Wednesday, August 12, 2009

Getting Dirty With Soapstone

Last week, the shareholders of Soapstone Networks (SOAP) elected to liquidate the company. It was determined that the shareholders of record on Friday, July 31st would receive the final dividend (if any) of the liquidation proceeds, which are expected to be doled out in the first quarter of 2010. On the company's last day of trading on the Nasdaq, SOAP traded for $7 million. Did this represent a value investment?

On its last set of financial statements, SOAP showed $82 million of cash against $3 million of liabilities. But that was before the company paid out a special dividend of $3.75/share, which comes out to about $56 million. So that leaves the company with about $23 million. The latest statements are from March 31st, however, and the company burned about $7 million in the first quarter. Since there was no mention of liquidation in the quarterly report for Q1, it's probably safe to say the company burned some more cash in Q2. If we're conservative and assume the company burned the same amount in Q2 as it did in Q1, that brings our running total to about $16 million.

From these numbers, it would appear as though investors could realize a 100% return in the course of a few months. However, in the interim, the company will also likely have to pay lawyers, consultants, bankers and other fees in order to complete its liquidation. It may also have to pay some amounts to settle some outstanding lawsuits. While these will likely subtract from the cash balance, the company will also have the opportunity to trade some of its property and equipment for cash. This is where someone who knows the value of the assets has an investing advantage.

Will shareholders of record on July 31st make money on their purchase? Probably. But nevertheless, there's a risk involved. If the company's assets fall within the circle of competence of the investor, there may be a margin of safety to be had. Otherwise, it may be more of a speculation play than a value investment.

Disclosure: None


ry said...

Hi, I am learning a lot from your blog.

How do you usually track down the changes in quarterly reports? Is there a web page somewhere to do this?

Also, why do the shareholders have to be on record on July 31st? If someone buys equity the day before dissolution, they should still have a claim on the cash balance right?

PlanMaestro said...

Did you read about the recent asset sale in Greenbackd? There is also an estimate on liquidation value including all your concerns.

Saj Karsan said...

Hi ry,

I'm not sure what you mean by "changes in quarterly reports". If you mean quarterly reports themselves, they are available from the SEC's website.

To answer your second question, this is an excerpt from the company's latest quarterly report (filed under 10-Q at the website I linked above):

"The board of directors has fixed July 31, 2009 as the record date for determining stockholders entitled to receive any future distributions of available assets..."

Saj Karsan said...

Hi PlanMaestro,

I had read about the asset sale, but had not seen the article you refer to. Thanks for the heads up.

PlanMaestro said...

No problem. Would love to know your opinion.

ry said...

Hi Saj,

Thanks for your reply. My question is, how can the company management decide who gets final handout based on a fixed date of record? What if someone bought the stock today? They wont be on the record as of July 31st, and hence are carrying worthless stock isn't it?

May be i am confused about the concept of "record date" here with respect to dissolution. Isn't it the same as dividend issuance?

Saj Karsan said...

Hi ry,

My understanding is that the stock is indeed worthless on that basis. I'm not sure why it still trades with such value; maybe I'm missing something.

Hi Plan,

The figures and assumptions in that article seem reasonable enough, but even those estimates are hard to pinpoint with any level of certainty, which is why I stayed away.