Thursday, July 3, 2008

Sale of the PCD - 100th blog post

When I posted last Monday regarding the likelihood that the PCD would be sold within the next six months, I didn't expect it would be the next day :-) The much anticipated divestiture of the PCD happened last Tuesday (July 1) for approximately $240m to AIG Vantage Capital, a part of AIG investments. "In addition to the cash consideration, UTStarcom could also receive up to US$50 million based on a three-year earn out provision."

The initial reaction to the sale was negative with the stock dipping to the low $5s and then rebounding back that day. Was it a buy on the rumor and sell on the news? Was it profit taking after a good run in this bear market? Was it disappointment with the amount? I have written a lot about the PCD because it made up a signficant part of the company's revenue and the cash/liquidity it could bring to the company. Some of my recent posts regarding the potential value of the PCD:

1. "Most people have discussed a $200-250m conservative valuation for UTs PCD." (March 8, 2008)
2. "PCD - Hamed was upbeat about the PCD (internal/resale). He thinks the resale part can be sold for/worth about $250m." (April 23, 2008)
3. "For the entire PCD, I am estimating it could be worth about $500m" (May 10, 2008)
4. "So, the enterprise value (PALM) is closer to $700m even with the 18% drop. UT is projected to make over $1.8b in revenues and operating profits of $85m. What is UT's PCD worth? (June 30, 2008)

The company sold the distribution part only and maintained their internal handset design unit. There were 14 potential buyers and four offers. UTStarcom maintained a 2% ownership and a supplier agreement. Barton mentioned three benefits of the divestiture:

1. Releases high working capital requirements.
2. Cash proceeds improving net cash position.
3. More transparent company profile.

The company received $216m immediately and the rest in escrow ($14m for closing and $10m for product warranty to be released in 12 months).

If we compare the financial performance of the PCD with Palms entire company, it would seem that the price is "low" considering Palm's enterprise value is over $700m (it even went up today by almost 8%). However, in 2004, this division was only at a $800-900m yearly revenue run rate and margins were in the 2-3%.

Overall, the company is executing on their strategy of divesting non-core assets, cutting expenses, improving liquidity/cash flow, and focusing on the core businesses. I would have liked the company to receive more (just as in the gemdale, infinera sales - look where they are now though) but receiving cash in this environment is definitely a positive. Some will point to profitability being pushed back but the true value of the company will be whether the core businesses take off or not. The asset/investment sales give the company the time/position to focus on the core businesses. For that, as a shaerholder, I applaud the sale and congratulate management for executing the sale of the PCD at a very reasonable price and at the peak of performance to date.

On a side note, this is my 100th blog post (since the blog started 8 months ago). The sale of the PCD is symbolic for me in that the purchase back in 2004 represented a deviation from their higher margin/core businesses. As a shareholder, it was not what I invested in. So, this sale represents a refocused company that has been delivering on its stated goals and slowly but surely regaining shareholder confidence. Much more work is still needed (and acknowledged by maagement) to get to profitability (specially without the PCD) so it will be interesting on how management will navigate that and get to their stated metrics in 2009. In future posts this weekend, I'll touch upon the cash position and operating metrics of the company without the PCD.

Have a wonderful Fourth of July to everyone!