Description
Sigma Designs (SIGM) is a near term liquidation play that has been significantly de-risked, offers a fairly quick payback and has a modest upside at the current price. In addition, there is a possibility that the liquidation process will offer an opportunity for investors who can hold an illiquid security for a short time.
Background
Sigma Designs operated several related businesses focused on chip design for the home and home entertainment space. In December the company announced a deal to be acquired for $7.05 per share by Silicon Labs. The deal was contingent on Sigma selling or shutting down its money losing smart TV/set top business. Alternatively Silicon Labs had the option to purchase Sigma’s smart home (Z-Wave) business for a fixed price of $240 million. In February, Silicon Labs terminated the deal to purchase the entire company for $7.05 per share and elected to purchase the Z-Wave division for $240 million. This left Sigma with two money losing divisions - its Wired Connectivity business and its TV set top business.
The Wired Connectivity business was sold in February for $23.4 million. There is a $4.2 million holdback from this deal that could come back to Sigma’s shareholders.
Sigma’s former CEO agreed to purchase the TV business for $5.25 million. This deal closed on March 30th. The remaining business – Mobile IoT is relatively small, and management has indicated that it will be shut down if it can’t be sold.
The transaction to sell the Z-Wave division to Silicon Labs is subject to shareholder approval. The vote is scheduled for Tuesday April 17. Sigma’s shareholders are expected to approve the plan of liquidation on April 17thas well. The bulk of the liquidation proceeds should be paid out shortly thereafter. Management has said that as a result of the sale of the TV business, it expects to be able to complete the liquidation by the end of September. Management has indicated that it currently expects shareholders to receive in the range of $5.95 to $6.46 per share.
While the stock is currently trading at the midpoint of management’s liquidation range, I believe management has been very conservative in its estimate of liquidation values. The definitive proxy filed March 19 estimated an initial distribution of $230 to $250 million ($5.82 to $6.33 per share) with the possibility of an additional $10 million ($.25 per share) at the high end. The original estimates were made before the deal with the former CEO to sell the money losing TV business. In a proxy supplement dated April 5, management increased its estimated range by $5 million to $235 to $255 million. ($5.95 to $6.46 per share)
The $.13 increase to the estimate is essentially the $5 million received for the TV business. No allowance is made for the fact that Sigma will no longer be responsible for the losses of the TV business which were forecast at $22 million for fiscal 2018. It’s not clear how much of this loss was built into the liquidation reserves, however the original proxy stated “ We do not believe the divestiture of the TV Business will result in material cash proceeds to Sigma; however, if we are able to divest this business, we expect that our operating expenses and liabilities will be reduced significantly”
The original liquidation assumptions were as follows:
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Low Range
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High Range
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Cash balance as of February 3, 2018
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40,630,000
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40,630,000
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Net cash from sale of Wired Connectivity Business
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21,730,000
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21,730,000
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Net cash from sale of Z-Wave Business
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236,500,000
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236,500,000
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Total cash assumed following Asset Sales
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298,860,000
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298,860,000
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Expenses and other costs
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Net cash outflow from operations
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29,720,000
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20,700,000
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Severance and other termination costs
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13,230,000
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13,230,000
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Change in control bonus payments
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3,620,000
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3,620,000
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Transaction-related expenses
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7,150,000
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6,150,000
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Reserves for known claims
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6,540,000
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2,010,000
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Shutdown costs
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8,600,000
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3,150,000
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Estimated cash to distribute to shareholders
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230,000,000
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250,000,000
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Shares outstanding as of Record Date
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39,499,507
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39,499,507
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Estimated per share distribution
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5.82
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6.33
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Although management added $5 million ($.13 per share) to both the low and high estimates of distributions following the sale of the TV business, it is likely that several of these items will be favorably affected by the sale, and as a result, the payout will either be at the high end of the range or above. For example, the TV business was projected to lose over $20 million in 2018. In addition, the $4.2 million holdback on the Wired Connectivity business offers additional potential upside.
Liquidations such as this also have a history of creating opportunities as distributions are made and the securities are delisted and become less liquid. Trading in the stub will I would expect an initial distribution of $5.75 to $6.00 shortly after the liquidation is approved. Management has stated that the liquidation can be wrapped up by September, so I don’t expect there to be a liquidating trust, although that is a possibility.
Risks
The liquidation is subject to shareholder approval, which should occur on April 17.
Liquidations almost always take longer than anticipated.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Shareholder approval of the liquidation - April 17.
Closing of the Z-Wave sale - shortly thereafter.
Initial liquidation payment.