Variant Perceptions

Category: Sellers

Update: Premier Exhibitions

Recent Mark Sellers interview where he comments on his plans with Premier and his life after Sellers Capital.

“In retrospect, I wish I hadn’t ever gotten involved in the company,” Sellers said. “If I can get out of it and break even or better, I’d have to say that’s a big victory.”

But it’s not that simple. At Friday’s closing price, $1.92, Premier’s market capitalization was about $89 million — far less than the appraised value of its Titanic holdings, which Sellers said is more than $145 million. Sellers said his fund’s investment in Premier is almost at break even.

But liquidating all that stock — the rough equivalent of about a year’s worth of trading volume — isn’t an option, since it would drive the price lower.

Key to Premier’s future and Sellers’ eventual exit from the company: monetize the Titanic.

With the 100th anniversary of the storied liner’s 1912 sinking coming up, timing is key. A well-publicized expedition to the wreck site in August helped stoke interest. A federal court ruling in August also provided some assurance that Premier couldn’t simply be stripped of its salvage rights to Titanic without a payment of about $110 million from the U.S. government.

“My plan is to make sure that the Titanic assets are well taken care of,” he said. “Whether they are held by Premier or held by someone else, I feel as though it’s almost a larger duty that I have. It’s an international treasure. I don’t want someone to piece them out and sell them on eBay or put them in a private collection never to be seen again by the general public.

“So I’m going to stay involved until there is some certainty about what is going to happen with those Titanic assets.”

Today, Sellers Capital controls 46 percent of Premier shares, representing the hedge fund’s only current investments. Once the Premier investment is sold off — Sellers makes no bones that selling the stock at a profit is his end game — Sellers Capital will cease to exist.

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

Long PRXI

Turnaround Cases: Premier Exhibitions Part 5 ($PRXI)

A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it – Max Planck

Science advances one funeral at a time – the shorter version

In the last part we ended our review of the turnaround plan and started tackling why usually institutional investors avoid turnarounds. There are several other reasons that deter institutional investors:

  • Headline headaches: the early stages of a turnaround are only bad news. New management may even exacerbate this on purpose trying to get all the bad news behind them early on. Including impairments, write downs, and restructuring costs.
  • Window dressing: imagine yourself explaining every quarter the reasons why you own Eastman Kodak to your investors. Most fund managers are in the asset gathering business where their investors can leave at any moment, so it is critical to build an aura of infallibility. It is much easier to just avoid it or sell it.
  • Information gaps: as we mentioned, management will “go dark for a bit” and many times the company can even be delinquent on their financials

What about Wall Street analysts? I do not want to be too harsh on them but for turnaround investing they can be worse than useless. We are all familiar with the bull bias in the profession, for example it is a well known fact that buy recommendations are disproportionally higher to sell recommendations. Now imagine an analyst reaction with a disappointing stock they have recommended. Even more, from a company that is not going to bring much investment banking business for a while.

Whose fault is this disappointment? The human reaction is to blame the company and its management. Not doing so is to admit that they were in fault with their rosy estimates. Add the psychological need for consistency and the result is the perpetuation of their bad perception of the company even when the turnaround is in full swing. Only when a new generation of analysts comes along it becomes easier to smell the coffee and without the analyst guidance the non entrepreneurial retail investor is lost.

So let’s imagine how the stock of a company in a turnaround develops over time. Premier has still lot to prove before we can brand it a successful turnaround. But I will still use it as an example for familiarity’s sake.

First, there is usually a jump just because the company is ridiculously cheap. For example, after Premier’s new management took control in February price continued its collapse. Part of it was that the market as a whole was skydiving in February but also it reflected the uncertainty of Premier’s situation. Then at the end of March there is a reversal that almost doubles the price. As you have read in other posts, I do not like to invest in this stage given that the company is still burning cash but I imagine the temptation for a Graham type investor that feels a margin of safety in the value of the assets.

Next, if the company finds ways to reduce the bleeding there is usually a Never Never Land period. All news is bad but fundamentals are improving. Neither price nor volume is going anywhere because institutional investors are simply not interested. Every once in a while there might be a jump like in mid April, when Premier received a not very convincing buyout offer, but things soon return to a range. This period can extend for several months if the company is doing OK. If it is not doing OK, well we know how that ends.

This is the period where we can make a difference, looking for every signal of how things are going and making sure that when we finally invest the turnaround has a high probability of success. I hope that through Premier’s example you get the importance for a disciplined follow up, a proactive search for info, and the conviction for a concentrated bet when the stars align.

Finally, things start moving again. That usually means that the turnaround is starting to pick up momentum and its potential is becoming clear. That brings us to our next rule for successful turnaround investing:

RULE #3 A TURNAROUND IS ITS OWN CATALYST

Fundamentals have improved sufficiently, we will see what that means in the next post, so it is attracting early buyers like you and me. Therefore price starts moving but we might still be disappointed because institutional investors are still not showing interest. However, another buyer, most critical and convincing, usually appears around here:

RULE #4 INSIDERS WILL RING A BELL

We mentioned incentives when we discussed the Wall Street analyst role. Insiders also have incentives and a privileged position to detect a bargain if there is one. Do you see that volume jump in early July? That is Mark Sellers buying one million shares that is close to two percent of the outstanding. Several directors and Chris Davino bought smaller positions too. Then in September 21st the company announced a one million shares buyback program. These two combined, insider buying and share buybacks, are a very powerful buy signal and it preludes the re-engagement of the institutional investor with a rapid rise of price and volume.

However, as we have learned over the last year, insider buying and share buybacks can have other motivators. Insider buying can be the result of CEOs trying to fake confidence when they depend on external financing. Share buybacks can serve to sustain prices for the exercise of stock options. It does not seem to be the case for Premier but it is still important that the fundamentals are doing well too. And that is what we are going to review in the next part. There is not much left, please have some patience!

Part 6, and last for the moment.

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

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

  1. 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
  2. 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.
  3. 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
  4. 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…

Long PRXI

Turnaround Cases: Premier Exhibitions Part 3 ($PRXI)

Walshgb, a reader of this blog, was right on the mark when he made this point on management in turnarounds

If you don’t have control, this means you should only focus on turnarounds that already have the right leadership team in place (although, they presumably wouldn’t be in that situation if they were the right team in the first place)?

This Gordian Knot gets cut with the rule number one for successful turnaround investing

RULE #1: FIRST, CHANGE MANAGEMENT

And I am not talking about the hippie projects that IT consultants try to sell nowadays with what used to be just accounting software and now called ERPs. No, it is literally waiting for a change of management before considering investing in a turnaround. And the reason is that most successful turnarounds involve an overhaul of management practices where former leadership is usually the source of the problems.

One Man Rule

Type of Turnaround

And that change should specifically include the founder if he is still in place. He already hinted a lack of organizational building skills, or they would not have deep problems in the first place, and will probably be stubborn , a character trait of all successful entrepreneurs. Therefore, any investment margin of safety could be in danger.

There are several types of transition during a corporation life cycle. But my favorite for investing is the transition from creating a business to building an organization. The skills required are so different that VCs usually transition start-up founders and hire professional managers. One particular reason is that entrepreneurs are usually addicted to one-man-rule that can work pretty well in small organizations, but when you get to revenues $50 million plus and growing 20% plus the risks increase. A survey of successful turnarounds gives some evidence that an excessively centralized organization could be at the root of the problems.

Organization

And consider that turnaround beginnings usually involve a centralization of power to discipline and focus the organization. However, after the bleeding has been stopped the most appropriate structure for a fast growing company is usually decentralized because it focuses growth where the market signals. This is something that some entrepreneurs do not like or do not get. There are some exceptions though: Bill Gates that was able to grow a great business out of products that were not necessarily the best.

One of the problems of this autocratic structure is that businesses lack processes and financial controls to direct the limited human and financial resources where they are most needed. Entrepreneurs usually do not like processes and controls. Most of them became entrepreneurs in the first place because they did not like processes and controls.

Well there is substantial anecdotal evidence that Premier was internal chaos and a candidate for the fall from grace that we saw in part two. As my wife remarked after reading this post, it seems as an Arrested Development episode

  • Disorganized Site Selection: The Bodies explosion to more than 17 exhibits without an organization to manage it was a major disaster. Months of no new exhibits and openings in suburban locations like Branson, Durham, Columbus and Farmingham. The pressures to use the new exhibits lead to some international fiascoes like Russia where new partners did not execute as expected. The bad results compounded by increasing marketing expenditures to turn around these locations. These site selection problems were running the risk of becoming endemic after Arnie Geller fired on his return the sales and marketing department and took personal control of site selection, even though the number of exhibits was much larger than a year ago. As a consequence of Arnie Geller’s unwillingness to delegate, Chris Davino, the new CEO, had to face large programming holes in Q2 and Q3 2009.
  • Delays on Permanent Exhibitions: Several delays in getting Bodies Vegas out of the Tropicana and into the Luxor got into everybody’s nerves. The delays were repeated with the Vegas launch of Titanic and Sports Immortals (that was finally canceled). Besides, $12 million in capital expenditures for the exhibition center? That was not pocket change for a small company. The story repeated itself with the permanent exhibition in New York. It took years for the selection of the site in Times Square. However, the Davino’s team has been able to inaugurate it in less than six months.
  • Lack of Financial Leadership: There was no real full time CFO in Atlanta until 2008 and earnings surprises were the usual state of affairs. Premier did not even have budgets before the arrival of Bruce Eskowitz. The reason for all this was that Arnie Geller had brought in Stephen Couture in 2006, a young CFO whose only qualification was that his family had inherited a large Premier stake since his father was the former CFO. This resulted in a suspicious incident of a pumped up 68 cents guidance, reiterated in subsequent conference call, that Couture used to sell most of his position. On the next call the guidance was reduced by over 50%.
  • Excessively Promotional: Timothy Sykes was right on this point, management was overly promotional. For example, Arnie Geller commented in a conference call that the share price would be $30 in a couple of years and, adding to the guidance incident, he was in several publications sharing overly optimistic revenue projections that were more that twice peak levels. His phrase “Should have looked right and left” has become part of the company folklore.
  • Secondary Accounting Firm: The use for several years of Kempisty and Co., a little known accounting firm, while resisting the pressure to change it was at least highly suspect. Premier finally engaged Cherry, Bekaert & Holland, L.L.P, a large regional firm, as a result of Marc Sellers’ activist pressure. Why Kempitsky in the first place? We will probably never know.
  • Second Class Event Marketing: several exhibits were promoted only a couple of weeks in advance. The excuse was that their competitor could jump in if they promote it too soon. Given the related evidence, it seems that the real reason was last minute decisions on site selection. The consequence was under promotion of exhibits and the lack of access to some museums that needed advanced scheduling. Also merchandising and sponsorship revenue was almost negligible and Premier’s internet site was a laughing stock. They did not remove closed exhibits and did not add exhibits close to openings.
  • Nepotism: Judy Geller, the wife of Arnie Geller, was a consultant to Premier and received payments of approximately $100K during 2007. In addition, she also received royalty payments on the sale of the exhibition catalogs of approximately $197K. How can someone justify this? One of the directors was also Arnie Geller’s nephew while he received many times the normal director compensation while failing to disclose he was a relative. If these incidents were not enough, Arnie Geller was still getting paid a$675K CEO and President salary after Bruce Erkowitz was hired adding to the SG&A expense issues. And the clique was back when Arnie came back, hiring several family members.
  • Geller’s Inability to Delegate: Bruce Erkowitz was fired but most senior management decided to leave promptly after Geller’s comeback. CFO Bud Ingalls even made the unusual step of saying publicly that Arnie Geller was the reason for his resignation. The CFO, VP exhibits, VP Sales/Marketing, VP Strategy, VP Sponsorships were all gone by late 2008. That had also an impact in running costs; the company had to pay some of them for another year after their decision.
  • Titanic Trial the long time to reach a conclusion was endangered with a company statement on ownership of the Titanic property when they only had rights to salvour-in-possession. Why risk a district court response when you are still negotiating the covenants and conditions for a sale?
  • Botched Dialog in the Dark launch: Premier did virtually nothing to promote it and the selection of Kansas City for a liberal exhibit certainly was head scratching. Reviews have been very good and the creator was even invited to TED. However, word of mouth most certainly takes time and Premier’s divided attention did not help.

And this is just a summary of the problems of the lack of control and procedures in this autocratic organization. Is Arnie Geller incompetent? No need to make judgment. As investors -not as judges, lawmakers or journalists- the important thing is that there is a pattern, the one man rule story, that has provided and will provide opportunities. So it does not matter if the reason is incompetence, bad luck, entrepreneurial psychology, or an organizational cycle. One big advantage of turnaround investing, for example compared with growth investing, is that we do not have the difficult task of picking ex ante the next Bill Gates. We can instead wait for the fall and the following arrival of professional management. Also, if a company had good years with such a chaotic organization imagine what it can do with a well functioning one. So it is time to hear Premier’s new management turnaround plan.

Long PRXI

Turnaround Cases: Premier Exhibitions Part 2 ($PRXI)

OK, what is the deal with Premier Exhibitions. How a company that caught the imagination of some value investors can fall from grace so swiftly. This is not only out of curiosity: understanding the history helps to understand the turnaround complications. We can never be completely sure, but let’s try our best to play Sherlock Holmes and build our case.

Premier Exhibitions basically created the business of running museum quality exhibitions. There have been some other local exhibits and one hit wonders, but nothing similar in number exhibits or geographical scope. And not only that, it was very successful.

Historic Financials

The pressure to grab the opportunity without an organizational role model might have lead to ad-hoc decisions. Here is a list of some of the growth initiatives the company was seeking in 2008 just before the downfall:

  • Increase Bodies Exhibits: From 6 in 2006, to 8 in 2007 to more than 17 in 2008. Arnie Geller decided to bet the future of Premier on one concept. It is clear that there was demand but he was risking to kill the golden goose by overexposure.
  • Permanent Exhibits in New York and Vegas: In 2008 closed a lease for 36,141 square feet of space within the Luxor Vegas and they were looking for years for a venue in New York City (Times Square). This Luxor lease was for a five year period with an annual rent close to $3.6 million (!)
  • Self-run Exhibits: after several issues with some of the promoters, JAM in particular, they decided to take the promotion of several exhibits in-house. The economics of running exhibits should be favorable for Premier, but were the additional organizational needs and complexity, not just the costs, taken into account?
  • Three New Concepts: According to management they were working on nine exhibition concepts, and they announced and launched three of them in 2008: Dialog in the Dark, Sports Immortals and Star Trek. It is clear that Premier’s privileged position, with access to museums and promoters worldwide, was a center of attention for entrepreneurs with interesting concepts.
  • Internationalization: Premier added several exhibits running around the world. The complexity of moving and controlling exhibitions internationally can not be over estimated. At the beginning most of them were with partners that managed and promoted issues locally. After they run into problems with some of these partners Premier decided to run some of the shows itself with mixed results.
  • Merchandising and Corporate Sponsorships: Premier was and is doing a mediocre job in alternative sources of revenue. They finally decided to buy a merchandising firm for close to $1 million. This was the pet project of Bruce Eskowitz the CEO that replaced Arnie Geller at the end of 2007.

Besides the obvious organizational complexity, this plan included significant capital expenditures: $12 million for Luxor Vegas, $6 million for Dialog in the Dark, $6 million for Sports Immortals and $4 million for maintenance.

Arnie Geller’s big idea was to achieve all this by bringing new management. Brilliant man eh? The new CEO Bruce Eskowits lasted less than a year on the job. His package only matched his previous compensation in Live Nation, but it was a heavy burden for a small company. He had a $312 thousand salary but with awards and bonuses his total compensation was over $3 million. Just as a reference he received $1M cash bonuses in 2007 and 2008. He also brought in an expensive executive team that probably matched what he used to have in Live Nation.

But still with this, this is a really small company. We don’t have hundreds of employees. It’s a small head count, and we’re trying to be very focused on what we do. It’s just physically impossible to go from two products and 20 exhibitions to 40 without adding a few people who can support it. Unfortunately, we’ve got to get revenues to catch up to the G&A – Bruce Eskowitz July 9, 2008

Build it and they will come? Individually, all the growth initiatives seem not only plausible but attractive. I run some back-of-the-envelopes and, if well executed, all of them would probably be very profitable. However, if you have not been paying attention let me put it in black and white

  • New customers (tourists in Vegas and New York)
  • New products (not one but three new concepts: Sports Immortals, Star Trek, Dialog in the Dark)
  • New geographies (not one but two new continents: Europe, Latin America)
  • New channels (not only proprietary locations but also malls)
  • New capabilities (merchandising)
  • Forward integration (promotion)
  • New management

And all that at the same time! My background is in growth strategy and turnarounds (let’s leave out for the moment how I became a value investor) and never before I have seen such an ambitious plan, for lack of a better word.

This is the type of plan that can only be the result of irrational entrepreneurial will. The plan was to do everything that was in Arnie’s mind at the same time. No focus man.

I am all for experimentation: new businesses have to try new things to find their edge, old businesses have to try new things to renew themselves. But resources are limited, organizations have constrains, markets are competitive, and cash flow is king so if you do not pay attention to these realities you have:

  • Contradictory goals
  • Wasted resources
  • Unfinished projects
  • Outsized organizations
  • Mediocre financial results

So from the get go, I am putting the burden of evidence on former CEO Arnie Geller. He was the entrepreneurial force behind all those initiatives and his was the plan even before Eskowitz arrival (than lasted for only 10 months). Besides he controlled the company through the Board of Directors.

SG&A

More expenses, fewer sales? The perfect recipe for a great business. Can you identify the entry of the new team, when it was fired and Arnie Geller’s second coming? I bet you can.

Cash

This little experiment burned $20 million in cash and left Premier at the brink of collapse. You need the discipline to shut down your best ideas, Arnie Geller and Bruce Eskowitz were not capable of doing that. Premier looks too much like the pattern of a one-man rule. Confirmatory evidence would be a disorganized culture and organization. That is what we are going to review next.

Long PRXI

Turnaround Cases: Premier Exhibitions Part 1 ($PRXI)

A great investment opportunity occurs when a marvellous business encounters a one-time, but solvable problem. You just need to know the business to recognize this – Warren Buffet

So after reviewing some situations where a turnaround was threatened by tough issues that were not completely on management’s control, we now move to situations where the core business is healthy but the performance has been compromised by solvable issues. This is usually the result of bad luck (it sometimes happens), internal issues brought upon themselves by incompetent leadership or by management’s inability to rise to a solvable new challenge.

What is the point of having a blog and end discussing examples with a strong consensus. Instead I am going to propose a controversial case: Premier Exhibitions (PRXI). You probably never heard that name before but you probably heard the names of its two exhibitions: Titanic and Bodies. Both are hit shows not only in the US but around the world and both continue to attract crowds. Bodies shows cadavers treated with a technical process that makes them viable for exhibition and Titanic shows pieces recovered from the wreckage. Someone appropriately used the adjective macabre to describe the situation however that is not necessarily bad. As Peter Lynch once wrote

Something that makes people shrug, or turn away in disgust is ideal – One Up on Wall Street

If you agree with that statement then Premier may be your kind of stock. This is a company well known for value investors since Mark Sellers, a respected hedge fund manager, is its majority shareholder. There are several articles on Premier’s good economics and the potential value of its Titanic assets so I am just going to make the introductions. Dear reader, here is Premier Exhibitions:

Most of these articles were written before Premier hit an earnings bump. That bump’s cause, consequence, solution and opportunity are going to be the topic of several posts, but as an appetizer let me show you the historic stock price:

Wow, that is what I call a rise and fall. You just have to go through Yahoo’s board to retrace the story and is really something. You can read how early adopters bought the story of the unrecognized Titanic assets, were joined later by growth investors that valued the successful new Bodies exhibition, how pricing got out of hand with momentum investors pumping pie-in-the-sky projections and the sudden collapse. Now it had gone full circle becoming a value stock again: I recommend you to check the Complete Growth Investor podcast on Premier and get their free report. This is indeed the story of an Icarus growth stock.

The collapse has wrongly been attributed to the 20/20’s attempt on character assassination of Bodies –that I still recommend to watch, also here is Premier’s response - and the settled investigation of the bodies’ origin. To the contrary, both were short term attendance boosts because as we know there is no such thing as bad publicity.

The reason for the collapse was simpler: an outsized and undisciplined organization built by an entrepreneurial one man rule seeking growth on too many fronts without the needed processes to manage that growth. This is a story repeated time and again that has been the subject of some best sellers like “Inside the Tornado” and “Build to Last”. I do not offer these books necessarily as testaments of good research but as witnesses of the topicality of the challenge.

All investing is risky and growth stocks have their particular set of challenges. Their stocks multiples can collapse fast when earnings or growth disappoints. And the probability of disappointing is higher than people think: these are some Bain and Co. estimates of success for growth initiatives

Growth

If this is not material for a good series, I do not know what is. It certainly has drama. In the next part we are going to address the story of Premier’s collapse and discuss if it is solvable.

Long PRXI

Follow

Get every new post delivered to your Inbox.

Join 1,913 other followers