Turnaround Cases: Premier Exhibitions Part 6
Seventeen years of litigation closing to an end. We left Premier Exhibitions (PRXI) at the end of last year suspecting the granting of this award. With this positive verdict and the slow but sure improvement in fundamentals it is about time to pick up where we left.
In turnarounds the outcome is asymmetric: the upside potential is a multiple of the investment. However, it comes with a problem: the expected payoff depends on the probability of success versus failure that is usually tilted to failure. So it is critical to look for situations with very few paths for a total loss and several ones for success. In this way the business has the ability to take hits without failing while leaving open the possibility of lucky breaks. In chess is called playing for two results; in football, catenaccio; in poker, being a rock; in investing, downside protection.
RULE #5 FORTITUDE IS A VIRTUE
One advantage of a good business is that it can take several hits, and Premier has taken several. No debt, cash in hand, high gross margins, and professional expenses that were only temporary meant that the Bodies core business did not need much in terms of revenues to survive or thrive. And this ability to take punches left open the possibility of a lucky break. The grant was one event that we planned for but there were other, like the potential upside of other exhibits like Dialog in the Dark that did not materialized. That is OK, those were free options.
The opinion is a fascinating document that should dispel any skepticism on management’s claims that there is value of the artifacts. It includes details on how the artifacts were appraised and why, in the opinion of the appraisers and judge, the valuation is considered conservative. It also includes prices of specific sold pieces and praises the effort to rescue the artifacts given the costs and risks of the expeditions. In passing, Arnie Geller gets his a ear twisted for his efforts to blindside the court, but that is old history.
How much is it worth? Difficult question to answer given that we still do not know the process for granting the award, how restrictive will be the covenants, or the potential upside over the appraised value. Above Average Odds is trying to get his hands on the monetary value, you might want to take a look at their post.
In case you do not have the time to read the 70 pages of the court opinion or listen the conference call, Chris Davino CEO released a short letter yesterday with his view regarding the verdict. I am attaching an excerpt of the letter including the most relevant facts on the value of the artifacts and how the award could be granted (no later than a year from now).
Premier, through RMST, has been the salvor-in-possession of the Titanic wreck site since 1993, giving it the sole and exclusive rights to recover artifacts from the wreck. In 1993, a French maritime tribunal awarded RMST the title to artifacts recovered in 1987 (the “1987 Artifacts”). In 2007, the company sought a salvage award — either a payment of cash or an award of title to the artifacts — for its work in salvaging and conserving artifacts recovered in multiple dives after 1987 (the “Post 1987 Artifacts”).
Though the award may ultimately take one or more different forms, we believe, based on the language of the order itself and other legal precedents, the $110,859,200 is the minimum consideration Premier would receive as a payment for its salvage efforts. The Court can either satisfy the award in cash or in-kind (which would be achieved by conveying title to the Post 1987 Artifacts to Premier’s RMST subsidiary) and will make this determination no later than August 15, 2011. The total value to Premier of this award plus the 1987 Artifacts (estimated at a fair market value of $35 million based on an independent appraisal obtained by Premier in 2007) approximates $146 million.
As noted, one option available to the Court in satisfying this award is to sell the Post 1987 Artifacts to a buyer willing to pay the award amount and who satisfies any other conditions the Court may impose. If the Court were to pursue this approach, we believe it would likely conduct a sale of the Post 1987 Artifacts through an auction, where an appointee of the Court would be charged with identifying acceptable bidders who would be willing to pay, at a minimum, the award amount with the sale proceeds being paid, in cash, to Premier. The other option available to the Court would be to convey title to the Post 1987 Artifacts through an in-specie award. The award amount established by the Court is based on an independent appraisal obtained by Premier in 2009 that established a fair market value of approximately $110 million for this collection.
Should the Court issue RMST an in-specie award of title to the Post 1987 Artifacts, Premier has agreed to keep that collection and the 1987 Artifacts collection together. An in-specie award would effectively satisfy payment to Premier of the award amount through an in-kind payment of the artifacts themselves. Title to these artifacts would be granted subject to the conditions established by the Court which include:
- The 1987 and Post 1987 Artifact collections must be maintained as a single collection,
- The combined collections can only be sold together, in their entirety, and any buyer would be subject to the same conditions applicable to Premier, and
- Premier must comply with provisions which would guarantee the long-term protection of the artifacts.
In its desire to keep both the 1987 Artifacts and Post 1987 Artifact collections together as a single collection, the Court expressed concern in the ruling that an in-specie award would create the potential for ongoing litigation relating to the Company’s compliance with the covenants. Our management team and our board of directors are committed to allaying the Court’s concerns. To that end we have agreed to establish a preservation trust which the Company would fund over time to provide for the maintenance and conservation of the artifacts independently of Premier.
In addition to the artifact collections, Premier has also developed significant work product and other intellectual property related to Titanic, such as film footage of the wreck site, digital archives, dive records, mapping of the wreck site, a valuable database and other unique elements obtained over the last 23 years by the Company. The 2007 appraisal found approximately $44 million in additive value to the collection attributable to this intellectual property and to the Company’s undertakings such as the costs of salvage, lab operations and exhibition.
Letter to Shareholders, CEO Chris Davino