Soapstone Networks Inc. (NASDAQ: SOAP) has been added to our ValueHuntr portfolio. According to the latest SEC disclosure, the company had $90.1M in current assets and total liabilities of $3.0M as of December 31, 2008. This means that with a net asset value of $87.0M ($5.88/share) and a market capitalization of $42.5 ($2.85/share) the company is currently trading at a nearly 48% discount to its net asset value and a 49% discount to its net cash value.
Soapstone Networks is at the forefront of the movement to Carrier Ethernet by developing resource and service control systems that realize NGN software-provisioned services in the new Carrier Ethernet transport network. Soapstone’s common control framework decouples services from underlying network technologies. The Soapstone solution is designed to dynamically provision precise, SLA-quality services, continuously optimizing utilization of network resources to bring orderly, predictable business-driven behavior to service provider networks.
SOAP is an unprofitable business with currents assets completely in cash and virtually no short-term or long-term commitments. With an average ROIC of -27% for the past 5 years, it is our view that the company does not have the ability to create shareholder value with the exception of special cash returns or liquidation. Therefore, we value the company at how they would sell at a possible liquidation rather than future earnings expectations or how the assets are currently carried on the company’s books.
With a net-cash value of $86.0M ($5.8/share) and a market capitalization of $42.5 ($2.85/share) the company is currently trading at a 49% discount to the cash the company has in its books. We estimate its value at liquidation at $87.3M ($5.7/share), a 51% discount to the company’s present market value.
On February 19, 2009, the company announced that is has engaged Morgan Stanley as its advisor to assist the company in exploring strategic alternatives for enhancing shareholder value. The press release indicated the following:
Soapstone Networks Inc. has engaged Morgan Stanley & Co. Incorporated (“Morgan Stanley”) as its advisor to assist the Company in exploring strategic alternatives available to the Company for enhancing shareholder value, including but not limited to, continued execution of the Company’s business plan, the payment of a cash dividend to the Company’s shareholders, a repurchase by the Company of shares of its capital stock, the sale or spin off of Company assets, partnering or other collaboration agreements, a merger, sale or liquidation of, or acquisition by, the Company or other strategic transaction.
A sale is a likely, but we believe the board of directors will only approve such option if the sale price is higher than the value shareholders would realize through an auction or liquidation. Liquidation of the company would result in a nearly 100% return to shareholders due to the discrepancy between market value and cash assets. However, the current economic climate makes it difficult to approximate the value that the company’s non-cash assets would attract from interested buyers. Furthermore, Bill Leighton, the company’s CEO stated the following during the February 12, 2009 earnings call:
Like many companies in this macro-economic environment, we have heard from certain of our shareholders that, for their particular interests, a near-term cash return from the Company is desirable. With the help of our outside advisors, we will carefully consider this expressed interest in a cash return, within the process of evaluating a range of alternatives, understanding that our goal is, as always, to provide enhanced value to all of our shareholders
It is obvious that cash-stripped shareholders have been pushing management for a quick cash return. Thus, we consider a special cash dividend to be the most likely scenario. The company has the ability to declare up to $2 per share in special dividends without affecting the company’s operational goals for this year.
At its $2.85 close yesterday, SOAP is trading at approximately half our estimate of its value in liquidation. Fortunately, management is taken the right steps to increase shareholder value. We believe that the probability of a special dividend is high, followed by the liquidation of the company. Due to its high probability of realization and its steep discount to the value that could be realized through auction or liquidation, we are adding SOAP to the ValueHuntr portfolio.
[Full Disclosure: We do not have a holding in SOAP. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]