SIGM - Sigma Designs

[writser]

SIGM, Sigma Designs, is a "provider of intelligent platforms for use in a variety of home entertainment and home control appliances". Basically they design and make chips for televisions, media connectivity and the "internet of things". Smart home / IoT is obviously very cool stuff at the moment so Silicon Solutions offered $282m ($7.05 / share) for the company last December - on the condition that they sold or wound down their boring (and not very profitable) Smart TV business. SIGM failed to do that and the deal was adjusted (as was initially agreed upon in the merger agreement) to an asset transfer: Silicon Solutions is now only buying the cool stuff only for $240m. The CEO resigned and SIGM stock cratered from ~$7 to ~$5.50 after that was announced. There wasn't much information available but it seemed cheap and I bought some shares. As of now a preliminary proxy is on the table. Basic details:

 

- Company intends to liquidate.

- Pro forma balance sheet as of Jan, 28 shows $310m in cash and marketable securities and $51m in liabilities.

- No significant taxes to be paid due to tax assets.

- Subsequently SIGM struck a deal to sell their wired connectivity business for $28m (minus a $4.2m holdback). Also tax-free.

- The CEO resigned because he is in talks with the company to buy the Smart TV segment.

 

So, where does that leave us? My (I hope) conservative back of the envelope calculation:

 

TV-segment: $0 (assuming the CEO will take it over at a bargain price).

Cash: $310m + $28m.

Liabilities: $51m.

Liquidation costs: $15m (basically a guess - probably a bit too much but you never know with these lawyers and insiders).

 

For a total of $272m. Shares outstanding are 38.8m but as per the latest 10Q there are ~400k RSU's and options with high strikes outstanding. Lets say 40m shares will be outstanding after everything vests and/or is settled. That all adds up to about $6.80 per share. Seems to make sense to me that the sum of the parts is somewhat below the original takeover price, given that the buyer who offered $282m for the entire company is now buying the trophy division only for $240m.

 

SIGM wants to make an initial distribution after the deal is approved. My best guess is that they will distribute around ~$200m this summer (~$5) so IRR should be decent if the stub is worth somewhere around $1.80. And there's some margin for error here if, for example, my estimate of liquidation costs is too low.

 

Deal seems relatively safe given the balance sheet. Key risks: for some reason the Internet of Things asset sale fails to materialize (seems unlikely, according to the discussion in the proxy there are lots of interested parties), Smart TV segment sale / wind down takes longer than expected, initial distribution takes longer and/or is lower than expected.

 

Finally, Soros owns ~12%, Renaissance owns 6% so you are in somewhat decent company.

 

Seems like a decent bet if you can live with the uncertainty. I bought a couple of extra shares today. Curious what you guys think.

[Foreign Tuffett]

SIGM, Sigma Designs, is a "provider of intelligent platforms for use in a variety of home entertainment and home control appliances". Basically they design and make chips for televisions, media connectivity and the "internet of things". Smart home / IoT is obviously very cool stuff at the moment so Silicon Solutions offered $282m ($7.05 / share) for the company last December - on the condition that they sold or wound down their boring (and not very profitable) Smart TV business. SIGM failed to do that and the deal was adjusted (as was initially agreed upon in the merger agreement) to an asset transfer: Silicon Solutions is now only buying the cool stuff only for $240m. The CEO resigned and SIGM stock cratered from ~$7 to ~$5.50 after that was announced. There wasn't much information available but it seemed cheap and I bought some shares. As of now a preliminary proxy is on the table. Basic details:

 

- Company intends to liquidate.

- Pro forma balance sheet as of Jan, 28 shows $310m in cash and marketable securities and $51m in liabilities.

- No significant taxes to be paid due to tax assets.

- Subsequently SIGM struck a deal to sell their wired connectivity business for $28m (minus a $4.2m holdback). Also tax-free.

- The CEO resigned because he is in talks with the company to buy the Smart TV segment.

 

So, where does that leave us? My (I hope) conservative back of the envelope calculation:

 

TV-segment: $0 (assuming the CEO will take it over at a bargain price).

Cash: $310m + $28m.

Liabilities: $51m.

Liquidation costs: $15m (basically a guess - probably a bit too much but you never know with these lawyers and insiders).

 

For a total of $272m. Shares outstanding are 38.8m but as per the latest 10Q there are ~400k RSU's and options with high strikes outstanding. Lets say 40m shares will be outstanding after everything vests and/or is settled. That all adds up to about $6.80 per share. Seems to make sense to me that the sum of the parts is somewhat below the original takeover price, given that the buyer who offered $282m for the entire company is now buying the trophy division only for $240m.

 

SIGM wants to make an initial distribution after the deal is approved. My best guess is that they will distribute around ~$200m this summer (~$5) so IRR should be decent if the stub is worth somewhere around $1.80. And there's some margin for error here if, for example, my estimate of liquidation costs is too low.

 

Deal seems relatively safe given the balance sheet. Key risks: for some reason the Internet of Things asset sale fails to materialize (seems unlikely, according to the discussion in the proxy there are lots of interested parties), Smart TV segment sale / wind down takes longer than expected, initial distribution takes longer and/or is lower than expected.

 

Finally, Soros owns ~12%, Renaissance owns 6% so you are in somewhat decent company.

 

Seems like a decent bet if you can live with the uncertainty. I bought a couple of extra shares today. Curious what you guys think.

 

The pro forma balance sheet I'm seeing in the 2/23/18 proxy is from 1/28/2017. Page #113.

 

 

[writser]

That would be super duper extremely embarrassing  :-\ . But you are correct! Thanks for pointing that out. The good thing is that also for Q3 2018 financials the picture is still more or less the same but they could have burned through some cash since.

[Foreign Tuffett]

That would be super duper extremely embarrassing  :-\ . But you are correct! Thanks for pointing that out. The good thing is that also for Q3 2018 financials the picture is still more or less the same but they could have burned through some cash since.

 

After spending 30 minutes on this:

 

I think the downside is protected to a certain degree.

 

I also think the upside is mostly dependent on (1) how much they get for their SmartTV and Mobile IOT businesses (2) how well they control cash burn and liquidation costs.

[writser]

Company announced an agreement to sell the TV business to the (ex-) CEO today for ~$5m (adjusted for working capital changes): link. From the proxy (emphasis mine):

We do not believe the divestiture of the TV Business will result in material cash proceeds to Sigma; however, if we are able to divest this business, we expect that our operating expenses and liabilities will be reduced significantly, and our revenue following the closing of the Asset Sale and the TV Divestiture will be reduced to substantially zero. We do not expect the sale of our Mobile IoT Business, if we are successful in divesting this business, or the shutdown of this business to be material to our operations or assets available for distribution to shareholders.

 

So, only the mobile IoT business is left and that doesn't seem material either way. Estimated liquidation proceeds were $5.82 - $6.58 / share as per the proxy and with the TV business sold chances are we end up in the upper range of that estimate. Bit worse than expected (especially the net cash outflow from operations) but I still own a few shares.

[writser]

Revised guidance from the latest proxy update: 5.95 - 6.46 with a final distribution expected before September, 30. Looks more or less fairly priced. Might still be a decent place to park some cash as the initial distribution will probably be paid out in a few weeks (EGM  is next week).

[writser]

No more position as of today - trades above middle of estimated proceeds range, don't see any news.

[hillfronter83]

No more position as of today - trades above middle of estimated proceeds range, don't see any news.

 

Good call again! Have you looked at RMGN? Spread is pretty wide. There are a couple of law suits going on. Not sure if they will derail the deal.

 

[writser]

Yep, I have a small position. Crazy price action yesterday! Couldn’t resist. Sachs owns ~20% and Wilson owns ~40%, there should be decent support for a deal (seems unlikely Sachs would try a coup without Wilson’s consent after he participated in a placement two years ago). I don’t have any deep insights, setup looks reasonable but yeah, maybe a bit hairier than other deals..

[writser]

Starting to look more attractive again.

[writser]

$6 initial distribution upcoming. Guidance updated to ~$6 - $6.375 / share.

 

https://seekingalpha.com/pr/17221779-sigma-designs-announces-plan-initial-distribution-6_00-per-share-shareholders-connection

 

Traded a bit in and out of this during the year. Some price spikes, for example I managed to pick up some shares the 9th of July.

[walkie518]

$6 initial distribution upcoming. Guidance updated to ~$6 - $6.375 / share.

 

https://seekingalpha.com/pr/17221779-sigma-designs-announces-plan-initial-distribution-6_00-per-share-shareholders-connection

 

Traded a bit in and out of this during the year. Some price spikes, for example I managed to pick up some shares the 9th of July.

 

"We believe that our total aggregate distributions, which includes this initial distribution, will fall within the range of $240 million and $255 million, with the expected share count to be approximately 40.0 million shares.”

 

this would leave $5m downside with possible $10m upside...I can't tell if I missed the boat

 

forgive my ignorance, but do you know what the tax implications are for the distributions?

[writser]

this would leave $5m downside with possible $10m upside...I can't tell if I missed the boat

Yeah, seems more or less fairly priced. I'm not buying at $6.15.

 

forgive my ignorance, but do you know what the tax implications are for the distributions?

I'd say that, given the accumulated deficit, these would be classified as 'return of capital'. But I'm no US citizen and tax implications are not my specialty - it's not so important for me. Maybe contact IR if you want to know for sure?

[writser]

Trading ex today. I wasn't paying attention but first few premarket trades of the stub were at $0.35 - $0.45. Would have loved to sell there but missed the opportunity. Very low volume anyway. I sold my position in the stub at $0.30 today. Latest estimate for payout is $0m - $15m or up to $0.375 per share. IRR of my trades is pretty meaningless since I traded in and out of my position at opportune times. My average buy price was around $5.95, average sell price $6.22 and I flipped around my position about two times in total since I started buying in February.

 

Hard work though, basically the stock market equivalent of flipping burgers. I guess the hourly was a bit better.

 

At three specific points in time I think you can argue that the mispricing was most extreme: at the end of January / beginning of February the stock drifted down to as low as $5.50 for a diluted market cap of $220m which I think was on the low side given that $240m in cash was incoming. In the end of July / beginning of August there was some confusion about the ex-date and you could've easily picked up some shares at $6.05. And today premarket you could've sold the stub for around $0.35 which I think is on the high side (though only some retail volume).

[wabuffo]

wild action in this one on Monday's early morning trading.  There was confusion over the true x-date and it forced Nasdaq to bust trades. 

 

I wonder why Nasdaq, OTC allow this confusion to persist and then have to make random/arbitrary decisions about whether to bust trades or not and at what price levels.

 

wabuffo

[writser]

Stub starting to look interesting again for a small position.

[writser]

FWIW I've been buying the stub a bit too optimistically (f**k me) and now have a ~1% position at an average price of ~$0.19. So I'm down a bit on this but I don't want to size it much bigger as there's not really a margin of safety. Still I think this is a decent bet at current prices. The company guided for $0 - $0.38 per stub. I think management has some incentives to be conservative with their estimates as investors will be really pissed if the stub turns out to be worthless. There could be some selling pressure as this is getting delisted and large investors get rid of their marginal positions in the stub. Also, the wide range of payouts might not be very attractive from a psychological perspective to most investors.

 

Basically I think you buy for $0.15 a decent chance at a $0.20 - $0.25 ish payout. Obviously hard to handicap this exactly but I think that partially explains why it could be mispriced: there is hardly any data to analyse and nobody likes to buy something that's potentially worthless.

 

A contrary opinion would be appreciated.

[bianji108]

Shareholders can't say anything if there's nothing left as it is still within the range, though. I used to like these CVR, Stubs and Escrow plays as the projected return on expected stub value is pretty good, but most of the time for me it takes lots of time to get the distributions that are usually less than what I expected based on the PR before they delist.

[Foreign Tuffett]

I agree with writser that this is a good bet given the significant discount to the midpoint of estimated future distributions. I just bought some @ $0.15-ish

[writser]

Interesting action yesterday on no news whatsoever. Might be a good time to sell.

[hillfronter83]

Interesting action yesterday on no news whatsoever. Might be a good time to sell.

 

Is it possible that a distribution payment is coming that some people might know ahead of market? It's about the time:) That said, I took the chance and sold some of my shares.