Ebates Deal Pushes Comdisco Closer to Liquidation

"Liquidations require an extended investment horizon, and therefore are of little interest to the majority of investors.  The timing of the payout, if any, is unpredictable.  However, if and when it comes, it may handsomely reward the investor's patience." - Horizon Kinetics

The above quote is from Horizon Kinetics' September 2013 research note on liquidations, which everyone should read.  One current liquidation they own, and are the largest shareholder of, is Comdisco Holding Company (OTC:CDCO) which I discussed in May 2013 but didn't purchase until recently.  To give a brief overview, the original Comdisco was a computer leasing and disaster recovery company that invested its free cash into ~900 start-ups during the middle of the dot com bubble, the company went into bankruptcy, and after restructuring the new Comdisco set on a liquidation track.

Fast forward a decade or so and Comdisco assets consist primarily of cash and three remaining stakes in the dot com start up portfolio valued at $8,875,000 as of 9/30/13.  All three investments are private companies awaiting liquidity events for Comdisco to exit and appear to be the primary hurdle remaining before the company can make a final distribution (although they do have a few claims against former customers that they're still pursuing).  During the company's fiscal second quarter, one of the investments was sold for just over $1MM.

The bigger liquidity event happened this week, when Ebates (As of 9/30 93% of the equity portfolio) was sold for $1B in cash to Rakuten.  I haven't been able to determine what percentage of Ebates the company owns (any help here would be appreciated), so it's difficult to determine if the exit price is higher or lower than the ~$8.25 million it was valued at back in September.  The Ebates position is a little hidden in Comdisco's filings, you have to go back to the 2012 10-K where the company mentions they participated in an additional round of financing for Ebates to see the position called out.  Competitors RetailMeNot and Coupons.com both conducted initial public offerings in the past year and have seen their market values cut in half since, so I'd err on the conservative side and view this as a positive news story in terms of bringing the liquidation wrap up timing forward and not a potential windfall.  There's now potentially one other private equity investment that's of insignificant size (hopefully they just dump it), and some other bad debt they're chasing down before all operations are wrapped up, the end looks near.

The company has contingent distribution rights (CDRs) that are entitled to a 37% sharing percentage of the total amount distributed to the CDRs and equity holders.  Comdisco currently estimates their CDR liability at $11.2MM, meaning the equity distribution is estimated at $30.1MM ($7.50/share), the current market cap is $24.2MM ($6/share) representing a 24% upside.  There could be additional upside depending on the amount they net from Ebates and other bad debts, and again the main risk here is the timing of the final payment.  If this situation appeals to you, be careful, it's a very illiquid stock with a large bid/ask spread.

Disclosure: I own shares of CDCO

Will Comdisco Ever Finish Liquidating?

I was sifting through Horizon Kinetics' holdings (one of my favorite value investors) and stumbled upon an interesting special situation in Comdisco Holding Company (OTC:CDCO).  Comdisco was a computer leasing and disaster recovery company that ran into trouble in the aftermath of the dot.com crash and declared bankruptcy in 2001.  Prior to their troubles, CEO Nicholas Pontikes used $3 billion to invest in 900 starts ups in the middle of the tech bubble, a rather disastrous decision.  After declaring bankruptcy and emerging as Comdisco Holding Company, the new entity's limited purpose was to sell the company's assets (including the 900 start ups) and distribute cash to the creditors and shareholders.  It's essentially a zero coupon bond, but without a defined maturity date.

Today, with only a few of the start up investments remaining and most of the assets in cash or near cash, the liquidation scenario is pretty easy to estimate with the current balance sheet.

The one adjustment I'll make is to value the company's equity investments in private companies at $5,166,000 per Comdisco's estimate of the realizable value.  With that adjustment, stockholders' equity jumps to $30,003,000 versus a current market capitalization of $20,190,000.

The question becomes, how long will it take to complete the liquidation?  A quick Google search will show investors asking this question in 2008-2009 and assuming it would be only 2 years, and here we sit in 2013.  Now that most of the private company investments have been sold off, could it finally finish in the desired 2 years?  As a general rule, I look for investments that return a 20% IRR, plugging the PV, FV, and I/Y values into my trusty BA II Plus and I get 2.17 years, so probably anything under 2 years gets you over the 20% hurdle when you consider ongoing expenses, etc.

One other thing to consider, the contingent distribution rights holders seem to be telling us that an end might in sight.  CDCOR shares last traded for $0.069, with 148,448,188 shares outstanding, that's a market capitalization of $10,242,925 compared to the $11,229,000 liability on the balance sheet, only about a 10% discount.  Overall, Comdisco seems like an interesting special situation without much downside and little correlation to the broader market.  But beware, its highly illiquid and rarely trades, probably going to have to be patient with a GTC limit order.

Disclosure: No position