Wednesday, August 11, 2010

A Business Selling For Free

Tikcro Technologies (TIKRF) trades for just $7 million, but it has $7.4 million of cash on hand against just $240K of total liabilities. In addition, Tikcro owns between 20% and 30% of a public company in Israel named Biocancell (BICL). Tikcro's stake in Biocancell is worth about $8 million.

One way of looking at the above situation is as follows: upon purchasing a share of TIKRF, the investor is getting the rights to an amount of cash equal to his investment, and in addition he is receiving a stake in another public company for absolutely free. For the value investor, a free stake in a business comes at just the right price, as it offers good downside protection. Unfortunately, this investment is not without risks.

First of all, the free business is very much unproven, having shown no revenues as of yet. The company has some cancer-fighting products undergoing Phase I and Phase II FDA trials. Anyone familiar with this process knows that the progression from trials to a prescription-ready drug is a long and far-from-certain process. This isn't the type of business that one can put a value on easily, in contrast to a company that sells nuts and bolts for example. The company could be completely worthless in the near future. (On the other hand, it could also be worth a whole lot.)

Second, it is not clear what Tikcro management will do with the company's cash, as no definite plans have been offered. Should that cash be invested in another risky business, the investor's margin of safety is gone just like that.

Finally, this stock does not trade on a regular exchange. As such, it does not have the safeguards (which would be costly for a company of this size) that are offered to investors of companies on exchanges such as the Nasdaq or NYSE.

Despite these risks, some value investors might find this to be an offer too tempting to resist. For now, downside protection is present (e.g. even if the Biocancell business goes bust, the cash still protects the shareholder's entire investment). Should the drugs under study work safely, however, shareholders will be rewarded many times over.

Disclosure: None


Anonymous said...

Thought provoking...there is also an activist investor involved according to the various form 13D filings available from the SEC.

Thank you for your analysis.

Anonymous said...

interesting, cash burn not as high as I would have thought, I generally need more cash buffer for cash burning companies though given the likelihood of value destruction inherent in the near term at least.

-Shaun Noll

Subu said...

has any one checked the status since the earlier post approx 1 year ago

Unknown said...

Just a heads up, since it was your blog post that introduced me to TIKRF back in Aug 2010.

I passed on this net-cash bargain back then at $7 million for the company, but added it to my watchlist and was just able to pick up a few shares at $4.3 million.

So... Thanks for the original post and thought I'd draw your attention back to TIKRF.

Parker Bohn