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Technology Stocks : Source Media SRCM -- Ignore unavailable to you. Want to Upgrade?

To: MW who wrote (2150)	2/18/1999 2:52:00 PM
From: Smilodon	Read Replies (3) \| Respond to of 3015

Analysis of the United Video Deal from the 8K. This deal is clear evidence of the desperate position of SRCM. Actually, this deal seems to be insane. The terms of this are so one sided, I am shocked SRCM could not have gotten something better. Here are the problems: 1) The value of the Warrants granted to United Video is many multiples of the equity infusion they got. 2) SRCM gave up all intellectual property of the IC and virtual modem for shares in the Joint Venture that in a best case scenario seems to have a value of about $55 million. Value of the Warrants: Prior to the announcement of the letter of intent, SRCM closed at $21. United Video purchased stock at $14.25, providing an equity infusion of $12 million. This provides a year of interest for the bonds and keeps SRCM alive until 2001. Let us assume that the discount of the stock purchase to the market price was fair given the lack of liquidity and call it a push. Now look at these warrants. SRCM granted United Video 5-year warrants to buy 14,155,356 shares for $14.25. If we look at their value if exercised on the day the deal is announced we get approximately $95 million (($21 - $14.25)) * 14,155,356). With SRCM currently trading at $18 5/8, they would be worth approximately $62 million ((18.625 - $14.25)) * 14,155,356). And finally, I can use publicly traded options as a value proxy. The April 99 calls with a $15 strike price currently sell for 5 5/8. This gives the value of the warrants SRCM granted as $80 million (5.625 * 14,155,356). Adding the value of the stock and warrants, SRCM traded securities with a market value of almost $100 million (($21 * 842,105) + ($5.625 * 14,155,356) for $12 million in cash. Essentially, they raised equity with an 88% discount. Typically, you would expect maybe a 30% discount for lack of liquidity, but 88% is a bankruptcy type discount. Which is what I think is happening here. SRCM sold most of its intellectual property for a small amount: I see two ways to value SRCM's ownership in the joint venture. The first is to look at the contribution of United Video at the beginning, and the the second is to look at the future convertible. First, United Video is going to contribute $5 million in equity and essentially run the business. If I assume the value of their contribution to operations is worth $20 million (which is quite liberal) we can say United Video is contributing $25 million for 45% of the Join Venture, which implies a total value of the JV to be about $56 million. Thus, SRCM's 55% stake would be worth around $30 million. On the other hand, United Video agreed to provide a convertible of $5 million to the JV. If converted, this would increase their ownership of the JV to 60% and give them 90% voting rights. So, we can say that 15% of the JV is worth $5 million, and thus the entire value of the JV is worth about $33 million. Therefore, SRCM's 55% stake would be worth around $18 million. So in conclusion, this deal values SRCM's virtual modem and interactive channel at anywhere from $18 to $30 million. In summary, it looks like SRCM sold their intellectual property for a very small amount, and massively diluted their shareholders in exchange for one more year of interest payments. The only reason I can see for this is they were going to have language in their audit reflecting going concerns difficulties. I think the slow death spiral has finally begun. Regards, Archer