Author Topic: SIGM - Sigma Designs  (Read 7977 times)

writser

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SIGM - Sigma Designs
« on: February 26, 2018, 07:40:26 AM »
SIGM, Sigma Designs, is a "provider of intelligent platforms for use in a variety of home entertainment and home control appliances". Basically they design and make chips for televisions, media connectivity and the "internet of things". Smart home / IoT is obviously very cool stuff at the moment so Silicon Solutions offered $282m ($7.05 / share) for the company last December - on the condition that they sold or wound down their boring (and not very profitable) Smart TV business. SIGM failed to do that and the deal was adjusted (as was initially agreed upon in the merger agreement) to an asset transfer: Silicon Solutions is now only buying the cool stuff only for $240m. The CEO resigned and SIGM stock cratered from ~$7 to ~$5.50 after that was announced. There wasn't much information available but it seemed cheap and I bought some shares. As of now a preliminary proxy is on the table. Basic details:

- Company intends to liquidate.
- Pro forma balance sheet as of Jan, 28 shows $310m in cash and marketable securities and $51m in liabilities.
- No significant taxes to be paid due to tax assets.
- Subsequently SIGM struck a deal to sell their wired connectivity business for $28m (minus a $4.2m holdback). Also tax-free.
- The CEO resigned because he is in talks with the company to buy the Smart TV segment.

So, where does that leave us? My (I hope) conservative back of the envelope calculation:

TV-segment: $0 (assuming the CEO will take it over at a bargain price).
Cash: $310m + $28m.
Liabilities: $51m.
Liquidation costs: $15m (basically a guess - probably a bit too much but you never know with these lawyers and insiders).

For a total of $272m. Shares outstanding are 38.8m but as per the latest 10Q there are ~400k RSU's and options with high strikes outstanding. Lets say 40m shares will be outstanding after everything vests and/or is settled. That all adds up to about $6.80 per share. Seems to make sense to me that the sum of the parts is somewhat below the original takeover price, given that the buyer who offered $282m for the entire company is now buying the trophy division only for $240m.

SIGM wants to make an initial distribution after the deal is approved. My best guess is that they will distribute around ~$200m this summer (~$5) so IRR should be decent if the stub is worth somewhere around $1.80. And there's some margin for error here if, for example, my estimate of liquidation costs is too low.

Deal seems relatively safe given the balance sheet. Key risks: for some reason the Internet of Things asset sale fails to materialize (seems unlikely, according to the discussion in the proxy there are lots of interested parties), Smart TV segment sale / wind down takes longer than expected, initial distribution takes longer and/or is lower than expected.

Finally, Soros owns ~12%, Renaissance owns 6% so you are in somewhat decent company.

Seems like a decent bet if you can live with the uncertainty. I bought a couple of extra shares today. Curious what you guys think.
« Last Edit: February 26, 2018, 07:58:31 AM by writser »
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Foreign Tuffett

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Re: SIGM - Sigma Designs
« Reply #1 on: February 26, 2018, 08:44:27 AM »
SIGM, Sigma Designs, is a "provider of intelligent platforms for use in a variety of home entertainment and home control appliances". Basically they design and make chips for televisions, media connectivity and the "internet of things". Smart home / IoT is obviously very cool stuff at the moment so Silicon Solutions offered $282m ($7.05 / share) for the company last December - on the condition that they sold or wound down their boring (and not very profitable) Smart TV business. SIGM failed to do that and the deal was adjusted (as was initially agreed upon in the merger agreement) to an asset transfer: Silicon Solutions is now only buying the cool stuff only for $240m. The CEO resigned and SIGM stock cratered from ~$7 to ~$5.50 after that was announced. There wasn't much information available but it seemed cheap and I bought some shares. As of now a preliminary proxy is on the table. Basic details:

- Company intends to liquidate.
- Pro forma balance sheet as of Jan, 28 shows $310m in cash and marketable securities and $51m in liabilities.
- No significant taxes to be paid due to tax assets.
- Subsequently SIGM struck a deal to sell their wired connectivity business for $28m (minus a $4.2m holdback). Also tax-free.
- The CEO resigned because he is in talks with the company to buy the Smart TV segment.

So, where does that leave us? My (I hope) conservative back of the envelope calculation:

TV-segment: $0 (assuming the CEO will take it over at a bargain price).
Cash: $310m + $28m.
Liabilities: $51m.
Liquidation costs: $15m (basically a guess - probably a bit too much but you never know with these lawyers and insiders).

For a total of $272m. Shares outstanding are 38.8m but as per the latest 10Q there are ~400k RSU's and options with high strikes outstanding. Lets say 40m shares will be outstanding after everything vests and/or is settled. That all adds up to about $6.80 per share. Seems to make sense to me that the sum of the parts is somewhat below the original takeover price, given that the buyer who offered $282m for the entire company is now buying the trophy division only for $240m.

SIGM wants to make an initial distribution after the deal is approved. My best guess is that they will distribute around ~$200m this summer (~$5) so IRR should be decent if the stub is worth somewhere around $1.80. And there's some margin for error here if, for example, my estimate of liquidation costs is too low.

Deal seems relatively safe given the balance sheet. Key risks: for some reason the Internet of Things asset sale fails to materialize (seems unlikely, according to the discussion in the proxy there are lots of interested parties), Smart TV segment sale / wind down takes longer than expected, initial distribution takes longer and/or is lower than expected.

Finally, Soros owns ~12%, Renaissance owns 6% so you are in somewhat decent company.

Seems like a decent bet if you can live with the uncertainty. I bought a couple of extra shares today. Curious what you guys think.

The pro forma balance sheet I'm seeing in the 2/23/18 proxy is from 1/28/2017. Page #113.


writser

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Re: SIGM - Sigma Designs
« Reply #2 on: February 26, 2018, 08:55:17 AM »
That would be super duper extremely embarrassing  :-\ . But you are correct! Thanks for pointing that out. The good thing is that also for Q3 2018 financials the picture is still more or less the same but they could have burned through some cash since.
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Foreign Tuffett

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Re: SIGM - Sigma Designs
« Reply #3 on: February 26, 2018, 09:13:42 AM »
That would be super duper extremely embarrassing  :-\ . But you are correct! Thanks for pointing that out. The good thing is that also for Q3 2018 financials the picture is still more or less the same but they could have burned through some cash since.

After spending 30 minutes on this:

I think the downside is protected to a certain degree.

I also think the upside is mostly dependent on (1) how much they get for their SmartTV and Mobile IOT businesses (2) how well they control cash burn and liquidation costs.

writser

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Re: SIGM - Sigma Designs
« Reply #4 on: March 22, 2018, 06:19:40 AM »
Company announced an agreement to sell the TV business to the (ex-) CEO today for ~$5m (adjusted for working capital changes): link. From the proxy (emphasis mine):
Quote
We do not believe the divestiture of the TV Business will result in material cash proceeds to Sigma; however, if we are able to divest this business, we expect that our operating expenses and liabilities will be reduced significantly, and our revenue following the closing of the Asset Sale and the TV Divestiture will be reduced to substantially zero. We do not expect the sale of our Mobile IoT Business, if we are successful in divesting this business, or the shutdown of this business to be material to our operations or assets available for distribution to shareholders.

So, only the mobile IoT business is left and that doesn't seem material either way. Estimated liquidation proceeds were $5.82 - $6.58 / share as per the proxy and with the TV business sold chances are we end up in the upper range of that estimate. Bit worse than expected (especially the net cash outflow from operations) but I still own a few shares.
« Last Edit: March 22, 2018, 06:21:32 AM by writser »
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

writser

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Re: SIGM - Sigma Designs
« Reply #5 on: April 09, 2018, 02:24:28 AM »
Revised guidance from the latest proxy update: 5.95 - 6.46 with a final distribution expected before September, 30. Looks more or less fairly priced. Might still be a decent place to park some cash as the initial distribution will probably be paid out in a few weeks (EGM  is next week).
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

writser

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Re: SIGM - Sigma Designs
« Reply #6 on: April 13, 2018, 09:19:45 AM »
No more position as of today - trades above middle of estimated proceeds range, don't see any news.
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

hillfronter83

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Re: SIGM - Sigma Designs
« Reply #7 on: April 13, 2018, 10:38:31 AM »
No more position as of today - trades above middle of estimated proceeds range, don't see any news.

Good call again! Have you looked at RMGN? Spread is pretty wide. There are a couple of law suits going on. Not sure if they will derail the deal.

writser

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Re: SIGM - Sigma Designs
« Reply #8 on: April 13, 2018, 11:17:26 AM »
Yep, I have a small position. Crazy price action yesterday! Couldnít resist. Sachs owns ~20% and Wilson owns ~40%, there should be decent support for a deal (seems unlikely Sachs would try a coup without Wilsonís consent after he participated in a placement two years ago). I donít have any deep insights, setup looks reasonable but yeah, maybe a bit hairier than other deals..
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

writser

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Re: SIGM - Sigma Designs
« Reply #9 on: June 19, 2018, 10:55:48 AM »
Starting to look more attractive again.
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.