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small mystery Company XYZ


krazeenyc
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I've been looking at a company for quite a while now -- it is very near bankruptcy. Given the fact that the volume is so anemic and the market cap is so small (<5 million) I don't think I can really make any real money on it. (the ask is also about 2x the bid lol) .  You are lucky if the $$ volume on a given day is larger than $1000. But I'm following it because I believe this industry will have other companies suffer the same fate. 

 

They are ebitda postive, loaded with debt, and obviously very cash flow negative.  They have 1 large customer -- which likely does not want to see them bankrupt.

 

In late june/early july this company announced that they restructured their debt that was to be paid in June to december (and a possible further 3 month extension). The company has no hope to pay this off.

 

Additionally last Summer, the company had agreed to be bought out at 7-8x their current price by one of their competitors (in addition to taking on their debt) Unfortunately the deal was not closed and their competitor walked away after being themselves acquired.

 

Another interesting thing is that recently a 10% owner of the company has purchased appx 8% of the company at prices all significantly above the current price . (presumably knowing full well that they have 6 months or so to find a buyer).

 

Another interesting thing is a few years ago a similar company in a similar boat was bought out by their largest customer at a significant premium. 

 

These companies are often valued on a per subscriber metric.

 

If people know the company and want to simply disclose it for a better discussion cool.  Also if people think it would be better to simply disclose the company/exact industry -- that'd be fine too. And if people think this is silly, mods, just delete.

 

 

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Why don't you think you can make money on this?  Maybe you're a fund with hundreds of millions or billions under management, then point taken.

 

If you're an individual, or a small fund you can absolutely take advantage of this.  Say you can buy a 5% or less position so you don't have to file, that's $250k.  If you prefer to hold 10 positions or less (like most on the board) then you're priced out at $2.5m in assets.  If you hold 20 positions or more you're priced out at $5m in assets.

 

Here's another way to think about this, if the position could return 7-8x do you really need a 20-30% position?  If you allocate 5% and it really returns that much you'll be sitting pretty.

 

One last point, the bid ask is worthless on illiquid stuff.  No one is actually paying that, place a GTC order at what you'd pay somewhere in there and you'll probably get a fill.  There is a lot of phantom volume.  I have purchased stocks with a bid $10 ask $500 for $10-11 without issue over and over.  People put in goofy asks on these things, market makers ignore them until some unlucky soul places a market order and market makers pounce and then promptly go buy themselves an expensive steak dinner.

 

Curious as to the name.  Shoot me a PM, I'll keep it confidential, just curious.  Might be worth building a stake and working with management to go private or work out a buyout.

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I'm not opposed to making small(ish) <1% investments at times if they are highish risk, but super high reward.  I've rarely invested in companies though that don't trade a single share for days/weeks. So while I've invested in many companies with sub $100 million market caps - under $5 million market cap -- I've never gone there. (Nate I know this in your wheelhouse! -- I enjoy your blog.)

 

I don't think you will make 7-8x on this investment, but not really sure what the right buyout price would be for a potential acquirer.  I would figure it was less than it was last year

 

I think the risk here is high -- Net Debt to current Ebitda is like 12-13:1. I'll post more on this later if there is anyone else who is interseted.. and i'll get back to you nate.

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  • 7 months later...

Well, we're past the deadline and the three month extension. Would you mind sharing the name of the company and the outcome? Enquiring minds want to know...

 

 

I'm not opposed to making small(ish) <1% investments at times if they are highish risk, but super high reward.  I've rarely invested in companies though that don't trade a single share for days/weeks. So while I've invested in many companies with sub $100 million market caps - under $5 million market cap -- I've never gone there. (Nate I know this in your wheelhouse! -- I enjoy your blog.)

 

I don't think you will make 7-8x on this investment, but not really sure what the right buyout price would be for a potential acquirer.  I would figure it was less than it was last year

 

I think the risk here is high -- Net Debt to current Ebitda is like 12-13:1. I'll post more on this later if there is anyone else who is interseted.. and i'll get back to you nate.

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