Description

Soapstone Networks (SYMBOL: SOAP.PK) is a liquidation play with a relatively short investment horizon and decent return. We believe the liquidation stub has solid downside protection and can likely return 27% to 45%+  by the end of Q1 2010. As is the case with most decent opportunities, the scale is this name is limited, but the patient buyer can occasionally pick up a decent block of shares.

Valuation

a. DEF 14A Management Liquidation Estimates

On July 2, 2009 management filed a DEF 14A. On page 30 there is a table outlining their liquidation estimates for the company. They estimate the range for the large initial distribution to be between .25 and .75. Below are management's estimates:

Estimated Liquidating Distributions to Stockholders

(in millions, except for per share amounts)

b. Fast forward to October 5, 2009

The estimates of liquidation value in the DEF 14A may have been good at the time, but the situation has certainly changed for the better. I'll go through each line that has major changes or updates. You can call the CFO to confirm this information at 978-715-2300 and ask for Bill Stuart (not officially working for the company as of October 5th, but still willing to answer questions). 

1) Proceeds from sale of Assets

Soapstone just announced that they have received $2.2mm for their assets.

http://biz.yahoo.com/e/091005/soap.pk8-k.html 

2) Operating Expenses after June 30, 2009

The DEF 14 estimates for operating expenses are pegged at $2mm. This is ludicrous given what has happened since that estimate (at the time they were expecting to run a shop of 30+ employees for at least a year). As of August 31, the company had 6 remaining employees and according to the CFO they were "downsizing very fast and trying to wrap up operations by Q4 2009."

The CFO wasn't lying.

As of Oct 5th SOAP has 1 person left at the company (the young guy who answers the phone when you call the company) and they have Bill Stuart and Mike Cayer in a helping role for $10,000 a month (there to wrap up the lease situation).

Conclusion: The $2mm estimate is no longer applicable given the current situation at SOAP.

Low Estimate:  -200k for costs incurred from June 30, 2009 to Oct. 5th, 2009 (conservative guess based on conversations with CFO); the lone employee at the company goes nuts and burns -800k from Oct 5th until liquidation: $1mm

Expectation: -$200k for costs incurred from June 30, 2009 to Oct. 5th, 2009; the company burns $10k a month on Cayer and Stuart for 6 months, $50k on the sole employee, and $120k for misc: -$430k

High Estimate:  -$200k for costs incurred from June 30, 2009 to Oct. 5th, 2009; the company burns $10k a month on Cayer and Stuart for 3 months, $25k on the sole employee, and $60k for misc: -$315k

3) Real Estate and Equipment Lease termination costs

The DEF 14 estimates these expenses to range from -$5.4mm to -$1.6mm. These figures include the actual lease obligations ($3.728mm as of June 30, 2009, page 20 on the 10Q) and operating expenses associated with the leases (taxes passed through by building owner and maintenance charges). The $5.4mm figure assumes they stay in the building until 2014 and eat 100% of the costs. This is NOT going to happen. The building is already aggressively being marketed and the CFO expects to get out of the actual lease at 50% fairly easily. While the commercial RE market in the area is very weak, a lease buyout at a large discount is very possible.

Conclusion: Lots to gain here...

Low Estimate: Sole employee sits in the building for 6 months and has the lease bought out at 25% (i.e. someone gets the deal of the century): -3.30mm

Expectation: SOAP eats 150k more in taxes/maintenance charges and gets out with a 50% buyout of lease in the next 6 months. -$2mm

High Estimate:  SOAP gets out of lease with 60% buyout and eats 150k in taxes/maintenance charges in the next 6 months: -$1.6mm

4) Professional Fees

The DEF 14 estimates these expenses to range from -$2.7mm to -$2.2mm. As of August 31, 2009 the CFO said they had spent about $1mm and expect to spend about that much going forward (conservative estimate).

Conclusion: Estimates in DEF 14 are fairly accurate

Low Estimate: -$2.7mm

Expectation: -$2.2mm

High Estimate:  -$2mm

c. How estimates look after accounting for what has happened since the original liquidation estimates

With a current stock price of .59 the low estimate translates into a .75% return, the expectation is a 26.83% return, and in the high estimate we have a  44.94% return.

Of course, all of these estimates exclude a 1.8mm reserve for unanticipated claims and contingencies, which is unlikely to be tapped in my opinion. If this is distributed as a second payment (perhaps by Q4 2010) add another .1168 per share to all the estimates. It is probably prudent to consider this worth 0 and build in a margin of safety.

Smart Money

A quick analysis of some of the recent ownership filings suggest that the cat is already partially out of the bag on this liquidation play. Fortunately, there are still shares for sale out there: one of our brokers (Cantor) mentioned that a 500k+ block was for sale today.

Conclusion

There really aren't many solid opportunities in the current market, so we've resorted to dealing in micro-trash--sad state of affairs, I know.

The current market in SOAP is pretty illiquid, but the past few weeks have shown promise for the patient buyer to pick up 20k+ blocks. It would be nice if this were a deep liquid stock, but unfortunately that is not the case, however, if you are looking for a place to stash your cash, this is a safe, lower-risk, ~6 month investment, that pays multiples of the current bank rates...

Catalyst

1. Lease buyout announcements

2. Liquidation payments