Telesytem International Wirele
September 08, 2005 - 8:21am EST by
2005 2006
Price: 2.67 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 596 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Telesystem Wireless Inc. (TIW on TSX and TIWI on NASDAQ) is a cash shell company in the process of liquidation (all numbers below are in Canadian dollars). It sold all of its operating businesses to Vodafone and that transaction closed at the end of May 2005. This liquidation investment is best done in non-taxable accounts (see details below).

As a result of the Vodafone transaction, TIW had a liquidation amount of $19.96 + investment income to distribute to its shareholders. As at June 30, 2005, this liquidation amount had grown to $20. Assuming a money-market type of return (let’s say 2% annualized) and a 40% tax rate, the $20 should grow to approximately $20.06 by the end of September, 2005. Though TIW will continue to earn investment income in the future, this amount will be substantially less as a significant portion of the liquidation proceeds will be paid out by the end of September (see details below).

TIW went ex-dividend on September 6, 2005 for the return of capital portion of the distribution which amounted to $17.01. So, an investor today would be paying $2.67 (plus commissions) to get back roughly $3.05 in the future.

This remaining $3.05 will be returned to investors in the form of a dividend. This will be treated as a Canadian dividend for Canadian taxpayers. Because of the tax treatment, this investment is best made in Canadian non-taxable accounts. I am not sure of the tax treatment for non-Canadian non-taxable shareholders (please consult your own tax advisor with respect to issues such as withholding taxes, etc.).

On September 19, 2005, TIW goes ex-dividend for another $1.79 (a dividend distribution). Both the return of capital distribution ($17.01) and the dividend distribution ($1.79) will be paid on September 27, 2005. After these distributions, the remaining amount to be received is $1.26

Since I am tying up $1.79 for three weeks, I am charging myself 15% on that tied-up capital, so after the payment of the $1.79, my net investment is $0.92 ($2.67 - $1.79 + $0.02 on the tied-up capital + $0.02 for commissions).

Though the liquidation should be completed within the next 12 to 24 months, if not sooner, I am assuming I receive $1.26 two years from now. In that case, the annualized return on the $0.92 investment is 17%. The returns also go up if interim payments are made.

After payment of the first distribution totaling $18.80 per share ($17.01 + $1.79), the Company still has set aside $318 million to satisfy the following:
(i) potential obligations owing to taxation authorities (specific reserves totaling $255 million)
(ii) all remaining costs to dissolution and
(iii) potential creditor claims and other items including contingencies and unforeseen obligations.

The main risk in this liquidation is that the reserves set aside are insufficient to cover the actual future liabilities. If they are insufficient, the shareholder distributions will be reduced. On the other hand, if the reserves are too high, the over-reserved amounts will serve as a reduction in the purchase price to Vodafone in their transaction (all an investor gets is the original $19.96 + investment income less any downside adjustments if the reserves are insufficient). So, in essence, an investor takes the downside risk on the reserves, but none of the upside.

However, the main reserve that could be understated is the tax reserve and the Company provided the following in a recent press release:

"Although the Company, the taxation authorities and the Monitor have together established the specific reserves for potential tax liability, the taxation authorities have not yet determined the specific amount of their claims and tax assessments may not be completed for several months. The Company believes that there are no material past, present or future amounts owing to taxation authorities. However, there can be no certainty that the authorities will not propose adjustments which, if not successfully opposed by the Company, may result in tax liabilities."

Based on the above information, it seems that the Company is relatively comfortable with the level of the tax reserve (but there are no guarantees). Furthermore, the Company is using months in its timeframe for the tax audits, while I am giving it 2 years – and the return still works out to be acceptable.

Please note that TIW will be delisted from the Nasdaq on September 19 and will also be delisted from the TSX shortly thereafter. It will continue to be listed after that on the Canadian Venture Exchange.

Catalysts: ongoing distribution (dividend) payments


-Ongoing distribution (dividend) payments
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