RNK - Rainmaker Entertainment

[Packer16]

This has become an interesting net-net.  The amount of cash post the sale of the animation assets is estimated to be $2 million plus the note from Xing Xing of $5 million get you a NAV of $0.40 per share plus almost $30 million of NOLs and a residual revenue interest in Escape from Planet Earth to be released in the Spring of 2013.  The current price is $0.20 per share.  I haven't looked at this in a while and just received the proxy to approve the transaction.  Given the remaining asset value, NOLs and McElvaine being CoB this may be an interesting play on what Tim can do.  (Note: Francis Chou also owns a good sized stake in this).  Anyone else looked at this?

 

Packer

[writser]

Looks interesting. I'm wondering why the deal is structured in this way. If I'm correct, they sell their assets and provide a loan to do so at the same time. I cannot find any financials for Xing Xing Digital. What's the their financial status? Should we value the loan at face value?

[Green King]

its doesn't look like they came out of nowhere.

 

http://www.xing-xing.com/danduyemian/qiyebao/

[writser]

I'm not saying they are a scam (although I would prefer more disclosure, especially from a Chinese company) but I don't understand why the deal is structured this way. For tax reasons? Because Xing Xing doesn't have enough liquid assets?

[uncommonprofits]

Xing Xing apparently produced the Secret Millionaires Club featuring an animated WEB and his voice. Here are snips from a couple of episodes:

 

And Buffett's take on it a few years back.

 

Xing Xing has rapidly grown from 5 animators to 250+ (soon to be 500+ after this acquisition?).  Xing Xing no doubt needs the loan to fund growth - I view the structure of the conversion entitlement as a bit of a lottery ticket if the loan is not paid off within 3 years and Xing Xing happens to run into some success (box office or otherwise) going into the 4th year.  Perhaps the best deal they could get considering the direction that would be best for the company (not a lot of time for a superior proposal - but if one were to develop the break up fee is only $500 K).   

[Green King]

looks like CHOU brought 2,536,800 shares for 5,227,610. (average cost 2.06 per)

According to Dec 31 2011 statement of investments

 

THE MCELVAINE INVESTMENT TRUST brought 5,451,228 shares for $9,868,492. (average cost of $1.81 per)

according to the schedule of Investment Portfolio dec 31 2009

 

 

seems this either been a great mistake or there is a great value in the movie "Escape from Planet Earth".

 

Seems like a movie for the masses with A list cast. who knows with theses things.

 

Anyone here knows about movies and can give ball park number on its worth ?

How will the profit sharing for the movie work ? 

Edit found it

 

"Escape From Planet Earth 

Rainmaker has retained an interest in the back-end box office revenue derived from the production

“Escape From Planet Earth”. Pursuant to the terms of the Asset Purchase Agreement, RSI shall be

entitled to the first $1,000,000 of revenue received, if any, pursuant to the Production Service Agreement

dated January 11, 2011 between The Weinstein Company LLC, Escape Productions Inc. and Rainmaker

(the “Back-End Revenue”).  Thereafter, RSI shall be entitled to 60% of  any Back-End Revenue and

Rainmaker shall be entitled to 40% of any Back-End Revenue.  "

 

FORM 51-102F3 MATERIAL CHANGE REPORT

 

[bathtime]

The original hope was for an $80m domestic box office. As I understand it back end revenues can vary wildly depending on how they're structured:

 

http://filmescape.com/2010/12/21/what-is-a-back-end-payment/

 

Here's a lawsuit by the original writer/director about the movie and the making of it sounds like a nightmare:

 

http://www.scribd.com/doc/49890373/Protocol-Pictures-vs-Weinstein-Co

 

So it could be a bust as it's been in the works since 2006. Rainmaker doesn't come off very well from the plaintiff's description.

[bathtime]

The latest news on the movie:

 

http://www.imdb.com/title/tt0765446/news

 

Maybe there's hope?

[Packer16]

Thanks for the info.  It sounds interesting as RNK has a 40% stake in back-end revenue with an estimated gross a few years ago of $80 million.  The lawsuit would imply a $250 million of back-end revnenue (probably high for lawsuit purposes).  So the additional contingent value of this arrangement could be up to let say $40 million ($101 million in back-end revenue).  RNK has retained the NOLs which will shield most of this from income taxes.  For context, 2 movies directed by the same director: Despicable Me grossed about $500 million and Horton Hears a Who grossed about $250 million.  So we have $0.40 in tangible asset and a lottery ticket for and additional $2.30 per share.  Now I see why they structured it this way.  It was probably the highest tax shielded back-end stake while getting out of the movie animation business.  Am I missing something?  TIA 

 

Packer

[Green King]

TIA 

 

Packer

 

Whats TIA?

[mloub]

TIA = thanks in advance

 

M.

 

[lessthaniv]

I'm not saying they are a scam (although I would prefer more disclosure, especially from a Chinese company) but I don't understand why the deal is structured this way. For tax reasons? Because Xing Xing doesn't have enough liquid assets?

 

 

Xing Xing is privately held and doesn't want their financials disclosed through consolidated Equity accounting.

[Packer16]

Another interesting asset is $7.7 million of post-production credits or $5.6 million in cash and $2.2 million of production credits.  Some or most will be used for Escape from Planet Earth so there may be some overlap between back-end revenue and these assets unless they are re-imbursed upfront with the other costs.

 

Packer

[Sportgamma]

To quote M. Whitman from his latest shareholder letter:

 

In the broadest context, a corporation has only three uses

of cash:

1) Expand assets

2) Reduce liabilities

3) Make distributions to shareholders

    a) Pay dividends

    b) Repurchase outstanding equity securities

 

So, how will Tim & co allocate RNW´s cash?

[Parsad]

To quote M. Whitman from his latest shareholder letter:

 

In the broadest context, a corporation has only three uses

of cash:

1) Expand assets

2) Reduce liabilities

3) Make distributions to shareholders

    a) Pay dividends

    b) Repurchase outstanding equity securities

 

So, how will Tim & co allocate RNW´s cash?

 

Well, there will be few if any liabilities left, so #2 would be out.  I don't think dividends or repurchasing shares is the answer either, since you would have only $2M in working capital, with $5M tied up in the loan and $30M+ in tax loss credits.  I think the fact that 60% plus of the company is owned by a handful of value investors, who would be very long-term partners, means that #1 would be the likely direction...as long as Tim or any of the other value investors are willing.  Cheers! 

[Green King]

To quote M. Whitman from his latest shareholder letter:

 

In the broadest context, a corporation has only three uses

of cash:

1) Expand assets

2) Reduce liabilities

3) Make distributions to shareholders

    a) Pay dividends

    b) Repurchase outstanding equity securities

 

So, how will Tim & co allocate RNW´s cash?

 

Well, there will be few if any liabilities left, so #2 would be out.  I don't think dividends or repurchasing shares is the answer either, since you would have only $2M in working capital, with $5M tied up in the loan and $30M+ in tax loss credits.  I think the fact that 60% plus of the company is owned by a handful of value investors, who would be very long-term partners, means that #1 would be the likely direction...as long as Tim or any of the other value investors are willing.  Cheers!

 

I was thinking  the same thing.  ;D

[Parsad]

Let me ask the board a hypothetical question, since there are many long-term value investors on here. 

 

How would you feel about a company that is mostly owned by Tim McElvaine, Francis Chou and Jeff Stacey, and if that company had the mandate to go out and acquire private businesses? 

 

Would many of you consider being long-term shareholders in such an enterprise, where the board of directors had a significant vested interest in the company, and ran it as a low-cost enterprise similar to an early Leucadia National or Berkshire Hathaway?

 

Again, these are all hypothetical questions and scenarios, but depending on the outcome of the animation business sale, I certainly would feel comfortable being part owner in a company with such a mandate, and with the three value investors mentioned above!  Cheers!

 

 

[motownsf]

Let me ask the board a hypothetical question, since there are many long-term value investors on here. 

 

How would you feel about a company that is mostly owned by Tim McElvaine, Francis Chou and Jeff Stacey, and if that company had the mandate to go out and acquire private businesses? 

 

Would many of you consider being long-term shareholders in such an enterprise, where the board of directors had a significant vested interest in the company, and ran it as a low-cost enterprise similar to an early Leucadia National or Berkshire Hathaway?

 

Again, these are all hypothetical questions and scenarios, but depending on the outcome of the animation business sale, I certainly would feel comfortable being part owner in a company with such a mandate, and with the three value investors mentioned above!  Cheers!

 

Does the company now have the mandate to acquire other businesses?

 

I like situations like this and can think of several other quasi-shell companies with smart people involved allocating capital that hopefully can become a miniature LUK or BRK. 

[Packer16]

It will be interesting to see if this turns out to something similar.  If Escape from Planet Earth is a success they may have some money to begin buying firms.  There are certainly segments of small businesses throwing off alot of cash for them to put the money to work in (radio and TV broadcasting being one).  They could also raise funds via a rights offering.  I guess the question would be if Tim, Francis or Jeff would be interesting in running such a firm in addition to or possibly replacing their asset management firms.

 

Packer

[motownsf]

It will be interesting to see if this turns out to something similar.  If Escape from Planet Earth is a success they may have some money to begin buying firms.  There are certainly segments of small businesses throwing off alot of cash for them to put the money to work in (radio and TV broadcasting being one).  They could also raise funds via a rights offering.  I guess the question would be if Tim, Francis or Jeff would be interesting in running such a firm in addition to or possibly relplacing their asset management firms.

 

Packer

 

How would rights offering affect the NOLs (if at all)?

 

Great idea, Packer.

[Packer16]

That is a Canadian tax question I would not be qualified to answer.  In the US, sometimes there are change of control provisions put on the buying and selling of shares for example in cases where firms have emerged from bankruptcy.

 

Packer

[biaggio]

Let me ask the board a hypothetical question, since there are many long-term value investors on here. 

 

How would you feel about a company that is mostly owned by Tim McElvaine, Francis Chou and Jeff Stacey, and if that company had the mandate to go out and acquire private businesses? 

 

Would many of you consider being long-term shareholders in such an enterprise, where the board of directors had a significant vested interest in the company, and ran it as a low-cost enterprise similar to an early Leucadia National or Berkshire Hathaway?

 

Again, these are all hypothetical questions and scenarios, but depending on the outcome of the animation business sale, I certainly would feel comfortable being part owner in a company with such a mandate, and with the three value investors mentioned above!  Cheers!

 

Would be appealing to me as well.

 

Seems like a small amount of capital for these guys- is that right that the market cap is under $3 million- why would they not just buy the whole thing?

 

To me this would make sense from T Mcelvine, Chou, et Al. point of view as well if they had a decent amount of capital to manage. (they would not have to worry about shareholders cashing out just at the wrong time).

[Baoxiaodao]

Let me ask the board a hypothetical question, since there are many long-term value investors on here. 

 

How would you feel about a company that is mostly owned by Tim McElvaine, Francis Chou and Jeff Stacey, and if that company had the mandate to go out and acquire private businesses? 

 

Would many of you consider being long-term shareholders in such an enterprise, where the board of directors had a significant vested interest in the company, and ran it as a low-cost enterprise similar to an early Leucadia National or Berkshire Hathaway?

 

Again, these are all hypothetical questions and scenarios, but depending on the outcome of the animation business sale, I certainly would feel comfortable being part owner in a company with such a mandate, and with the three value investors mentioned above!  Cheers!

 

I bought this thing @.80 and sold at 30 cents/per, token position. There is always a doubt in my mind about the ability for RNK to compete effectively in this business. This industry is not about cutting cost, rationing operations and so on. Will RNK more likely make a blockbuster movie because there are so many value oriented investors owning the stocks or sitting on the board?

 

It is a wonder to me that so many smart people(much smarter than me) are trying to jump over the 100 feet bar!

 

 

[Packer16]

It is not a 100 foot bar at $0.20.  The have a $5 million note, $2 million cash/rcv, $5.7 million in production credits, $42 milllion in NOLs/tax credits and a back-end revenue share in the largest production they have put together all for $3.4 million.  I too bought a small position at $2.00 a few years ago and recently re-examined purchased a larger share and effectively averaged down.  I bought due to price and value investors in management who will ensure if the company can make money they will.  This reminds me alot of ACME Commmunications when I bought in around $0.28.  After reading Marks book, my focus has been these situations others run away from (that have value oriented management teams) as this lowers competition until results happen.

 

Packer

[rijk]

this is definitely a situation that most investors will run away from......

 

will there be any operational activity left at rnk after the asset sale, i.e. will it be an empty shell or will there be operating expenses and potentially cash burn that could eat into the mos?

 

regards

rijk