Premier Exhibitions (PRXI) revisited

Currently, Premier Exhibitions is losing some money in its exhibition business and is in the process of trying to sell its Titanic assets.  Premier paid Guernsey’s to auction its Titanic assets but it looks like this auction has failed to meet Premier’s reserve price.  The failed auction suggests that the market price of the Titanic assets is not that high.  In the future, it may be more difficult for Premier to fetch a good price for its assets as the Titanic story is getting played out, it will no no longer be Titanic’s 100th anniversary, and excitement over James Cameron’s film re-release fades away.

Premier’s operating business is likely worth no more than $30M ($30M is likely far too generous).  Premier has a market cap of $117M.  The difference between the market cap and the value of the operating business can be attributed to the implied value of the Titanic assets.  Valuing Premier basically comes down to how much these assets are worth.

Premier has had a long court battle trying to gain control of items it salvaged from the shipwreck.  In the past, Premier’s lawyers were constantly trying to get permission to sell off parts of the Titanic assets individually.  They failed.  Now, the court battle is over.  Premier has title to the Titanic artifacts with certain restrictions.  Some of them are:

  1. Premier has to take care of the Titanic artifacts.
  2. It has to commit $100k/year to a trust fund dedicated to the preservation of the artifacts until the fund hits $5M.
  3. It has to make some of them available for public exhibition/viewing.
  4. It can only sell the collection as a whole.
  5. The buyer will have all the same restrictions and has to be approved by the court.
  6. (This has nothing to do with the court battle) If Premier sells its Titanic artifacts it might not be able to use them for its exhibits.  I presume that Premier would have to work out some kind of deal with the buyer.

These covenants create a very limited market for the Titanic assets.

To value these assets, Premier’s 10-K provides some details:

On December 20, 2011, Premier entered into an agreement with Guernsey’s auction house to conduct a sale of the Company’s Titanic artifact collection and related intellectual property. The artifacts—coupled with the work product, intellectual property and certain undertakings of the Company including the costs of salvage, lab operations and exhibition rights—were appraised in 2007 at a total value of approximately $189 million. The appraised value of $189 million has not been updated in the last several years and does not include the intellectual property acquired from the 2010 expedition. In addition, this appraisal does not ascribe any value to the Company’s salvor-in-possession rights and does not consider the court ordered covenants and conditions to a sale. These assets are reflected in the Consolidated Balance Sheet dated February 29, 2012, at a book value of $7.5 million.

The formal auction process ended on April 10, 2012, and the Company announced that it was in discussions with multiple parties for the potential purchase of its Titanic artifacts collection and would conduct these negotiations and due diligence in confidence. Consequently, the Company indicated it would provide an additional update to shareholders as soon as practical and the press conference originally scheduled for April 11, 2012, was postponed accordingly.

The covenants greatly reduce the value of the collection relative to the $189M appraised value; this is the reason why Premier’s lawyers were trying to get permission to sell off parts of the entire collection.

The fact that no sale was ultimately announced suggests that the auction was a failure and that the reserve price was not met.  (If the reserve price was met but Premier reneged on selling, it would be hugely damaging to Guersney’s reputation and lawsuits would fly.)  I have no idea what the best bid or reserve price was.

Premier should be a motivated seller as its exhibition business has been losing money for the last few years.  It should sell the Titanic assets so that it can re-invest its capital into something with higher yield (or Premier could return cash to shareholders).  Here are possible scenarios for not selling to the highest qualified bidder:

  1. The best bid was so incredibly low that it is not worth it to sell.  Premier should take its chances and continue to run its Titanic exhibits.
  2. Premier feels that it can do a better job than Guernsey’s in drumming up demand for its assets.  This would be the best-case scenario for Premier’s share price.
  3. Premier is stubbornly holding out for a higher price that won’t materialize (e.g. if Premier’s controlling shareholder wants to sell his shares at close to his cost basis).

It is unclear which one of these scenarios is the most likely.  The language of Premier’s press releases such as its April 10 2012 release has been worded to suggest a level of demand that likely does not exist.

The Company announced today that it is in discussions with multiple parties for the purchase of its Titanic artifacts collection. In order for the Company to settle on the most appropriate bidder and maximize the ultimate value of the artifacts for shareholders, it will conduct these negotiations and due diligence in confidence. Consequently, the Company will provide an additional update to shareholders as soon as practical, and the press conference originally scheduled for April 11, 2012, will be rescheduled accordingly.

In a normal auction, the Company would simply vet the highest bidder and then take steps to close the deal.  The company’s discussions with multiple parties suggest that it is trying to convince somebody to pay a price higher than the highest bid.  Or, perhaps the company could be seeking some type of alternative arrangement (e.g. selling the artifacts but retaining a right to rent the artifacts for its commercial exhibitions).

I believe that management’s use of spin and lack of transparency regarding the auction’s failure may (or may not) indicate that the market value of the Titanic assets is nowhere near the number from the court-appointed appraisal.  The lack of transparency is unusual and suspicious.

Going forward, Premier may not have the best management team.  The current CEO used to be the COO of Sellers Capital, the hedge fund that is Premier’s largest shareholder.  I’m not sure if he has expertise in exhibitions (or auctioning rare items).  The auction seems to have been a failure and the company has lost money ($500k in auction fees plus marketing costs and presumably other costs).  They botched their window of opportunity to sell into a good market (100th anniversary, re-release of James Cameron’s Titanic, etc.).  The operating business continues to lose money.  This situation cannot continue indefinitely as Premier would run out of cash in a few years.  I think that they will likely be forced to sell off the Titanic assets; the lack of transparency to shareholders suggests that the sale price will be hugely disappointing.

*Disclosure: I am short PRXI.  I do NOT think that it is a compelling short.  The value of the Titanic assets is highly uncertain.  An expert in auctioning rare items would have a huge edge over me.

Links

F4Q12 Conference call transcript – In the Q&A, the CEO dodges a question regarding whether or not there is a signed deal to sell the Titanic assets.

VIC writeup (bullish) – This is one of three writeups on VIC.  The comments are interesting.

Auction of retrieved Titanic artifacts seems ‘fishy’ to collector Steve Santini –  The collector mentions that previous Titanic artifact auctions have failed and items were later resold at a fraction of appraised value.  He also has a theory that the auction was simply a PR stunt.  I do not believe that this is the case as Premier had to pay $500k in auction fees.

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