Timeweave (LON:TMW) are an interesting company primarily, to me, for one main reason - it's cheap on an earnings basis while holding nearly 70% of its market cap in cash. Since cash is a non-productive asset, sitting there on the balance sheet and not earning anything, implicit in the two factors above is that the productive bit of the business is really productive on a returns basis. That leads neatly to the two big questions I want to ask myself of the business. Firstly: why are they holding so much cash, and are they going to do anything with it? Secondly, how is this business earning such supernormal returns? And thirdly - I know I said there was only two but this one ties them together like the proverbial bow tie - can that huge wad of cash be invested to earn anything like the return the rest of the business is? If so, the signs are good!
If that's piqued your interest, there's good news and bad news. The good news is that there is some validation that your hunch might be correct - the bad news is that there's no real opportunity to stick your money on the line. Timeweave is in the process of being taken over in a deal which, according to the independent directors, 'fails to reflect fully the value of Timeweave, its prospects and its strengths'. Though, let's be honest; they would say that. Given it all, though, the figure does seem bizarrely low. Mayfair has paid 22p a share - £50m, basically, for a holding company which contains £33m cash. Given a post-exceptional profit of £5.2m last year, a figure of £17m for the operating business doesn't seem particularly demanding. That 'ex-cash' figure is tweaked around by how much you reckon is 'excess' and how much is part of 'working capital' - probably at least some - but the principle is the same.
Before I get too carried away, though, it should be noted that the company doesn't exactly have a glowing history of profitability. A number of discontinued operations and write-downs swamp the profit figures for the company over the last 10 years, and the following chunk from the last annual report made for entertaining reading:
In December 2007, the Company raised £11.1m gross from shareholders via a rights issue to provide further funding to the AMRAC venture with any surplus proceeds being used to strengthen the balance sheet.
The Board recognised the shareholder support for the longterm future of the business and set out a strategy committed to repay this shareholder investment. We are pleased to advise that, since September 2009, the Company has returned £11.95m to shareholders via dividends, from a combination of disposals and operational returns.
Still, confusion aside, I think they've cut away most of the dross and now have a pretty focused offering - their main asset, AMRAC. AMRAC is the company which owns Turf TV, a media package which has broadcast rights to a huge number of UK races. They receive their income from bookies shops, who presumably don't have a huge number of alternatives! Judging from the following quote, their position seems pretty unassailable, too:
with effect from 1 May 2012, 34 of the UK’s 60 race tracks’ pictures and data rights will be licensed to AMRAC until 2018.
The final little curious tidbit is the ownership structure of AMRAC - notably the fact that Timeweave own 50% of it, the other 50% being owned by, among others, some of the race courses. Sounds good for Timeweave, as something of a detriment to competition even after the 2018 media rights expiry.
I would've been interested in drilling into more detail had all of this not popped up, I reckon, simply by virtue of that apparently pretty solid asset. A growing one, at that. Instead, it just reminds me of the various roadblocks to reconciliation to 'fair value' - if (I always feel obliged to stick this proviso in) you assume that you are, indeed, right! Private shareholders make up a pretty small portion of the total register, which makes their opinions rather irrelevant. Mayfair managed to woo enough of the institutions, and at some point you have no real option for resistance. Holding on in an unlisted company isn't hugely attractive.
The real crux of the issue is whether you think the institutions who own significant numbers of shares are on your side. Theoretically, they should be - their mandate is (usually) to maximise returns for their investors over a given or indeterminate time period. I wonder how much that gets distorted. It's easy to see how, for instance, fund managers might be tempted to take a bid (a premium of cash now) over waiting for the 'reconciliation to fair value' that might take a while to come - while in the meantime their investors get impatient with their underperformance.
That whole discussion is just a classic principal/agent problem, but an annoying one at that. Finally, a nod to the significant possibility - given how common a cognitive bias this is - to me just thinking the grass is greener on the other side. Bemoaning an investment opportunity taken out of your hands by a private company, to be whisked off and milked at significant profit, is an easy position to take!