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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Saturday, May 7, 2016

$WELX: An investment in Beatles history and nostalgia

As readers of this blog know, owning stock makes you a part owner of a business. This is why owning shares in tiny $7.8M market cap pink sheet listed company Winland Electronics (WELX) makes shareholders part owner of Beatles history and nostalgia.

I'll explain ...  

WELX has a day job selling remote sensing equipment used to monitor (track, log and alert) temperature, humidity, water leaks and power changes within buildings. Their products include the WaterBug, TempAlert, PowerAlert and top of the line, EnviroAlert800-ip, which has inputs for up to 12 sensors and requires a subscription to a cloud based monitoring service, their entry into IoT.

Here's the product catalog

I've seen these products in the closets / mechanical rooms of rental buildings, but they are also in commercial refrigerators, food or pharma plants and other industrial processing that requires certain environmental monitoring. They are not fancy like the Nest but work out of the box. 

There's a lot to like about that tiny little business though its not for every investor; revenues are highly concentrated and at 4x book, etc. it's trading at nosebleed valuations.



The valuation reflects (obviously) a desire by some to own the stock for among other reasons that the company has transitioned from a manufacturer, to an asset light model, and some expect even possibly to an investment vehicle for its two Co-Chairmen: Thomas Braziel and Matthew Houk.

You've probably not heard of them but they've had some success investing, Thomas through his firm BE Capital and Matthew through his work at Horizon Asset Management.

Houk, one would presume, is good at what he does since his boss at Horizon, Murray Stahl, acquired 15% of WELX in late 2014, which is another reason for the valuation, given Stahl's fame as a "guru" in the investment world.

In short, this is really about putting money on two young jockeys (so to speak), and alongside Stahl.

A lesson I learned a long time ago is that if you have a chance to meet a CEO or Chairman and you find them to be terrific capital allocators with high integrity and great ideas on long term shareholder value, sometimes its best to just make an investment in them and let them do their thing, even if "that thing" is not totally known ahead of time.

Some might say this is investing with your eyes closed, misunderstanding everything you see, b/c another lesson I learned even longer ago is not to blindly follow what you read online or promises you hear from someone with an angle. Saying "no" a lot - A LOT - and the ability to separate the "A" ideas from the rest is the hallmark of the best investors.

But unless you're building something yourself, investing is ultimately about entrusting your capital with the best capital allocators you can find, whether its a coffeeshop owner (entrusting them to build the right space that attracts customers), an industrial company (entrusting mgmt to anticipate the right product mix), etc., and at a price and with the right concentration so that the inevitable blips and bumps don't hurt you.

The problem of course is how to find good capital allocators. I think my brief experience as a PI helps with that, though I might be overstating its benefits.

In any case, the "investing in a jockey" theme isn't some new ground breaking idea. I doubt most people understand at all what's going on at Berkshire but a few own BRK b/c Mssrs Buffett and Munger are "terrific capital allocators with high integrity and great ideas on long term shareholder value." It is why I own WELX.

The aspect of being a part owner of Beatles history came later and is just the sugar in my coffee. 

***

Many museums don't have budgets to put on one-off special shows so companies like Exhibits Development Group (EDG) create shows, sell them as a turnkey solution and - if the shows are successful and desirable - keep selling it over and over, presumably collecting some % of ticket sales.

Its an easy model to comprehend; build the exhibit and resell it over and over. The incremental cost after the first show is ostensibly zero, the rent in theory is zero since the museums host, the material is probably part of someone else's collection, insurance might even be carried by the museum. The point is, in theory its a tremendous business that requires little capital and if things go well, generates cash.

One new show that EDG is putting on is a collection of Beatles memorabilia titled "The Magical History Tour", whose world premiere was at the Pacific National Exhibition, in Vancouver, BC in August 2015 and just opened at the Ford Museum in Dearborn, MI to good reviews. Other venues to host the exhibit include the Chicago History Museum, Chicago, IL; Putnam Museum of History & Science, Quad Cities, IA; and Minnesota History Center, St. Paul, MN.

To put on this show, created an entity called EDG-PMA LLC, reflecting the partnership between EDG and Peter Miniaci & Associates, the group of four Beatles collectors who supplied items for the show.

WELX, through an investment vehicle I'll explain below, currently owns 14% of an investment in this LLC but it won't be long 'til more belongs to them b/c - if everything works out - that investment will eventually convert into a 25% stake.

Here's how the investment was put together: Two investment groups - WELX and FRMO Corp an unnamed third party* - created an investment vehicle called Northumberland with initial investments of $200K and $1M, respectively and owned proportionally. Thus, WELX owns 17% of Northumberland and an unnamed third party owns the rest. [* i'd previously thought FRMO was this unnamed third party but can't find my source for this info, so i've edited that out as of August 2018. it's not financially material but transparency has value for its own sake]. 

Northumberland invested this $1.2M to EDG-PMA LLC. It looks like a loan but acts like a convertible preferred equity. In return for the loan investment, EDG will pay interest at an irregular dividend of 10% and once the loan  the investment is repaid - this is key - Northumberland will own 30% of the LLC putting on the show.

Furthermore, when the investment converts to equity, WELX will end up owning 83.33% of Northumberland meaning it will own 25% of the LLC. (30% * 83.33% = 25%). I reckon its set up this way to utilize WELX's NOL's, so the profit they take might equal the profit they make without sharing it with the taxman (rim shot).

The Beatles I hear, are pretty popular and if this ownership continues indefinitely and the show can continue, it should generate solid cash flow for as long as the LLC has access to the pieces in the show.

Obviously, all investment carries risk as does this one, and of course, if you really want to own Paul McCartney's pick or George Harrison's notebook, eBay or other venues might be most appropriate. The value of Beatles memorabilia might even be enhanced as a result of the new show, which I hear is worth a visit if you're passing through Dearborn.

Full text of the investment language follows.

"On Friday, July 10, 2015, the Company completed an investment of $200,000 in Northumberland IX LLC (“Northumberland”), an entity formed with another third party to invest a total of $1.2 million in EDG-PMA, LLC (“EDG-PMA”), itself an entity formed in cooperation with Exhibits Development Group, LLC (“EDG”) to develop, design, construct, market, place, own, and operate a traveling museum exhibition presently known as The Magical History Tour: A Beatles Memorabilia Exhibition. 

"Northumberland’s investment in EDG-PMA is effectively structured as convertible preferred equity. 

"The convertible preferred equity pays an irregular preferred dividend at a rate of 10 percent per annum on any outstanding principal balance and is immediately convertible into 30 percent of EDG-PMA common equity upon repayment of Northumberland’s $1.2 million principal amount, the timing of such repayment being dependent on the distributable cash flow of EDG-PMA." 

"Until repayment of Northumberland’s $1.2 million principal amount, the convertible preferred equity is entitled to the entirety of EDG-PMA distributable cash flow. Prior to the repayment of principal, the Company’s interest in Northumberland is proportionate to its $200,000 investment. Following the repayment of principal, the Company’s interest in Northumberland shall be 83.33 percent." 

-- END --

This is not a solicitation for business or a recommendation to buy the stock just something unusual about a stock that I thought readers would appreciate. It is based on public filings but I can't vouch for the accuracy of those filings or of this blog post.. This "safe harbor" statement is meant to cover my ass and to remind readers they are responsible for their own research and investment decisions. At the time of this writing, I own some of the stock. All investing carries risk particularly small cap equities and that risk includes the potential for a total loss of capital.

4 comments:

  1. As a follow up to this, been thinking about what it will take for Northumberland to get paid back on the $1.2M and generally to assess the overall value of the Beatles exhibit.

    On the FRMO Corp conference call Murray Stahl said about the Beatles exhibit ...

    "I believe that it is close to, if not the most successful exhibition EDG has ever had. The results were better than we thought were even possible, or at least as good as we had any right to believe. We look forward to doing more business there."

    http://www.frmocorp.com/_content/letters/2016_Q2_FRMO_Transcript.pdf

    ... but that was in January 2016 and the exhibit hadn't even opened in the US yet. So not sure how he could say this in comparison to say the MythBusters Exhibit, which had over 1M visitors.

    Tickets to the show at the Ford Museum in Dearborn are $24 for adult non-members. Let's say the company putting on the show (EDG/PMA) gets 50% of the ticket sale. I think its an aggressive assumption but that means ~100,000 visitors to conversion.

    MythBusters opened March 2012 and was booked through every available four month stint over the last four years to get to 1,000,000.

    The Beatles exhibit closes in Dearborn in Sept then goes to Iowa in March 2017. It is contracted to continue through 2020.

    If Beatles can get to 1M visitors at $12.50 per then WELX's 25% stake in the LLC is worth ~$2.8M vs a market cap of $7M.

    A big difference b/t the two shows is that MythBusters appeals to kids and adults, to schools, science, engineering, etc. while the Beatles (with apologies to hardcore fans) appeals to an arguably smaller, older albeit potentially wealthier audience.

    At some point maybe I'll call the museum and find out how it's going but in the meantime, just framing my thoughts on the potential value.

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  2. Well, this Beatles show they invested in has two pretty lame reviews on Yelp ...

    https://www.yelp.com/biz/the-magical-history-tour-dearborn

    ... which might explain the ($2) loss on the investment in the quarter. I expect the whole thing will be a loss as pre-booking seems pretty weak already ...

    http://www.exhibitsdevelopment.com/Tour%20Schedules/Beatles%20-%20Tour%20Schedule.pdf

    ... what bugs me is that Stahl had previously said such positive things about it, making him look like a bit of an idiot. I doubt he likes that either. I wouldn't.

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  3. How do you know that it was FMRO invested the $1m in Northumberland?

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    Replies
    1. i thought i read it in a press release somewhere or that it was mentioned at the FRMO annual meeting or in the 3Q15 conf call transcript but now I can't find the backup to this and i'm not so sure so I will edit this to reflect that.

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