A Sale Or Joint Venture Of RadioShack De Mexico Might Be In The Cards

This article was accepted for publication by Seeking Alpha (http://www.seekingalpha.com) on August 18, 2013
http://seekingalpha.com/article/1642132-a-sale-or-joint-venture-of-radioshack-de-mexico-might-be-in-the-cards?source=yahoo
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I wrote earlier this month that Joe Magnacca is making many of the right moves at RadioShack (RSH). He brought in restructuring expert Holly Etlin from AlixPartners and investment bank firm Peter J Solomon to raise financing. It is no secret that they are looking at ways to reduce expenses, improve the balance sheet and right size the company footprint. Just last week we learned that the company is talking to lenders about reducing their interest expenses by paying off their current lenders with new lower cost loans. We also learnt from this SEC filing and subsequent news release that William Nebes III, the EVP of Mexico Operations separated ("fired"?) from the company. This got me thinking. Is there more to RadioShack de Mexico than meets the eye? Stay with me on this. I will get to the "Mexico angle" very soon.
It is clear that Joe and Holly are making all the right moves. This includes a number of initiatives to improve the top and bottom lines from reducing interest expense (debt refinancing) and reducing SG&A (headcount reduction) to sales and margin growth (concept stores). I actually think Joe wants to make RadioShack a "growth story" and not a story about a struggling consumer electronics (CE) retailer thrashing about for survival.
All indications are that the new concept stores are being well received. If Joe can pull it off, people may actually start talking about RadioShack as a cool place to try and buy the latest gadgets. Apple (AAPL) has shown us that physical CE retailing is not dead and can in fact be very profitable if done right.
While reduction in interest expenses and SG&A are important and necessary, these moves may not give Joe and Holly the financial flexibility to restock the stores with fresh new inventory for the upcoming holiday season or to expand the concept store rollout. This is why I think that they might consider a joint venture (JV) or outright sale of RadioShack de Mexico. This move would bring in a substantial sum of money and could give Joe and Holly the additional financial flexibility they need to finish executing the concept store roll out here in the US. A JV would be going back full circle since the company bought out its JV partner in 2008 for $44.7 million. At that time, RadioShack de Mexico had 200 stores. Now RadioShack has 273 stores in Mexico.
The table below tells the story of two different Radio Shacks.

	Year	2008	2009	2010	2011	2012	June 30, 2013
Number of company-operated stores in	US	4453	4476	4486	4476	4395	4311
	Mexico	200	204	211	227	269	273

As you can see, the number of company-operated stores in the US has been shrinking steadily from 4453 stores in 2008 to 4311 stores in 2013 (except for a slight uptick in 2009 and 2010). During the same period, the number of company-operated stores in Mexico has been growing steadily from 200 stores in 2008 to 273 stores in 2013. Many CEOs have come and gone but the Mexico operations have expanded steadily upward. Would the company have kept expanding in Mexico if the stores were not solidly profitable? I think not.
One might wonder why the company would sell all or part of a thriving and growing Mexico operation. This is a valid question. But given the current state of the company's balance sheet and cash burn, and given the company's focus on rolling out new trendy concept stores in the US, this might be a good way to generate some cash. The more I think about it, the more a JV makes sense as opposed to an outright sale. It would give the company much needed cash for the concept store roll out and inventory build for the holiday season, while at the same time continuing to maintain a stake in the Mexican growth story.
Or perhaps Peter J Solomon bank and Holly might advise Joe and the RSH board that an outright sale of the entire company is the way to go. Many names such as Best Buy (BBY), Google (GOOG) and Microsoft (MSFT) have been thrown up in the press as potential acquirers. But given Amazon's (AMZN) decision to support a sales tax and their yearlong experiment with locker pickup, Gina Chon and Maria Halkias suggest that Amazon may be the most likely candidate.
In any case, the fact remains that RadioShack has a number of options it can explore and Joe is a savvy retail merchant who can be counted on to do what is right for the company. However, a number of hedge funds and retail investors do not share my optimism. RadioShack is the 5th most shorted stock in the entire NYSE as a percentage of the float. This fact might actually provide a good reason to buy shares of if you are a true contrarian with a bit of technical trading savvy. With 39.2% of total float having been sold short as of August 09, 2013, I believe that the odds are in favor of a short squeeze in the not too distant future.

Will Joe Magnacca Prove To Be The Archie Norman Of RadioShack?

This article was accepted for publication by Seeking Alpha (http://www.seekingalpha.com) on August 09, 2013
http://seekingalpha.com/article/1622652-will-joe-magnacca-prove-to-be-the-archie-norman-of-radioshack?source=yahoo

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Some of you may not know about Archie Norman especially if you are not from the UK. In my opinion, he is one of the top 20 rock star CEOs of the last 50 years. He took over as CEO of ASDA in 1991 when it was on the verge of bankruptcy, managed to turn it around against all odds and then sold the chain to Wal-Mart (WMT) for $11 Billion in 1999!
It is perhaps a bit premature to compare a newly minted CEO like Joe to a tried and tested veteran like Archie.
But now compare this!
1) Before joining ASDA as CEO in 1991, Archie Norman had never been a CEO before.
Before joining RadioShack (RSH) as CEO in 2013, Joe Magnacca had never been a CEO before.
2) Before joining ASDA, Archie had overseen the successful turnaround of KingFisher (then Woolworth Holdings) and had already made a name for himself as a future high potential would-be CEO.
Before joining RadioShack, Joe oversaw the successful turnaround and sale to Walgreens of the Duane Reade drugstore chain and had already made a name for himself as a future high potential would-be CEO.
3) One of the early senior managers to be fired by Archie was the CFO who was part of the reason ASDA's finances were in such a mess.
One of the early senior managers to be fired by Joe was Dorvin Lively who was the interim CEO and had been the CFO since 2011 (and no - I do not think Dorvin willingly walked away from the job and a $1.5Million retention bonus)
4) Archie lost no time in cutting unnecessary Selling, General and Administrative (SG&A) expenses - read "bloated payroll" - at the corporate office.
Joe is taking steps to cut SG&A expenses and reduce inefficiencies at the corporate office.
5) In the midst of all the cost cutting, Archie decided to experiment with new store formats and new concept stores which were wildly successful. These stores bypassed the usual bureaucratic reporting chain in ASDA and reported directly to the top management.
In the midst of all the cost cutting, Joe has introduced a new concept store in New York and is proceeding with his planned country wide roll out of about 220 such stores. Early indications are very promising.
6) Archie realized that he could not do all the work alone and he also needed outside experts who were not part of the problem to take a fresh look and suggest good workable solutions. To this end, he brought in a consulting firm and some of the consultants stayed on to take important roles in the transformation.
Joe realized that he could not do all the work alone and he also needed outside experts who were not part of the problem to take a fresh look and suggest good workable solutions. To this end, he brought in turnaround firm AlixPartners and hired its managing director Holly Etlin as RadioShack's interim CFO.
7) Archie managed to rally the employees around a clear simple message and got them excited about working for ASDA again.
Joe is trying to rally the employees around a clear simple message and to get them excited about working for Radio Shack again.
I found the similarities between the stories of these two men fascinating to say the least. And the best part is that Joe does not have to be even half as good as Archie was. RadioShack is trading at a fraction of its tangible book value and is in no immediate danger of running out of cash. For the naysayers who say that a big chunk of the book value is worthless inventory, I will simply point out that using discounting and promotions, Joe not only managed to increase same store sales for the first time in 3 years, he actually managed to turn supposedly "worthless" inventory into cold hard cash.
All it takes is a change of "sentiment" and this stock could easily double in value from the current "bankruptcy" price of $2.51 per share. If you do not believe what "sentiment", or "market psychology" can do to a share price, then take a look at Tuesday Morning's (TUES) numbers. Incidentally, I randomly picked TUES as one of many excellent candidates to prove my point. I could just as easily have picked one of the other retail turnaround stories such as Pier 1 Imports.
Here are the numbers for TUES taken straight from the SEC website:

TUESDAY MORNING CORP	12 months ended June 30, 2010	12 months ended June 30, 2011	12 months ended June 30, 2012	Nine months ended March 31, 2013
Sales (in '000s)	828,265	821,150	812,782	636,179
SG&A (in '000s)	293,850	295,273	301,427	237,875
Operating Income (in '000s)	20,145	18,043	7,437	(45,211)
Share Price	3.99	4.65	4.29	10.37

In other words, I do not see any discernible or significant improvement in Tuesday Morning's sales and operating income or any significant decrease in SG&A expenses. SG&A expenses have actually increased steadily over the last four years. And operating income has been falling steadily and fell off a cliff from a positive number to a negative number in the nine months ended March 31, 2013! However, the share price has actually tripled since January 2012!! Why did this happen? One reason is that the market was pricing the company for bankruptcy and when it seemed that TUES would not go bankrupt, the share price skyrocketed.
Could this happen to Radio Shack? Most certainly. Will it happen? Nobody knows. However, with ample liquidity, a stock priced for bankruptcy and a rock solid CEO leading the way, the odds are in favor of such an event.
In summary, it is too soon to write the obituary for this retailer as many in the popular press have done. This is a 92 year old company that has survived many economic cycles. RadioShack was opened in 1921 by the Deutchmann family, offering ham radio operators and electronics buffs a retail and mail order source for their electronics needs. By the 1960s, the company had nine stores and was shipping electronics to people all over the world, but was falling on hard times.
Charles Tandy purchased the company in 1963 and turned its $4 million debt into a $20 million profit. Today the company operates stores nationwide, selling everything from batteries to satellite dishes to electronics buffs and general consumers.
Fast forward to August 2013 and the company is once again on the ropes.
Now it is Joe Magnacca's turn to write a new chapter in the Radio Shack story. I am betting that it will be one of success and one of survival.
Perhaps as a much stronger stand-alone company.
Perhaps as a stronger revived entity that is acquired by a bigger rival.
Only time will tell.

Tecumseh products

I wrote an article on Tecumseh Products that was accepted by Seeking Alpha on Feb 05, 2013. I decided to add the same content in my blog as well. So here it is:

Tecumseh Products Company (TECUA) is a special situation investment. The company announced on Jan 21, 2013 that Kent Herrick, Chairman and great-grandson of company founder Raymond Herrick is resigning. The company press release stated that Kent’s resignation was “driven by the pace of the strategic decision making by the Company”. A couple of days later, on Jan 23, 2013, the company announced that it was exploring strategic alternatives including an outright sale of the company. The same press release also noted that they had retained Sagent Advisors, LLC, which “the Company engaged to explore various strategic alternatives, including the possible sale of the Company”.

In this context, it is important to note that activist investor Roumell Asset Management , which disclosed  a 20%+ stake and filed a 13-D in May 2012, has been pressing the company to divest non-core assets – particularly a manufacturing facility in Hyderabad, India and a plant in Brazil. Roumell noted in its latest filing that the 55 acres of land held by the company in Hyderabad, India could be worth $67 million “after applying a large track discount with an immediate sale focus”.  Per their 13-D, Roumell commissioned “a leading worldwide real estate brokerage firm with offices in Hyderabad” to arrive at this number. Having grown up in India and having followed the real estate market in India for over 30 years, I can confirm that this valuation is not “pie in the sky optimism” and, as Roumell noted, the land could fetch even more if broken up and sold in parcels. This is just the Hyderabad property we are talking about here. I have not even brought up Tecumseh’s holdings in Haryana, India or its Brazilian plant. To put this in context, the company has a current market cap of $131MM and tangible assets on its balance sheet of $285 million. It is important to note that in this $285 million number, the value of “Land and land improvements” is held at $13.8 million. That is right folks. ALL the land held by the company in Brazil, India and other countries is held at a mere $13.8 million!!

From the company’s 10-K:

“We maintain manufacturing plants in the United States (“U.S.”), Brazil, France, and India as well as assembly plants in Canada, Mexico, Malaysia and a joint venture in China”.

This confirms that the company has real estate assets in multiple countries.

In addition, the company has $393 million worth of tax loss carry forwards that is not being reflected in this tangible asset number.

So it is safe to say that the value of the tangible assets is WAY NORTH of $285 million. The company WILL find a buyer. It is not a question of “IF” but when.

The stock rallied 19.45% to close at $7.06 on the news and has been trading around the $7.1x level since then. But I would like to make the case that the real rally is yet to come. And it has to do with two main themes. They are “Housing” and “Mergers and Acquisitions (M&A)” outlook.

Housing:

Housing is showing signs of a slow but steady recovery.  As of Dec 2012, 300,000 construction jobs were added since the Great Recession according to various sources. Of this number, 100,000 were added in the last four month of 2012 alone.  There are other signs of a slow but steady housing recovery all over the US. A respected investor with 30 years of successful investment experience in the Atlanta real estate market told me that he has never seen the market “this good” since 1998! He has seen multiple real estate market crashes dating back to the 70’s. This recovery in construction could provide a boost to the company’s household refrigeration business here in the US and to the company’s valuation as a whole.

M&A Activity:

The Fed has pledged to keep interest rates low till unemployment touches 6.5%. It could take us a few years to get to that number. Certainly, nobody is expecting us to hit the 6.5% number in 2013. This low interest rate environment combined with a resurgence in structured finance means that 2013 promises to be an even better year for M&A’s than 2012 was. This is not just my opinion. Two of Atlanta’s most prominent Private Equity investors told me so in talks I attended.

What does all this mean for Tecumseh?

First and foremost, the company’s Enterprise Value will show a significant increase as revenues and margins improve. This is a double positive because, this means that the company is

a)      Increasingly likely to find a buyer for its Brazilian and Indian assets or for the company as a whole

b)      The combination of margin expansion and increasing revenues may return the company to profitability. Given that the company has $393MM worth of tax loss carry forwards on its books, all this future profit will be tax free.

It is rare to find a special situation investment that is trading at a third of tangible book value. Tecumseh is one of those rare gems. To paraphrase Warren Buffet, TECUA is a “one-foot fence”. However, the opinions expressed in this article are just that and I urge everyone to do their own due diligence.