Monday, February 15, 2010

More on the Skillsoft take-under, and why shares are headed higher (SKIL)

This is an update with more details, to a post I wrote Friday afternoon. I'd just bought Skillsoft (SKIL) shares on a hunch that the LBO announced Friday morning at a price of $10.80 per share will have to be increased.

First, here's a few questions from incredulous analysts on Friday's conference call. (Transcript here).

An analyst at Blackrock takes issue with the company citing a weak outlook for revenue bookings - namely that DUH, of course bookings will be down in a recession. That doesn't mean you sell low....

Chuck Moran: No, we don’t believe we are at all. There’s over a 1000 competitors that do something like what we do. And if you haven’t had a chance to read the document yet, which maybe you haven’t because it’s been a limited time period, our fiscal year ‘10 bookings were down from prior year, so obviously fiscal year ‘11.
Andrew Thut: Well, wasn’t everyone’s fiscal year bookings down in the software space year-over-year in the worst recession ever? And you guys were still able to — presumably it’s not going to stay down at these depressed levels, right?
Chuck Moran: I can’t comment on what other people’s bookings are, Andrew.

By far the most important part of the conference call would be the exchange between CEO Chuck Moran and Ben Andrews of Columbia Wanger Asset Management, Skillsoft's largest stockholder. Andrews, absolutely LIVID as he should be, invites Moran for a tongue-lashing session at the end:
Ben Andrews: Good morning, Chuck. Just out of curiosity, why weren’t the larger shareholders consulted?
Chuck Moran: The reason the larger shareholders were not consulted is we are walking a fine line of Reg FD and we need to be very careful to what we communicate without tipping our hand and letting leakage get out. And I think that our experts and our Board’s opinion was that it would be a very limited window if we were to get a firm to acquiesce and sign an NDA, which they would have to do in advance to share the information and they would be reluctant to share the information without knowing what it was going to be involving and how long they would have to be tied up or locked up from trading. So it puts us in a very uncomfortable position of risking, leaking a potential offer or discussion and then we decided just to not pursue that.
Ben Andrews: Even though your largest shareholder has been an investor with you for some time and has gone through a fair bit of turmoil in you growing this company?
Chuck Moran: All those facts you’ve said are absolutely correct and all of our large shareholders and small but particularly large ones were in mind when he thought of that as an option. But we looked at the risk of putting the Company in as well as the risk for someone that then would be tied up and maybe wish they weren’t tied up in terms of their ability to trade and the Board decided that wasn’t the right approach.
Ben Andrews: Would you mind coming to see me, Chuck?
Chuck Moran: I’d be happy to.
Ben Andrews: Thank you.
Others were very concerned about the bidding process in this LBO, especially what information is being shared with the acquirers but not with other shareholders. Specifically, what are the company's renewal rates? (critical figure to predict lucrative recurring revenue). After citing the short notice of the conference call as a reason he can't share more information, CEO Moran is embarrassed when asked to promptly hold a call the next day:
John McPeake: Okay, so there’s a bit of asymmetric information here. What about renewals. Can you qualitatively talk — we went through a peak renewal period. How did that look?
Chuck Moran: We talk about that at our fiscal year-end conference calls historically and we will decide whether we will do that or not on this call, but it would be inappropriate for me to disclose that now because this isn’t a Reg FD approved call and that information I think is material.
John McPeake: Right, I think this is considered to be public disclosure, having a conference call though, right?
Chuck Moran: It is not, because we did not give enough advance notice for the call.
John McPeake: Okay. Can we have a call tomorrow, then?
Chuck Moran: I’m afraid not.

In another Friday morning filing, it's apparent that Skillsoft anticipated some angry shareholders. They cite very odd reasons for selling the company, including a worry over the liquidity of the shares. Worse, they cite the weakness ahead in their business as a reason to sell now. Soooo, are we to believe that the private equity group - Bain Capital included - are a bunch of DUNCES trying to buy a broken business?

Then there's the issue of HUNDREDS of MILLIONS in Net Operating Losses that can be used to defray future income tax. Incredibly, Skillsoft CFO Tom McDonald cannot even muster a halfway decent answer about how they impacted the deal price....

James McClurken: Okay, and in terms of the NOLs that are currently on the balance sheet, will the buyer be able to fully utilize those?
Tom McDonald: That is kind of difficult for us to determine. It really depends — on their particular situation and how they — how that will work with their financial situation. So it’s kind of difficult for us to really comment on their financial structure.

This deal is ROTTEN. It severely undervalues Skillsoft. Management and the board's reasons for selling are extremely weak, and shareholders are rightly outraged. I bought shares Friday because I think the deal price has to go up. If I'm wrong and the acquirers walk away, then I own shares of a company with some big Free Cash Flows and untapped NOL's. The shares should rise with or without the deal. That said, I strongly believe the deal happens at a higher price. The quick look below is what Skillsoft might look like in a buyer's hands. There is a TON of fat to be cut, making the buyout at $10.80 far too cheap....

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