unwillingness to sell PEM. By reviewing Mark Sellers’s actions over the past several years, his desire to fully monetize his position is clear.

Conclusion

Premier Exhibitions represents a relatively simple, compelling, and timely investment opportunity. It is currently trading at a material discount to its fair value with a catalyst to close this disconnect likely occurring within the next year. Furthermore, the stock is in the midst of irrational selling allowing for a prime entry point. After the sale of RMST is completed, it is likely that Sellers sells PEM as his fund is in dissolution and there is an activist clamoring for such a move. If Premier does not sell PEM, at least the market will be able to better value the remaining business after RMST is sold.

Disclaimer:

This report is intended for informational purposes only and you, the reader, should not make any financial, investment, or trading decisions based upon the author’s commentary.  Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision.  Before investing in a security, readers should carefully consider their financial positions and risk tolerances to determine if such a stock selection is appropriate.

At any time, the author of this report may trade in or out of any securities that are mentioned in the report as long or short positions in his own personal portfolio or in client portfolios that he manages without disclosing this information. At the time this report was published, the author was holding a long position in PRXI either in his personal account or in accounts that he managed for others.

THIS REPORT IS NOT A RECOMMENDATION TO BUY OR SELL ANY SECURITIES MENTIONED. THE AUTHOR ACCEPTS NO LIABILITY FOR HOW READERS MAY CHOOSE TO UTILIZE THE INFORMATION PRESENTED ABOVE.

Catalyst