AVP Inc. (OTC:AVPI) shares moved up $0.06, or 4.8%, to $1.30 today after Diker Management
disclosed a 15.8% stake in the company and expressed its concerns over AVP's proposed below-market-price sale of the company. AVP agreed to be acquired by Shamrock Holdings for $1.23 per share, which is significantly below the intrinsic value of the company and a staggering 18% below the prior day's closing price of $1.50! This is almost unheard of in the world of M&A where buyouts typically come at substantial premiums to both the current market prices and 20-day moving averages.
Diker insisted that AVP's future prospects appear very bright. The company's 2006 Form 10KSB said that its revenues grew 38% in 2006 while its gross profit expanded by 80%. Net loss decreased significantly from an $8.96 million loss to nearly breaking even with a $0.34 million loss. Excluding one-time expenses such as the administrative costs while raising money and a redesign of the company's logo, AVP would have been significantly profitable in 2006. The hedge fund said that it expects the company to report strong positive net income of $3 to $4 million in 2007 and substantially higher numbers in 2008. They support this notion by pointing to (1) signed or renewed sponsorship agreements with McDonald's, Hilton, Shick, Nature Valley, and Banana Boat, (2) a schedule of at least 18 events for 2007, up from 16 in 2006, (3) and plans on further reducing operating expenses while expanding revenues.
So, what is the company really worth? AVP is a lifestyle sports entertainment company that focuses on live and televised professional beach volleyball events. The company offers a well positioned business model that compares to
Speedway Motors (NYSE:ISCA),
World Wrestling Entertainment (NYSE:WWE), and
Dover Motorsports (NYSE:DVD). The proposed acquisition of AVP values the company at an enterprise value of $31.8 million, or 1.48x trailing 12 months revenue. The peer group mentioned above trades at an average and median of 3.1x trailing 12 months revenue. This suggests a valuation of $2.38 per AVP share. Moreover, the peer group trades at a median of 9.2x 2008 EBITDA consensus. Applying this multiple to AVP again yields a dramatically higher number - especially if you take into account the fact that the acquirer will be able to remove public company costs!
What can be done? Obviously, shareholders can reject the proposal which is definitely a possibility given Diker's 15.8% stake and the sub par buyout offer. However, for now, the hedge fund is appealing to the company's board of directors to reconsider the proposed offer in hopes that they will repeal it. If they are successful in either of these, we could see a substantially higher buyout offer, or the company remaining a separate entity. Either way, this stock is definitely
worth watching!
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