Voltari Corp and the madness of crowds

Every now and then, just when you think you’ve seen it all, the stockmarket demonstrates its endless capacity to surprise. Witness the recent move in Voltari Corp (Nasdaq: VLTC), which has rocketed from under $1 to $16.2 in 3 weeks:

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Normally I wouldn’t focus too much on the gyrations of penny stocks but in this case, I think the move has really gone beyond egregious and it perfectly encapsulates the periodic insanity and suspension of rational thought that can occur in bull markets (especially when combined with a high short-interest and low float). In that sense it is an instructive case of ‘madness in action’ and worth exploring a little further.

So what exactly does Voltari do?

Let’s start at the beginning: what does the company do? In its own words (from the 10-K):

Voltari Corporation (“Voltari” or the “Company”) empowers our customers (including brands, marketers and advertising agencies) to maximize the reach and economic potential of the mobile ecosystem through the delivery of relevance-driven merchandising, digital marketing and advertising solutions, primarily over smartphones and other mobile devices. Voltari uses advanced predictive analytics capabilities and real-time data management (including sophisticated data curation and modeling) to deliver the right content to the right person at the right time. Voltari’s unique combination of technology, expertise and go-to-market approach delivers return-on-investment for our customers.

So Voltari is an ‘ad tech’ play, of which there are a fair few listed comparables (YUME, SZMK, TRMR, LOOK, etc). The history of the company is fairly intriguing: it has gone through a number of corporate names, most recently ‘Motricity’, and through the years has compiled a hodge-podge of digital advertising assets (including the assets of the former Infospace), without generating much (read: any) in the way of profits.

In fact, a quick history of the financials is predictably messy (there is a reason this stock was trading sub $1). Voltari lost $29mm in FY14, $25mm in FY13, and $28mm in FY12, despite revenue ‘recovering’ from $9mm to $12mm last year (it was $133mm in FY10). As of Dec’14, the company had just $6.4mm cash (down from $25mm in FY13 and $52mm in FY12); it burnt ~$19mm in FY14, up from ~$13mm (from continuing ops) in FY13. While losses and cash burn are likely lower in FY14 (due to restructuring, lower impairments, and headcount cost cuts), I find it hard to see how Voltari doesn’t lose $10mm+ and burn a similar amount of cash at least this fiscal year – suggesting, even pro-forma for the recent capital raise, a still urgent need for capital (current pro-forma cash is ~$9mm). Frankly I am shocked that management hasn’t conducted an accelerated offering yet, given the extent of the rally.

In any case – Voltari is an ad-tech company with zero scale, de minimis revenues, near-zero cash, negative shareholder’s equity, and poor prospects for surviving another year. Despite this, it’s current enterprise value is ~$194mm (~$162mm market cap + $41mm pre shares less ~$9mm pro-forma cash) – not an insignificant number, and a cool 16x sales. YUME/SZMK/TRMR (which are all profitable or getting there, and mostly growing revenues) all trade at ~0.3-0.7x sales, for reference. So, if it’s clearly not fundamentals, what is driving this insane move?

First and foremost, the involvement of Carl Icahn. The proximate cause of the super-spike was the disclosure that Icahn’s investment company, Icahn Associates, had increased it’s stake in the firm from ~29% to ~52% (and ~61% including warrants), via his participation in a rights offering, back on April 1. Of course, the price of that rights offering was $1.36 (or $0.97 for minority, non-Carl Icahn investors). Icahn bought ~4mm additional shares (90% of the offering) – which, less fees, netted $4.6mm for the company.  Fully diluted shares outstanding (including shares, in-the-money options and warrants, vested + unvested restricted stock units, and the new shares from the recent rights offering), now total ~10mm shares. So at $16.2, the market is telling you that the additional $4.6mm cash from Icahn has created ~$148mm in shareholder value – in 3 weeks. Of course, Voltari management was happy to get the cash at $1 a share three weeks ago, hence the offering – so something fishy is going on here.

Bulls in recent days have been trumpeting Icahn’s large stake as a vote of confidence in the company’s technology, and suggest an acquisition or forced sale could follow. This thinking could not be more wrong-headed. Voltari is much more akin to a failed venture-cap company than the juicy activist targets Icahn is known for. Icahn first invested $50mm in Motricity pre-IPO in 2007, then another $50mm (via shares, pref shares, warrants, etc) in 2012, thereby raising his stake as he doubled down at lower valuations; he invested at least another $25mm in other follow-on offerings, etc. In a rare piece of footage, he described his investment in Motricity as basically a family obligation (“I was talked into it by my son”) – Brett Icahn, the son, still sits on Voltari’s board (as does Icahn’s son-in-law). Here is the link to the footage: http://dealbook.nytimes.com/2008/03/13/icahns-family-ties-bind-him-to-sinking-motricity/

Hence, we must view the recent ‘vote of confidence’ in Voltari via the $4.6mm capital injection in this context. Icahn had already tipped $125mm into this sinking ship; he has family obligations involved and at this point another few million does not move the needle for him or his investment cost basis. Yes, it is a case of ‘good money after bad’ but the absolute $ amount – both relative to his fund, and relative to his original investment – is so small as to be essentially a very cheap option (and oh, how that option has played out!). The massive rally in the stock in the belief that this investment says anything at all about the prospects of the company, is, therefore, profoundly misguided.

Secondly, there is some contention that because of years of losses, Voltari has some attraction for its NOL (net operating loss) hoard (which can be used to reduced taxes when a company actually returns to profit, in some cases). At ~$187mm of NOLs, the argument goes, this could equate to a chunky per share value (~$18.5 per share) if it could be monetized. However, this thinking is similarly confused given a) Voltari would need to generate significant profits to utilize the tax advantage (which seem unfeasible in the next couple of years); and b) the value of NOLs are severely limited if the company ever gets acquired (as the bull case would suggest is an opportunity). These so-called ‘section 382 limitations’ (referring to the section of the corporate tax code) limits the value of acquired NOLs to 4% of the ‘fair market value’ of the company before an acquisition – thus even if the company could sell itself at the current price ($16 a share), only ~$6.5mm (~65c/share) of NOLs would go to the acquirer (4% x rough market cap at $16/share) – clearly a far cry from the $187mm in purported value, and again, this presupposes an acquisition at the current crazy price. The only other option for Voltari to extract something from the NOLs would be for it to acquire a money-making business, the profits of which could be offset by the NOLs. However, as discussed above, Voltari has barely enough cash to last the year, let alone make acquisitions.

So, the two tenets of the bull/daytrader’s thesis are, well, garbage (just like the stock). Why, then, is the stock on a rocket ship? The simple explanation is a combination of a heavy short-interest, a low float, and an irrationally exuberant, bubbly environment. Daytraders have now taken over and the stock will eventually retreat to a $1-2 a share, where it belongs; but for the moment it is caught in the grip the kind of violent mania that only a bull market can sustain. The Voltari case – however and whenever it ends – should be Exhibit 1 whenever anyone tries to defend the efficient market hypothesis.

(Postscript: it is interesting to consider what Icahn does from here. Tthe recent rally has been so violent – and on such large volumes – that Icahn is in the curious position of being almost breakeven – which would have been marked at a 99% loss just a few weeks ago – and almost inconceivably, able to trade out of his position in a single day. Post the rights issue, Icahn owns ~4.74mm shares, worth ~$77mm at today’s prices; and 95.5% of the pref shares outstanding, which have a liquidation preference of ~$39.3mm (and currently trade at a premium). Of course, he cannot redeem the pref shares since the company has no cash; but he could certainly dribble out stock into the market to at least recoup some of his equity investment (the stock traded ~27mm shares yesterday, so, temporarily at least, the liquidity is there). This would necessarily crater the stock once an amended 13D was filed disclosing the sales – but this would just put the stock back where it was a few weeks ago, and Icahn would have saved himself – and his investors – a boatload in the meantime. I would not put it past Icahn to try something like this).

Disclosure: no position in VLTC (but short LOOK and suffering an incredible mount of pain)

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