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