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There has been a lot of activist investor activity in the Voltari (ticker : VLTC) corporation of late. Calcbench decided to look under the hood at some things that might pop up in a systematic analysis of the underlying fundamental financials of the firm. 

 We started by noting that the balance sheet shows a heavy cash burn. Given this rate of use of cash, the firm will likely run out in the summer or fall of 2015. 

In fact, the balance sheet only has total assets of $12 Million and negative book value (shareholders equity). It’s really not that interesting, so why would / should anyone care?

LOOK CLOSER!  

What isn’t on the balance sheet?  

Tax assets!   Using Calcbench’s Footnote tools, we were able to isolate the Deferred Tax Assets of $186.9 Million that the company has put into a Valuation Allowance. The language in the tax note goes further and states that the firm took a “full valuation allowance against its gross deferred tax assets because realization of these benefits could not be reasonably assured.”

This (likely) means that the firm does not expect to be profitable in the near future.  Further, given their cash burn, they will likely have to go the financing route and get some cash soon.  

So we thought, that it might make sense to do an analysis of a theoretical case …

** Disclaimer ** CALCBENCH is not a valuation company. You need to do your own homework.

In a scenario where the company “Duke & Duke” is a buyout candidate, a buyer Beeks Industries would likely value the deferred tax assets.  

Beeks Industries was profitable in 2014 .  It profit before tax at 500M USD.  Tax rate is 35%.

So their tax bill is 175 M so  their net income is 325 M (simplified scenario)  

Beeks Industries  buys Duke & Duke.  They get the Tax Loss Carryforward.   Assume tax loss carry is 100 M and Beeks is able to capture all of it (HOWEVER, IRS Rule 382 may prevent 100% capture).

Beeks Industries  makes 500M profit (again) in 2015.  This time, they apply the Tax loss carry forward of 100M to their profit and now have a profit of 400 M.  Their tax rate of 35% means that they now owe 140M in taxes instead of 175M.  So the carry forward only saved them 35M USD.   

Therefore, it only makes sense to buy Duke&Duke if the price is less than 35M USD (assuming that there are no other assets in the equation).

TAKEAWAY

So what does this mean for a firm like Voltari?  If you look at their shares outstanding in Calcbench, you find that there are 4.668 Million shares outstanding. Assuming that you value the firm at ZERO given it’s negative book value, you should only pay 35% of the valuation allowance of $186,967,000, or about $65 M USD.

So that means that the firm might be worth about $14 under a perfect scenario. OR maybe it is worth ZERO as the likelihood of running out of cash is VERY high. In any case, this is likely not a suitable investment for most people.  

 Now using Calcbench, can you identify firms that have similar characteristics?? 

Hint: You can… just sign up.  

www.calcbench.com/trial


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