While BKS has been a significant disappointment as a back door play, I have held onto my BKS shares, even though it had been my intention to sell them the day before the BNBN IPO. Unless the IPO is a complete bust, we should get some sort of pop out of BKS tomorrow. It is my intention to sell into that pop, should it occur.
In order to properly value BKS as a backdoor play, you need to break it into its two component parts, BNBN and the bricks and mortar. The bricks and mortar can be benchmarked against Borders(BGP). When you back out goodwill write offs, restructuring charges and Internet related losses for the five year period ending December 31, 1998, BKS averaged annual sales of $2,370 MM and had an average annual operating profit of $123 MM. For the comparable five year period, BGP had average annual sales of $2,016 MM and an average annual operating profit of $105 MM.
For the sake of argument, lets say that the BKS bricks and mortar are worth 20% more than the BGP bricks and mortar. (I am not going to put any value on either BGP's Internet business nor BKS's announced acquisition of the Ingram distribution business.) As of today's close, BGP had a market cap of approximately $1,324.9 MM. Add 20% to that and the BKS bricks and mortar have a value of approximately $1,589.9 MM, or $23.17 per share. Based on today's close, the market is valuing BKS's BNBN interest at $8.58 per share.
When you multiply $8.58 by the 68.626 million BKS shares that are currently outstanding, that gives you $589.0 MM. To get the gross valuation of BKS's interest in BNBN, divide $589.0 MM by .60 (to account for the discount associated with liquidity and tax issues). Divide the gross valuation of $982.0 MM by .411 (BKS's interest in BNBN post IPO) and you have an enterprise valuation for BNBN of $2,389.0 MM. Divide the enterprise valuation by the 140.0 MM BNBN shares that will be outstanding and you have a per share valuation of $17.06. Is BNBN going to be trading at $17 tomorrow? I don't think so.
If BNBN trades at $30 per share, BKS's discounted interest will be equal to $15.09 per share. Add that to the bricks and mortar valuation of $23.17 and you have a value of $38.26. (140.MM shares multiplied by $30 multiplied by .411 multiplied by .60 divided by 68.626 MM shares = $15.09.)
If BNBN trades at $25 per share, BKS's discounted interest will be equal to $12.58. Add the bricks and mortar and you have a value of $35.75.
The above is JMHO. Good luck
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