Those whispers you hear aren’t the island voices from Lost. They are the whispers that flow between the skyscrapers of Wall Street … the ones that say things like, “Coinstar (NASDAQ:CSTR) is going to get bought out by private equity.”
The stock price reacts accordingly (it rises), and everyone begins speculating as to the validity of the rumor.
I generally find speculation in these matters to be useless, but at the same time, it gives one an opportunity to review one’s holdings. Private equity usually comes in for one of two reasons — a turnaround play on a distressed asset, or a buyout on something with tremendous enterprise value. In either case, they seek to make multiples of their investment.
Let’s take Coinstar first. Of the company’s revenues, 86% come from its Redbox unit. DVDs still have two to three years of viability remaining before everything turns to streaming technology. The company has partnered with Verizon (NYSE:VZ) to offer streaming, and while it won’t corner the market, Verizon has enough cash to be competitive in paying for content licenses.
The coin-counting business will always be there to provide cash flow, as there are no competitors at this point and not likely to be any.
My thesis on Coinstar is that over the very long term, the kiosk business will be huge. The company is moving into selling Starbucks‘ (NASDAQ:SBUX) Seattle’s Best coffee through them, there’s talk of photo prints, and I believe prescription medicines will be there at some point, along with many other items.
I think the company is substantially undervalued at $51. I have been in, stopped out, in, stopped out, and am now back in. With this level of long term enterprise value, a private equity buyout is a realistic possibility. I’m not saying it will happen, but I can see value here.
Research In Motion
Research In Motion (NASDAQ:RIMM) rumors have swirled for some time. The company has failed in its turnaround efforts, and any time the words “explore strategic alternatives” comes up, it usually means a company is looking to sell itself or license its technology.
I can’t say I’m an expert in the technology arena, but what I do see is a fairly large established base of customers for BlackBerry, a technology platform that has enterprise value and is loaded with patents. Google (NASDAQ:GOOG) purchased Motorola for its patents. While there are numerous hurdles facing rumored buyers like Samsung or IBM (NYSE:IBM), I think RIMM is a classic distressed play and would be an attractive buyout candidate.
The problem with EA and its rivals is that console gaming has been giving way to mobile gaming, thanks to social gamemakers like Zynga (NASDAQ:ZNGA) and the rise of gaming on smartphones and tablet computers. Consequently, the games themselves also are seeing a decline in sales. This is a classic example of a company, and an industry, caught flatfooted by the sudden rise in new technology and consumer behavior.
As with movie studios, there is value in Electronic Arts’ gaming library and franchise value in its branded games. The issue is whether the company can keep up with technology. I think, given the volume of chatter about a buyout, that something seems likely here.
Again, this is all speculation, so if you are going to buy a stock, buy it because you see value — not because the rumormongers claims that others do.
As of this writing, Lawrence Meyers held CSTR shares and has has sold September 47.5 naked puts.