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Against the Topps Deal

In my earlier post entitled “Topps to be Acquired by Eisner and Others“, I said that I would look over the company’s financials. I did and what I found is quite interesting.

Actual Offer

First, you need to forget the $9.75 a share number you’ve seen reported as the offer from Tornante and Madison Dearborn. Topps (TOPP) has $84.87 million in cash and no debt. So, the $9.75 a share offer from Eisner et al. includes the acquisition of $2.19 per share in cash.

The offer for Topps’ operating business is $7.56 a share not $9.75 a share. When investors calculate standard valuation ratios such as price-to-earnings, price-to-sales, and price-to-book, they need to use the $7.56 a share number rather than the $9.75 a share number, because the utility of these ratios is in comparing an operating business to the price paid for that business.

For instance, although it first appears that Eisner et al. are making an offer that values Topps at over 100% of sales, this is an illusion. The offer values Topps at almost exactly one times sales – in fact, slightly less than one times sales.

Furthermore, Topps is expected to increase sales in the years ahead, because of certain favorable developments (brought on in part by management’s recent actions) that seem to have improved the outlook for the industry. I’ll address the issue of a “turnaround” later.

For now, it’s important to note that Topps’ current sales levels are not especially high – in fact, sales are roughly where they were in 2001.

Use of Cash

In that year, Topps spent close to $30 million to repurchase 2.81 million shares at $10.39 a share. Six years later, the entire company is set to be sold for $9.75 a share.

To be fair, Topps had more cash in 2001 than it has today. The difference in cash and investments is theoretically large enough to account for the $0.64 a share gap between the price at which Topps was enthusiastically buying in 2001 and the price at which Topps is now planning to sell itself. Regardless, this repurchase record betrays the fact that Topps’ board accepted an offer even they don’t believe to be substantially greater than what long-term shareholders will (eventually) be able to sell their shares for in the open market.

If that last statement is untrue, then either the 2001 repurchases were a negligent misuse of almost $30 million of company cash or unforeseeable events that occurred during the intervening years have permanently impaired the value of the business.

Which is more likely? Is management wrong now? Was it wrong then? Or, have circumstances conspired against the company?

If the 2001 repurchases were the error, perhaps they were an excusable error.

However, Topps’ long history of squandering cash is inexcusable. Almost exactly six years ago, Topps had $158.74 million in cash. Today, the entire company is being sold for $385.4 million dollars.

Over the last several years, Topps has spent far more …

Value Investing News: Top Stories

An excellent resource I’ve mentioned before is Value Investing News. If you’re ever short on reading material – or just looking for financial news with a decidedly value bent, stop by Value Investing News.

Here are the top stories from last week:

1. Another Buffett Wannabe
2. Note to John Bogle: Give Value Investors More Credit
3. The New Domtar: The Upgrade is Not Just On Paper
4. Finding Value In Microsoft
5. Friendly’s Higher; They Hired a Banker
6. Large Take-Two Investors Group To Nominate 6 to Board
7. Friendly Dissidents Use billboards to Press Views
8. Biglari Sends New Letter to Friendly Ice Cream Shareholders
9. The Inside Story of a Wall Street Battle Royal
10. Everybody Wants To Go To Heaven, But Nobody Wants To Die

Visit Value Investing News…

Topps Removes Dissident Directors from “Go Shop” Process

I’ll have a full post for you on the Topps (TOPP) deal tomorrow.

For now, I’ll just report today’s developments. The board blocked dissident directors Arnaud Ajdler and Timothy Brog from monitoring the company’s “go shop” process which allows Topps to solicit better bids for forty days.

Here are excerpts from the 8-K filed today:

At the March 5, 2007 Board meeting at which the Merger Agreement was approved, the Board concluded that the presently constituted Ad Hoc Committee, which consists of Messrs. Ajdler, Brog, Feder and Greenberg, would be charged with the responsibility of monitoring Topps’ progress with the go-shop process, and would report developments from time to time to the full Board. The Board made this judgment notwithstanding the fact that Messrs. Ajdler and Brog voted against the Merger Agreement because the Board understood that their primary objection to the Merger Agreement was that, in their view, an inadequate process had been conducted to permit the Board to enter into the Merger Agreement (a view with which the other directors strongly disagree).On this basis, the Board believed that Messrs. Ajdler and Brog, together with Messrs. Feder and Greenberg, could adequately represent the best interests of Topps’ stockholders during the go-shop process.

On March 6, 2007, Mr. Ajdler delivered a letter to the Board in which he registered his opposition to the Merger Agreement, alleging that the process that led to the Merger Agreement was flawed because the Board “did not shop the company.” He also stated that he intends to “actively solicit votes and campaign against the transaction.” Mr. Ajdler was widely quoted to this effect in various news publications, including The Wall Street Journal and The Daily Deal. Mr. Brog also made public statements to the effect that he opposed the Merger. In an article that appeared in The Daily Deal on Friday, March 9, 2007 (which was subsequently filed by Mr. Ajdler with the Securities and Exchange Commission), Mr. Ajdler stated: “At this point, we want to kill the deal, take the company over, improve the margins and create value, and then possibly sell the company.” He also indicated that if stockholders reject the Merger, he intends to nominate additional candidates to the Board in an effort to gain a majority.

Given the publicly stated opposition to the Merger Agreement of Messrs. Ajdler and Brog, including Mr. Ajdler’s stated intention to acquire control of the Board without buying the Company, the Board met on Tuesday, March 13, to reconsider whether Messrs. Ajdler and Brog could adequately represent the best interests of the Company’s stockholders. At the meeting, the Board appointed Messrs. Feder and Greenberg to monitor day-to-day developments during the go-shop period and made clear that the Ad Hoc Committee no longer has such authority. In addition, the Board created an Executive Committee consisting of Messrs. Feder, Greenberg, Mauer, Nusbaum and Shorin. The Executive Committee has been vested with the full power of the Board to the extent permitted by the Delaware General Corporation Law,

20 Questions for Jay Walker of The Confused Capitalist

Jay Walker’s passion for investing was kindled in 1996 when he was given a modest amount to invest, and within a couple of years of studying, had written his own book, “The Brink’s Truck Burst Open on Wall Street! A Holistic Approach to Finding The Easy Money In Common Stocks”. Jay began writing The Confused Capitalist in early 2006. He’s Canadian (as his spelling attests).

Visit The Confused Capitalist

1. Are you a value investor?

Yes. However, I think that almost all investors consider themselves value investors. It seems to be a popular delusion – perhaps I suffer from it too!

2. What is value investing?

Value investing is buying a physical asset or perceived income stream at some level below its true value. Like Warren Buffett, however, I don’t think you can really separate “growth” and “value” investing. They are inextricably entwined.

3. What is your approach to investing?

I try to invest about 50% to 70% of my portfolio in areas that I think are favourable to my strengths (my circle of competence is financially-related companies) and that market is weak at pricing correctly (under-explored areas of the market, like small and micro-caps).

I achieve some level of diversification, however, by using ETFs or ETF style investing for the balance of my portfolio. On that side, I tend to focus on sectors that pay and grow dividends regularly, as the market still hasn’t really priced those correctly. I’m also not afraid to use leverage-type stocks/ETFs on this side of my portfolio.

4. How do you evaluate a stock?

I have a process that I go through that I illustrate on my small/micro cap blog; an example is located here.

I can usually discard most stocks I scan fairly quickly, especially since in the small and micro cap field there’s so many poor quality stocks. However, the better ones have to make it through the aforementioned process. This usually takes at least several hours, once I’ve determined it appears to be a suitable candidate. This process also helps me hold a stock longer, as I can truly consider whether my investment thesis remains intact at various times after the initial investment.

5. Why do you buy a stock?

Because I perceive that the risk/reward is favourably skewed towards buying this stock. Typically, I have to perceive the potential gain over the next year as 20% or better. Using 20% as a benchmark helps me to establish my margin of safety.

6. Why do you sell a stock?

It’s usually because I perceive that another stock holds a better chance of achieving that minimum 20% gain. Then, I usually pick the stock with the weakest future risk/reward ratio to eliminate from my portfolio.

7. What investment decision are you most proud of?

Buying American Oriental Bioengineering (AOB) in the summer of 2005 at under $2/share. It was growing its earnings at better than 50% annually, and the PE was only nine; it more than doubled within a couple of …

Festival of Stocks: Send in Your Submissions

I mentioned Value Investing News in my last post. That site also happens to be the home of the Festival of Stocks, a blog carnival dedicated to highlighting bloggers’ best articles on stock market related topics.

Last week, George of Fat Pitch Financials hosted the Festival. He selected my post “On Posco, Berkshire, and Buffett” as his personal favorite.

This week, I’ll be hosting the Festival. So, please start sending in your submissions now.

You can submit an entry by using a standard form. Or, you can just send me an email.

Send in a Submission

Visit the Festival of Stocks

Visit Value Investing News

Visit Fat Pitch Financials…

On Rights Offerings and Western Sizzlin

George of Fat Pitch Financials just wrote an excellent account of his experience investing in Western Sizzlin (WSZL) through a rights offering. He sold the shares, because he had bought them for his special situations portfolio. However, he also gives his thoughts on the company and its Chairman, Sardar Biglari.

As you know, Biglari has been embroiled in a battle over Friendly’s (FRN). It seems he’s winning and shareholders in Western Sizzlin are profiting from that victory.

George’s account is a good read for those interested in rights offerings and for those interested in Western Sizzlin.

Friendly’s shareholders might want to read it as well.

Visit Fat Pitch Financials

Related Reading

The Week of Activist Investors

Friendly’s CEO Resigns; Largest Shareholder Requests Seats (my 9/29/06 story on Biglari and Friendly’s)…

20 Questions For Investing Bloggers

Regular readers know I have an ongoing series of posts asking the same twenty questions to different investment bloggers. I designed the questions to work well with different bloggers and different styles of investing, while still leading the discussion down a familiar (and hopefully fruitful) path.

So far, six bloggers have had their answers appear on this site. You can read any you missed by clicking on the links below:

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB’s Market Musings

20 Questions for George of Fat Pitch Financials

20 Questions for John Bethel of Controlled Greed

20 Questions for Robert Freedland of Stock Picks Bob’s Advice

20 Questions for Joe Citarrella of Joe Cit – Intelligent Investing

I’m always looking for more bloggers to answer these questions. If you write an investing blog, or read one you find especially insightful, please send me an email with the URL of the blog.…

The Week of Activist Investors

I try to keep you up to date with the most interesting “activist” situations. But, this week the activism is coming far too fast for me to keep up with.

There’s an excellent resource called Value Investing News that can help.

The latest headlines there are full of activist situations.

I’ll do my best to follow the three most interesting ones:

Topps and the Eisner offer

Sardar Biglari and Friendly’s

The coup at Take-Two

As promised, I’ll have a longer follow-up post on Topps (TOPP) for you soon. I’m sure other bloggers will be writing about the other two situations.

Until then, the best way to follow these stories is by going to Value Investing News.

Visit Value Investing News

Visit Street Insider 13D Tracker

Related Reading

Friendly’s CEO Resigns; Largest Shareholder Requests Seats (my 9/29/06 story on Biglari and Friendly’s)

Topps to be Acquired by Eisner and Others…

20 Questions for Joe Citarrella of Joe Cit – Intelligent Investing

Joe Citarrella is a student at Yale University who began investing as a teenager in order to debunk family myths about the stock market. Joe writes JoeCit – Intelligent Investing, a value investing blog that combines research and advice. Joe is a devoted value investor whose portfolio holdings and results can be seen at the About section of his blog.

Visit Joe Cit – Intelligent Investing

1. Are you a value investor?

Absolutely.

2. What is value investing?

Value investing is the practice of buying a security for less than it’s intrinsically worth. Arguably the most important element of successful value investing is the concept of a margin of safety. If you feel a stock is worth $20, for instance, but it sells for $18, that’s simply not enough of a cushion. $10-$15 might be more like it, in my opinion. Looking for the no-brainers is a hallmark of “true” value investing.

3. What is your approach to investing?

On a very broad level, I look for simple, easily understandable businesses that sell for less than they’re worth. Because of their general scarcity, that often means focusing on just a few really good ideas and putting a large chunk of my portfolio to work in just one or two “theses” that I believe have a high probability of outsized returns. In seeking out these opportunities, my approach is a combination of following the so-called paper trail and, occasionally, using quantitative screens to find stocks matching certain filters. In general, I’ll use guiding criteria that, most of the time, lead me to say “no” quite easily. But this narrows the playing field, forces efficient use of time, gets rid of noise, and enhances returns while lowering risk.

4. How do you evaluate a stock?

After a stock passes some basic filters and meets my criteria of a simple business that appears undervalued, I’ll take a look at the most recent 10-K. I’ll read management’s discussion and check the company’s financial position and operating results over the past several years. Normally, before digging very deeply, I’ll already have an idea what the thesis for an investment is.

Naturally, buying a company for half of book value is an entirely different ballgame than buying a company because of its growth potential or operating successes. Because I’ll do both, I need an idea of why I’m looking into the company in the first place. Doing so also allows me to know what to look for and where to look. This seems obvious but it’s often forgotten. Lots of mistakes are made by people who forgot what they were setting out to do.

As I continue digging into the numbers, management, etc., the stock will have to continue passing filters and tests. In the process, I look for reasons to say “no” rather than reasons to say “yes”. When it’s tough or impossible to say “no”, you can be more confident in your affirmative decisions when you make them. Buffett’s twenty punch rule should …

Topps to be Acquired by Eisner and Others

Today, Topps (TOPP) announced it has agreed to be acquired for $9.75 per share in cash in a transaction valued at $385.4 million. The maker of trading cards and confections (Ring Pop, Push Pop, Bazooka gum, etc.) will be acquired by the Tornante Company and Madison Dearborn Partners. The Tornante Company was founded in 2005 by Michael Eisner – it is privately held.

Topps was founded in 1938. Although it was always a chewing gum company, Topps didn’t start selling the products it would become best known for until after the war. Following World War II, the company developed Bazooka Bubble Gum. In 1951, Topps added baseball cards.

The company had annual sales of $298.84 million in fiscal 2006. Topps derives roughly half of its total revenue from each of its two business segments – 49.1% from confections and 50.9% from entertainment.

Total sales have been stagnant for some time now. Sales actually declined slightly during 2005 and 2006. Although sales have grown over the last twelve months (to over $300 million), the company is still far short of the $439.3 million in net sales it registered six years ago.

That recent high water mark was set during the height of the Pokemon craze in 2000 – when those little Japanese monsters brought in $179.6 million (or 40.88%) of Topps’ $439.3 million in total sales. In a single year Pokemon sales plummeted by $155.5 million or 86.58%.

Here it seems right to add (with apologies to Matthew) that all those who live by the fad die by the fad.

As you might expect, Topps had dealings with Disney (DIS) during Eisner’s reign. Whether this previous experience played any part in Eisner’s decision to invest is anybody’s guess.

In the press release announcing the deal, Eisner said only this:

“Topps is a wonderful company with a powerful brand portfolio and a rich history. Topps’ management team and employees are the best in the business, and we look forward to working with all of them to grow the company in new and exciting ways.”

According to the press release, Lehman Brothers served as sole financial advisor to Topps.

In February of 2005, the board of Topps “authorized the company to pursue, with the assistance of Lehman Brothers, a sale of the candy business, believing such a step might provide value for the stockholders, in light of recent industry transactions at attractive multiples.”

It seems Lehman did one better.

The always interesting 24/7 Wall Street has a post on the Topps deal written by Jon Ogg.

This just in: Crescendo Partners Said Topps Buyout Offer is Inadequate

Director Arnaud Ajdler has written a letter to the board which includes these fighting words:

Since the Board of Directors has decided to pursue this transaction over the significant concerns which I have continually and repeatedly voiced to the Board, I intend to actively solicit votes and campaign against the proposed transaction.

I’ll post on this story as it develops (and I have some time …