ITEX - Itex Corporation

[Guest fedcep]

Hello everyone, this is my first post so I apologize in advance if I'm inadvertently breaking any rules.

 

ITEX runs the largest barter marketplace in North America. Network effects and market dominance drive their wide and expanding moat. Think eBay but where members trade services without using cash. Because of ITEX's $12M market cap, it is ridiculously underfollowed. Liquidity on this name is very low (about $120k traded per month), and it has a history of sketchy corporate governance, but it's a great business with a solid balance sheet that is extremely cheap. This is a business that generates +25% FCFROIC, trading at 30% cyclically-adjusted FCF / EV and 1x price to tangible book.

 

You can find a much deeper analysis in my blog here: http://valuetakes.blogspot.com/2012/02/itex-corporation-itex-33-12mn-long.html

 

Again, trading this name can be painful, but if you can get ahold of the shares at the current ask of $3.75, you'd get:

 

1) $3.19 in tangible book value, $1.5 of which in net cash

2) $4.6 in 2012 revenues

3) A market leader in its niche with a tremendous moat and huge room for expansion through accretive transactions that can produce free cash flow returns on invested capital north of 25%

 

In addition, the firm pays around 5% dividends.

 

Thanks for reading. Please check the link above for a much more comprehensive analysis if the idea appeals to you. Looking forward to hearing your thoughts.

[beerbaron]

Welcome Fedcep, quite a first post.

 

I think Parsad our host has plenny to say about ITEX as well. There was a proxy fight last year, maybe you could look at it a bit.

 

BeerBaron

[Hielko]

Looks like an interesting idea, but the corporate governance is a pretty serious issue.

[Guest fedcep]

Thanks for the replies and sorry for the delay.

 

Yes, the proxy fight is still going on from Polinitza, paired with a lawsuit against management for breach of fiduciary duties. Management's move was quite outrageous so, strictly from personal opinion, I think the case may stick in court. I'd appreciate it if someone has any thoughts to share about similar cases filed in Washington and what their outcome has been.

 

On a more positive note, the tender offer they announced last Friday is a positive sign, at least strictly from a capital structure standpoint.

[berkshiremystery]

Thanks for the replies and sorry for the delay.

 

Yes, the proxy fight is still going on from Polinitza, paired with a lawsuit against management for breach of fiduciary duties. Management's move was quite outrageous so, strictly from personal opinion, I think the case may stick in court. I'd appreciate it if someone has any thoughts to share about similar cases filed in Washington and what their outcome has been.

 

On a more positive note, the tender offer they announced last Friday is a positive sign, at least strictly from a capital structure standpoint.

 

Here's an article from SeekingAlpha.com about the 1 million share buyback tender offer at prices up to $4.20 per share

http://seekingalpha.com/article/444541-itex-in-1-million-share-buyback?source=yahoo

 

 

[rkbabang]

I just voted my gold proxy today for the Polonitza Group nominees.  What do you think their chances are this year?  They only got 35% last time and the stock has been diluted since then with a greater percentage owned by employees than last time.  But that is one of the reasons outside shareholders should vote with the Polonitza Group this time.

[ragnarisapirate]

Is anyone thinking about the potential arbitrage play here? It is selling at a discount to the tender, but the problem is that people may sell for less than $4.20/shr. Additionally, it seems like selling at that price is taking short term gains at the expense of forfeiting the stock appreciating to it's intrinsic value.

 

Thoughts?

[Ballinvarosig Investors]

Is anyone thinking about the potential arbitrage play here? It is selling at a discount to the tender, but the problem is that people may sell for less than $4.20/shr. Additionally, it seems like selling at that price is taking short term gains at the expense of forfeiting the stock appreciating to it's intrinsic value.

 

Thoughts?

Agreed! I would even go as far as say as suggesting that the $4.20 tender offer is merely an attempt by management to try and snag some of the activist vote that's looking for a quick profit.

 

I was lucky enough to top up my position in the low $3 mark when it was dirt cheap. At $4+ the dubious corporate governance issues are enough to pervent me from buying more. The 4% dividend however is enough to keep me sitting tight.

 

By the way, congrats of IBAL, Rag - I love it when a graph goes parabolic :D

[ragnarisapirate]

Is anyone thinking about the potential arbitrage play here? It is selling at a discount to the tender, but the problem is that people may sell for less than $4.20/shr. Additionally, it seems like selling at that price is taking short term gains at the expense of forfeiting the stock appreciating to it's intrinsic value.

 

Thoughts?

Agreed! I would even go as far as say as suggesting that the $4.20 tender offer is merely an attempt by management to try and snag some of the activist vote that's looking for a quick profit.

 

I was lucky enough to top up my position in the low $3 mark when it was dirt cheap. At $4+ the dubious corporate governance issues are enough to pervent me from buying more. The 4% dividend however is enough to keep me sitting tight.

 

By the way, congrats of IBAL, Rag - I love it when a graph goes parabolic :D

 

Thanks for the props on IBAL. When it got up to close to $3 bucks, I think that the market was getting a little bit a head of itself... The backlog looks great, but, it is a pretty cyclical company... I see cheaper stuff out there. I love the business though.

[rkbabang]

ITEX Announces Preliminary Results of its Tender Offer

 

"ITEX expects to acquire 1,072,827 shares of its common stock at a price of $4.20 per share, for an aggregate cost of $4,505,873 million ... As of March 15, 2012, ITEX had approximately 4,040,925 shares of common stock outstanding (including approximately 399,584 shares of unvested restricted stock). After giving effect to the results of the tender offer, ITEX expects to have approximately 2,968,098 shares of common stock outstanding (including unvested restricted stock)."

 

 

[berkshiremystery]

ITEX Announces Preliminary Results of its Tender Offer

 

"ITEX expects to acquire 1,072,827 shares of its common stock at a price of $4.20 per share, for an aggregate cost of $4,505,873 million ... As of March 15, 2012, ITEX had approximately 4,040,925 shares of common stock outstanding (including approximately 399,584 shares of unvested restricted stock). After giving effect to the results of the tender offer, ITEX expects to have approximately 2,968,098 shares of common stock outstanding (including unvested restricted stock)."

 

Have you seen today's share price movement, at $3.55, down -13.20%

[rkbabang]

Only 4000 shares though.  Could be a single trade.  Current ask price is $4.00.

[Ballinvarosig Investors]

http://www.sec.gov/Archives/edgar/data/860518/000114420412029688/v313516_ex99-1.htm

 

All the current BOD have been re-elected, looks like Polonitza has failed again to get representation.

[ragnarisapirate]

http://www.sec.gov/Archives/edgar/data/860518/000114420412029688/v313516_ex99-1.htm

 

All the current BOD have been re-elected, looks like Polonitza has failed again to get representation.

 

I believe that you mean control. ;)

 

Tis a shame, too. ITEX has been one of the most interesting cases ever. I would have thought that they would have won by now- it's a shame that the thing trades so little now. Kinda hard to build a position.

[Parsad]

I was at the AGM and it has not been decided yet.  Those are the preliminary results, and a judge has to certify whether those shares issued by ITEX in the last year can be included in the results.  Only when the judge certifies the results is it over. 

 

Unfortunately, the board is extremely resistant to an independent shareholder sitting on there.  There were about 60 people or so at the meeting, and about 85% were franchisees, 10% directors or employees, and 5% independent shareholders...Dave, myself and one other shareholder.

 

The format was restricted to written questions and shareholder's were only allowed to ask a maximum of two questions.  The first five questions were all aimed at Dave and written by franchisees who have been only given one side of what happened.  I asked my two questions and that was it.  No other questions were asked! 

 

The few franchisees that engaged me actually found what we had to say made sense...that all of this could have been resolved three years ago by expanding the board to five people, and adding the franchisee board president and an independent shareholder.  Unfortunately, ITEX had no interest in doing that unless they had two candidates of their choosing on there, and they didn't want the franchisee board president on there.

 

We sold our shares in the open market during the tender, because we thought they were paying too much to buy back shares that could have been bought for much less over the previous six months, and that the tender would be oversubscribed.  We planned on buying back our shares at lower prices, but I think the environment is now too toxic for independent shareholders.  Even some of the franchisees agree that the company has become stagnant and the environment toxic for shareholders and franchisees. 

 

We didn't participate in the lawsuit because we felt it wasn't in the best interest of our partners, ITEX corporation, franchisees or shareholders.  Even if Dave somehow manages to win and displace Steve White, the environment will be difficult to manage because there is considerable animosity now from the franchisees.  They've been told that the proxy participants have been trying to wreak havoc and take over the company.  The fact that this all stemmed from the board removing the "special AGM" provision because they were entrenching themselves does not come up.  That they've implemented our ideas they were totally resistant to in the beginning...dividend, share buyback plan, etc...doesn't come up, except that they somehow came up with the ideas and managed to implement them with all of this proxy distraction nonsense!

 

Shareholders at the end of the day are the owners of the company, and the executives and board work for the shareholders.  You cannot have a well-run corporation and board, when the CEO is adamantly against changing the board to give it some independence and oversight.  While some collegiality is essential for a good board, you also need independent thought and discussion to give the board's decisions any true weight.  ITEX's board cannot provide that when related parties sit on the audit and compensation committees! 

 

Unless the CEO changes his stance on how he treats independent shareholders, and adds an independent shareholder to the board, we will probably not be shareholders in ITEX.  We like the company, we like the franchisees, but the board wants to engage independent shareholders, but doesn't want one to occupy a seat and give the company some objectivity and oversight.  We had offered three years ago to work as a director and not take a cent in compensation.  They said no!  So three years later they have spent hundreds of thousands on legal fees and have not grown the business at all.  That was money that should have been spent developing franchisees!  It's quite sad actually, that stubborness has lead to this.  Cheers!

[Ballinvarosig Investors]

http://www.marketwatch.com/story/the-polonitza-group-provides-an-update-to-the-results-of-itex-corporations-2011-annual-meeting-results-2012-05-16

WESTFIELD, N.J., May 16, 2012 (BUSINESS WIRE) -- The Polonitza Group today issued the following statement with respect to the results of ITEX Corporation's just-concluded annual meeting:

 

The preliminary report of ITEX's Inspector of Elections indicates the margin of difference between the votes received by the Incumbents and those received by the Polonitza Group's nominees is less than the amount of shares that the current Board created in 2011 through stock grants and a private placement to select franchisees. The voting of these shares and their inclusion or exclusion in the directorial election are being challenged in the Washington State Superior Court. David Polonitza has offered the court evidence which he believes demonstrates that these shares were created for the purpose of entrenchment by the Board of Directors in order to frustrate the Polonitza Group's proxy contest. If Mr. Polonitza is successful in challenging the voting of these stock shares, we believe the Polonitza Group's two nominees will have received more votes than each of the three Incumbent's nominees. The final certification of the 2011 Annual Meeting stockholder vote is currently subject to court approval pending further proceedings before the Washington State Superior Court.

 

SOURCE: The Polonitza Group

[ragnarisapirate]

the plot thickens!

[Parsad]

http://www.sec.gov/Archives/edgar/data/860518/000114420412029688/v313516_ex99-1.htm

 

All the current BOD have been re-elected, looks like Polonitza has failed again to get representation.

 

I believe that you mean control. ;)

 

Tis a shame, too. ITEX has been one of the most interesting cases ever. I would have thought that they would have won by now- it's a shame that the thing trades so little now. Kinda hard to build a position.

 

We would have won the previous proxy fight if someone didn't change their vote on us at the last minute...no names of course.  This someone threw their votes behind Dave this time...probably because we weren't on the slate!  ;D 

 

Now it will all come down to a judge's decision.  Not sure why ITEX's board is gambling on this?  They should just make a move and come to some agreement with Dave.  Crazy of them to risk it like this, but I guess they think the judge is going to vote in their favor.  Cheers!