Turnaround Cases: Premier Exhibitions Part 4 ($PRXI)
Now we know how Premier got in trouble, so it is time to evaluate the new plan to turn around the company and, as we learned in the Eastman Kodak case, the best place where to start is the story. Most turnarounds have a story and is public. Given that new management has to earn fast investors confidence and since at the beginning there is not much to share but bad news, the one thing to share is the turnaround plan. In Premier’s case the two best places to start with are
- Sellers Capital consent solicitation during the proxy fight
- Mark Sellers and Chris Davino investors conference call after taking control
I recommend specially that first conference call. Turnaround plans usually include a bleak picture of the current situation, a short term plan to stop the bleeding and a silver lining based on the quality of its people and the long term future. It is sort of the equivalent to Churchill’s Blood, toil, tears and sweat speech, his first as new Prime Minister facing also a turnaround situation. And Mark Sellers and Chris Davino did not disappoint.
Mark Sellers first set expectations on their communications with shareholders: brutal honesty and no guidance. Brutal honesty is essential in that first communication; and not only with shareholders but also employees, clients, suppliers and partners. The no guidance part seems also like a smart move. Turnarounds are uncertain and specific target numbers would restrain the necessary flexibility.
We are going dark for a bit – Louis Gerstner when he became IBM’s CEO
And talking about Louis Gerstner, a thing that you do not want in that first call is the articulation of a new vision. If the company needs a new vision well you are investing in the wrong turnaround. We want solvable problems not new problems to solve. From the previous posts we know that Premier had out of control expenses and collapsing revenues, but even more important, it was an unfocused and dysfunctional organization. In this type of situations you are going to have surprises:
- Frictions with Partners: “When we arrived on the scene in late January, corporate counsel presented us with a list of more than 20 outstanding issues, most of them contract-related that required immediate attention. Some of these involved stretched payables – cash payments due to third parties which had not yet been paid. Some of these issues involved litigation, or threatened litigation. Many of them involved contracts that had been entered into by Premier’s previous management that obligated the company to make large payments to third parties, payments the company can no longer afford. We have spent many hours meeting with the company’s partners to try and work these things out one-by-one. Some of these negotiations are going well, some aren’t. So fixing this company is not a matter of just cutting some heads, turning out a few lights, and going home to sleep peacefully each night. Each of these contractual relationships are unique, separate, and require renegotiation or possibly even litigation”. – Mark Sellers
- Hole in the Exhibition Schedule: “For whatever reason, it appears that previous management did things on the fly rather than develop a long-range plan and following it. Exhibitions were often booked at the last minute, with little time to properly prepare a PR and media campaign before entering a market. By rushing, you don’t maximize the revenue opportunity and you risk failure in a new city. We’re attempting to try and fill the revenue hole the best that we can because if we don’t, revenues will fall off a cliff later this year.” – Mark Sellers
- Cash Issues: “We may need to raise capital in coming months so that we don’t have to rush to book last-minute shows without doing the appropriate preparation. During our proxy consent solicitation, we talked a lot about the company’s deteriorating financial condition. That problem has not magically gone away in the month that we’ve been here. As a result, we’ve been considering strategic alternatives. These alternatives might include, but are not be limited to, selling certain parts of the company to raise capital, partnering with other companies, or raising outside financing by selling debt or equity”– Mark Sellers
When I heard that in March, I almost dropped the idea right then and there: it looked much more complicated than just old time cost cutting. The hole in the schedule was what concerned me the most since it was not clear if that was Arnie Geller’s fault or a complete collapse of demand for Bodies. My intuition told me the first, but my pocket protested the possibility of the second.
After you have heard the good news it is management’s time to show that they know what they are doing. Chris Davino takes over trying to show how they are going to stop the bleeding.
The stabilization plan really includes four what I would describe as discreet pathways. And it starts with the very basics – Chris Davino
Hey I like that very basics. Blocking and tackling is what is needed in a good turnaround investment
- Cash Flow: “Developing a 13-week and really even a 26-week cash flow that’s in the context of how the business is currently configured. That might seem like a very obvious endeavor to most folks. It certainly is to me, but historically that has not been part of the company’s normal process, which certainly gives you a sense of how the company has been managed in the past.” – Chris Davino
- Making the Core Operations more Efficient and Profitable: Improve scheduling and site selection based on targeted demographics. Decide on whether or not to execute self runs or to have promotional relationships. Use cost-benefit analysis in venue selection. Define a media approach that respects the opportunities in each market.
- Assess all Third-Party Relationships and Contractual Relationships: “The next area that’s going to have a big impact on liquidity aside from general operations is the contractual relationships. As Mark indicated, we’re in the process of assessing all of our third party relationships to see what the business actually needs” –Chris Davino
- Overhead Rationalization and Infrastructure: “again, we’re at the very early stages of that assessment. We believe there’s significant opportunities there to kind of what I would call reengineering the infrastructure to fit the business. But candidly that’s going to come a bit later” –Chris Davino
Not a simple pure cost cutting plan but usually it is never that simple: previous management usually finds ways to complicate things for new management. At the same time, the plan seems down to earth and honest so I decided to add the idea to the watch list.
Ok. We have a plan, we sort of liked it and management seems transparent and pragmatic. Was this the time to buy? Well I do not know: would you have bought UK stocks after Dunkirk? And that brings us to rule number two of successful turnaround investing
RULE #2 IT IS NOT ABOUT PICKING THE BOTTOM
Turnaround investing is one area where value investors do not have to be clairvoyant and pick the next Gates. We can instead just add the fallen angel to our track list and follow new management’s results. Time is our margin of safety not asset value.
And there is time. Turnarounds usually loose their investment constituencies and it will take some time before they fall in their radar again
- Index Funds: usually dropped off the indexes
- Mutual Funds: internal restrictions on penny stocks could apply
- Momentum Investors: no momentum, they are at the bottom of the pit
- Dividend Investors: any dividend was most probably suspended
Each of these constituencies is a potential catalyst later on so the upside will usually be very good even if you do not pick the bottom. The game is about balancing the uncertainty of success versus the potential upside. Therefore, it is smarter to size the position with the progress in the story. To be continued…