Description

Note: This one is for PAs only, pretty much. Volume tends to be light, but there are typically spurts of activity which enable one to build a position, so I feel like it’s fair game for a VIC post. 

Tix Corp is a reasonably decent business which at the current stock price carries a $20mm enterprise value, $5mm in normalized operating income, and a $44mm NOL which will free it from having to pay any taxes for the next several years. As is often the case with companies trading at 4x earnings, there is a bit of hair on this one, specifically a management team that hasn’t been particularly shareholder friendly, but I’ll argue at this price we can expect to get a decent return on investment anyway.

Tix Corp sells discounted tickets to Las Vegas shows on the day of the show through a network of a dozen or so ticket booths up and down the Strip. It’s like TKTS in NYC, except in this case it’s very much a for-profit business. They do about $100mm in ticket sales a year, of which they keep about $20mm for themselves as revenue. Management has argued in the past that the business will persist because they enable the shows to engage in price discrimination – in a lot of cases, the people willing to stand in line in the hot sun for the chance to buy discounted tickets which or may not even be available probably would never have bought full price tickets anyway, and some revenue is better than no revenue. The Company had some competitors in the past but has since bought them out and now seems to be the only game in town.  I’m inclined to agree at this point that they have built a business that has some power over their suppliers (the shows) and their customers as well.

Tix has a somewhat colorful corporate history. It was a pink sheet listed company known as Cinema Ride (don’t ask), which found itself in the Vegas discount ticketing business through a JV that fell apart. Though the JV failed, they saw opportunity, and got into the space on their own in 2004, as the company teetered on the edge of bankruptcy. The business quickly took off, and the stock soon soared.

Not content with being a simple ticketing business, management used their inflated stock in 2007 to acquire an event production business, as well as an exhibit merchandising business. Those businesses did terribly, and under pressure from some hedge funds that had acquired large stakes, they sold them off by 2012. (This era of the business has been chronicled in a couple of VIC posts on the stock, for the curious).

Here is the financial history of the ticketing business, as best as I could reconstruct it:

Some of the growth in 2009/2010 is acquisition related, as they bought out a couple of their smaller Vegas competitors. In 2012 and 2013, they had to move a couple of their most productive locations because of major construction projects on the Strip, which led to a decline in revenue. Overall, though, this has not been a bad business. 

Here is their profit in 2012 and 2013, with addbacks:

I usually hate addbacks but most of these are legitimate. Litigation and advisory is the biggest bucket and it pertains to things which have mostly gone away (much more on this later). In Q1 2014, litigation and advisory was only $100k. Half of D&A is amortization related to acquisitions, which is not real and will go away shortly as acquisitions become fully amortized. Stock comp here is less real than it seems. It pertains to stock options that were granted when the stock was trading much higher and so didn’t ultimately impact shareholders; they never repriced them. I expect there will be stock comp for management in the future but it will be much more in line with the size of the company today. 

Taking all of this account, I conservatively peg normalized operating income at around $5 million. In reality it’s probably quite a bit higher – gross profit is over $12 million, and maybe there really shouldn’t be $7 million in SG&A considering the size and nature of the business. Management is well paid – the CEO earns $700k and the COO earns $400k, which again is on the high side for a business with $22mm in revenue. The Board is compensated very well also, for a company of its size.

This brings us to the management situation. The CEO and COO combined own only around 20% of the stock, which made them a bit vulnerable when Baker Street bought up 23% of the stock and came in demanding change. Baker Street made a non-binding proposal to buy the entire company for $2.10 a share, which was rejected.

In response, management did some shareholder unfriendly things, like execute a complicated stock buyback in 2011 that allowed management to vote the shares for a period of time before they were ultimately retired, and adopt a poison pill. Eventually, Baker Street was able to negotiate itself 3 of 8 board seats in return for a standstill.

In 2012, Mitch Francis, the CEO, made a proposal to take the company private at $2.25 per share; it’s not clear if he ever had the financing lined up to execute it but it quickly fell through.

At the end of 2013, the Company agreed to buy Baker Street’s stake for $1.95 a share. This was a big premium to the then-trading price, but based on fundamentals, the price seems reasonable and trading volume is fairly tiny so perhaps the current stock price has to be taken with a grain of salt. (After all, that is the thesis here).

My view is that management has made some mistakes in the past, but is not intent on ripping shareholders off. There is some risk that without Baker Street looking over their shoulder, they might not behave as well, but I think at this price the risk is manageable.

I expect TIXC to continue to generate cash over the year to pay off the debt they incurred to buy out Baker Street.  Eventually, I think they do go private. There are some 382 limitations (rolling 3 year window / 50% change of control) they don’t want to trip so they may not do so immediately, but I think it does happen within the next 3 years. It’ll probably be a low-ish price, but still something current shareholders can be comfortable with.

Catalyst