Wednesday, September 10, 2014

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 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


  1. Great post. Two thoughts:

    1.) one should note that the common and the CDR share in both the upside and downside. Therefore even if one assumes terrible ongoing expenses and the litigation trust's SIP lawsuits continuing for longer than expected, there is still a nice cushion on the common given that the CDR liability decreases as the recovery to the common decreases.

    2.) the remaining private investment is IronPlanet. Source: IronPlanet 2011/2012 S-1s.

    Happy investing, T

  2. 8-K out 10/29/14, pre-tax net of $15.1MM to Comdisco for it's Ebates investment:

    Hopefully taxes are fairly minimal as they have $106MM in federal NOLs, and $5MM in state NOLs.

  3. Congrats. Not a huge windfall, but the amount seems acceptable for a decent return. The only thing left to do is hope that they distribute the final payment sooner rather than later and that expenses don't eat everything up.