Friday, November 23, 2012

Bogen a spinoff with uncertain motivations

Unlisted companies are famously opaque, so it's no surprise when an unlisted company decides to spinoff a division that they're less than forthcoming with information.  The company in question is Bogen Communications International.  Thanks to a Twitter message, and a post from Inelegant Investor   at Stock Spinoffs I was alerted to the strange spinoff occurring at Bogen.

The company recently issued a press release stating they were spinning off a wholly owned subsidiary named Bogen Corporation.  The release is confusing to say the least, the company announced the spin of a subsidiary, except there is almost no mention of this sub in their annual reports.  The company announced the spin on November 20th, which is curious considering the record date for the spinoff was November 19th.  Shareholders will allegedly get to vote on this, but with management owning 70% the vote is nothing more than a token measure.

This transaction caught my attention for two reasons, the first is this is an unlisted stock, and I'm naturally attracted to these, and secondly after looking at the annual report is seemed like there might be some opportunity here.  The company barely makes mention of their two divisions except for a small section at the bottom of the notes in the annual report.

The company is an audio products company, they design, and manufacturer speakers, amplifiers, and sound systems.  The products all appear to have professional applications, from stadium speakers, to rack mountable mixing boards.  The company also sells products for intercoms and school broadcast systems.  Further evidence that the company targets a professional customer is the fact that the only way to purchase products is through a sales rep, or a very limited set of distributors.

In the US spinoffs are known to be an area of the market where outsized returns can be found.  I find it fascinating that spinoffs have generally only been profitable when American companies are doing the spinoff. I remember seeing some literature (don't remember where) a year or two ago that looked at global spinoffs and for the most part the stocks of the spun off companies resulted in a small loss.  My impression is that American companies spin off a division to unlock value; they provide incentives to management at the new spun off company to do well.  Non-American companies spinning off divisions do it to dump an underperforming division.

The motivation behind the Bogen spinoff is very unclear, but looking at the segment information from the past few annual reports we can get a glimpse of what management is thinking.


The above are the results for the Bogen Corporation division for the past six years.  The company's US operations have been profitable every year except for 2009.  The foreign operations haven't been profitably any of the past six years.

The company has a respectable gross margin and operating margin.  I didn't calculate the net margin because my net income figures are estimated.  The company carries a small amount of debt, and I'm not sure which division the debt belongs to, or how the interest costs might break down.

Maybe the company's international operations will turn around, it's possible, but I wouldn't want to speculate on it.  Instead I think the opportunity here lies in the domestic operations.  The company states that 58% of the total assets belong to the domestic operations.  The domestic subsidiary generates 100% of the profits.  Spinoffs are usually conducted on an asset basis not an earnings basis.  If we applied that formula to Bogen the domestic operations would have a market cap of $10.44m against a net income of $2.8m for a P/E of 3.73x.  Clearly the better investment is the Bogen Corp spinoff, and I think management realizes this.

Why would the company management suddenly decide to spin off the profitable operation?  Management owns 70% of the outstanding shares, and they can effectively do what they want with the company.  My guess is they are looking to sell one of the divisions and a potential acquirer said they would be interested but they only wanted to buy a portion of the company.  It was easier to spin off the undesired division rather than complete a purchase for a portion of the company.

After looking into Bogen the question I had was how do I buy the spun off shares?  I don't have an answer, I'm not sure if the Bogen Corp shares will even trade publicly after the spinoff.  If the Bogen Corporation shares do eventually trade I think they offer a very compelling opportunity, with an extremely low valuation, and a management that might be motivated to sell.  If anyone has more information regarding this spinoff I'd appreciate an email, or a comment.

Talk to Nate about Bogen

Disclosure: No position

11 comments:

  1. This is interesting, particularly because I've never tracked a spin off of a company trading exclusively on the OTC Markets. Thanks for the idea Nate!

    My expectation is that the shares will eventually trade on the OTC markets also. A broker/dealer can initiate quotation on the OTC Markets by completing Form 211 which requires a basic level of due diligence (http://www.finra.org/Industry/Compliance/MarketTransparency/OTCBB/P126017). I'm not sure the specific catalyst for this, but my guess is someone who receives shares from the spin off and wishes to sell them will contact his/her broker to initiate this.

    One thing I'm thinking though is that a spin off of this type of company may not insight the level of bargain creating indiscriminate selling that the spin off of a small division of a company that's part of the S&P 500 (due to a lower level of institutional shareholders that dump for uneconomic reason). But simple neglect can create a bargain as well, so I'll keep track of this! Would be curious to know what insiders are doing with their shares, but I'm not sure they have to disclose their trades similar to a listed SEC registrant.

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    1. William,

      I was waiting to respond to you hoping someone would have more clarity, and Ted a few comments down does, it appears the spun off shares won't trade at all. Maybe they'll appear on the grey market as some investors want to dump their shares, but it's unlikely.

      It appears investors are being stranded in this company and new investors are being blocked out.

      Insiders don't have to do any reporting for an OTC stock. In this case I'm guessing they're sitting still as they silently suck up shares from desperate shareholders selling out.

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  2. I asked the CFO whether the spun-off shares would be public, this her her reply:

    The shares of Bogen Corporation (the company being spun-off) will not trade publicly after the spin is completed.

    The shares will have significant restrictions as detailed in the Information Statement distributed to all shareholders of record in early November.

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    1. Ted,

      Thanks for the comment, so this appears to be a very underhanded way to go private. Spin off the profitable operations into a stock that doesn't trade, and leave the junk European assets on the OTC.

      It's a shame they're playing the shareholder of record game as well. This means if anyone owns shares at Schwab or Fidelity they won't get details, only people who have the physical certificates.

      I realize management owns 70% of the company, but for them to slight minority shareholders like this is frustrating.

      Thanks again for the details.

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  3. Nate,
    Very interesting. There was an 11,631,000 loss in 2009. Not a lot of color in the annual report. Any idea what was driving the loss?

    The timing of this..... there is a chance, given the company has paid significant dividends, that a special dividend will be forthcoming in the next few weeks. I have no idea what the chances are, but the timing would make this a possibility.

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    1. I had a similar thought for 2009, seems like a bath tub year, just throw in everything they can. They bounced back really quickly to their trend earnings. I wonder if they just used 2009 as an excuse to dump something.

      I'm not sure about a dividend, I don't think they've paid them in years. I think this is essentially a really cheap way to go private without having to buy out the shareholders. Spinoff the loser division and take the profitable one completely private. What fascinates me is those shareholders stuck in those spun shares, will they just try to dump them cheaply or will they sell them to the company?

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  4. Nate, looking at cash flow statements, the following amounts appear to have been paid as dividends on the common stock:
    2008 - 2,042,000
    2009 - 3,062,000
    2010 - 4,079,000
    2011 - no dividends were paid

    My concern with 2009 is that management granted themselves a large bonus (or something akin to what PRRR did a few years back).

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    1. Well, I can stick my foot in my mouth…I feel like an idiot after reading your comment!

      Your guess isn't a stretch at all, SG&A was really inflated:
      2007: 19m
      2008: 21m
      2009: 30m
      2010: 13m
      2011: 13m

      Why was SG&A so inflated? Management compensation is as good of a guess as any, and a large bonus that swung them to a loss isn't out of the question at all. Between that and the weird private spin management hasn't left a great taste in my mouth at all.

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  5. As far as the large cost in 2009...see note AA in the 2011 statement as follows:

    On July 18, 2006, the Company and BCII were sued by a former contractor, Tri-Signal Integration, Inc., in Los Angeles County Superior Court, case number BC355591. The litigation was settled by agreement between the parties dated December 24, 2009. The terms of the settlement are confidential and no further action is expected. These financial statements include the substantial settlement and related legal costs in Selling, General and
    Administrative expense for 2009.

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    1. I saw that as I was just skimming, but didn't see that they were lumped into SG&A. So the 2009 loss could be simply a result of the lawsuit.

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