Image Entertainment (DISK) went through a change in leadership over the last year with the retirement of Marty Greenwald, who was replaced by ex-COO David Borshell, but one thing hasn’t changed: its bad luck when trying to sell itself.
Readers of this space may recall that producer and entrepreneur David Bergstein, with the financial backing of real estate mogul Ron Tutor, had tried to buy Image early last year for $4.40 per share, beating a $4 bid from Lionsgate (LGF) – which now itself is under attack by Carl Icahn. The deal collapsed when hedge fund D B Zwirn ran into trouble with accounting, valuation and redemption woes and was unable to provide the promised funding.
Inevitably, the stock reacted by dropping to penny levels, as it did after the collapse of Bergstein’s acquisition. However, Image has since improved its financial condition significantly: in the last quarter its earnings improved by $0.10/share from a loss to a small profit, and its top line grew by a whopping 43.2%. Given these achievements, we have confidence in the capabilities of Image’s management.
Management’s proven ability to deliver differentiates Image Entertainment from the other collapsed buyout that we blog about: Wilshire Enterprises (WOC), where management changes were purely cosmetic and Sherry Wilzig Izak is still in charge despite years of failing to make money on rental real estate.
Image stands to collect a business interruption fee of $1.8 million from the failed deal. We would anticipate that the buyer Nyx/Q-Black will follow Bergstein’s lead and litigate in order to avoid paying, or get a reduction. Fortunately, management learned from the last deal and insisted on pre-funding of the business interruption fee, so it is in a stronger position this time. Merger-related expenses were $0.6 million last quarter, and we would expect a little less for the current quarter, leaving Image with a small profit. Maybe Image should change its business model and make business interruption fees its main source of revenue?
We thought $2.75 was a low price for Image Entertainment, but given where the market is were willing to go along with it. In light of the growth Image has experienced, in particular in its digital Egami division (read our last post about DISK) with no less than 68%. We think that a higher price target than $2.75 should be achievable for patient investors. Maybe Image’s management should give Carl Icahn a call to revive talks with Lionsgate once he takes control of that board. We wouldn’t mind selling at a discount to its last proposed price.
Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which owns shares of Image Entertainment. He is the author of a free e-book about alternative strategies as well as the forthcoming book Merger Arbitrage: How to Profit from Event-Driven Arbitrage (Wiley Finance, 2009).