Trident Microsystems (TRIDQ) is a recent bankruptcy where there might actually be a substantial recovery for the equity. There appears to be a. downside protection in the form of substantial value to the equity in a liquidation scenario, b. upside in a reorganization of the company as a going concern, and c. a party that will go to bat for the interest of the equity holders.
Trident designs and markets microchips. They started off in PC graphic design chips in the 90s. As that market consolidated they sold off the PC graphics business in 2000 and started making video controllers for digital TVs. They did well in that business until 2008 when the market shifted to an integrated video and audio chip and Trident was left behind. Trident acquired several small business lines from Micronas in 2009 for $17 million in stock. In February 2010 Trident purchased the digital TV (DTV) and set top box (STB) business lines from NXP Semiconductor for 60% of TRID stock. The DTV and STB lines are now their primary markets, and they sell to customers like Samsung and Sony.
The operating results since acquiring the DTV and STB lines from NXP have been terrible to say the least with CFO of -79 million in 2010 and -38 million through 9 months of 2011. This led TRID to file for bankruptcy on January 4th. In their filings, Trident describes the events leading up to their bankruptcy:
Like many technology based industries, the set-top box and television industries in which the Company focuses its operations have been undergoing rapid changes which have made it difficult for the Company to operate profitably. The Company has faced increased pricing pressure from Taiwanese SoC suppliers who have recently made great inroads in penetrating the market. Additionally, industry semiconductor inventory levels are currently elevated due to slowdown in consumer electronics markets primarily driven by slowdown in Western economies, which has forced all market participants, including the Company, to further adjust pricing to manage inventory levels. These pricing pressures have been compounded by set-top box manufacturers who have been slower than anticipated in launching new products. As a result, suppliers have been straddled with higher than anticipated inventory levels and high development costs that cannot be offset by next generation product sales. In addition to these pricing and inventory pressures, there has also been a shift in the industry’s supply chain dominated by Asian OEMs (original equipment manufacturers) and TV manufacturers are increasingly depending on manufacturing SoC and FRC (frame rate converter) components for high-end TVs in-house, reducing the need to look to outside suppliers for products. As a result of the above items, the Company has experienced continued operatinglosses which have resulted in declining cash over the past year.
It looks like there would be substantial value to the equity even if the company were to liquidate in bankruptcy. And while the intentions of the players involved are unclear at this point, the company may be attempting to reorganize itself as a pure IP licensing company, in which case there may be further upside. Let’s start with a liquidation analysis.
TRID’s goal is to sell off most of the operating assets of the company through the sale of the DTV and STB business lines. So that leaves current cash on hand and proceeds from those sales as their primary assets. There is also value in the remaining payment from the RDA Micro IP license and a note receivable from NXP.
According to Trident’s testimony at first day pleadings, the company filed with $55 million in cash. On their Q3 11 call, the company projected ending 2011 with $25-35 million in cash, inclusive of a $20 million sale/leaseback transaction on a facility in China that was completed in Q4. So it is not entirely clear where the extra cash came from. Part of the extra cash is a $7.5 million initial payment received from RDA Micro for an IP license. That still leaves $12.5 million above even the high end of their estimate. It is hard to imagine that the operating results came in that substantially above plan. TRID had said that NXP was going to loosen payment terms (TRID outsources manufacturing to NXP as part of the sale agreement), and they might have gotten some other vendors to stretch terms as well. If that is the case those increased liabilities will be accounted for in TRID’s stated pre-petition trade claims, although it is possible some of the extended terms also relate to off balance sheet purchase obligations.
So far TRID has only released cash flow projections for the two filing entities, which showed a cash balance of only $13 million as of January 16th. It appears then there is cash at other subsidiaries. TRID will begin filing both consolidated and entity-by-entity cash flow statements in February so we will have a better picture of their cash balance.
RDA Micro IP License Payment
On the day they filed, TRID also announced a $16 million IP licensing agreement with RDA Microelectronics. TRID has been paid $7.5 million and has yet to receive the remaining $8.5 million.
Sale of Set-Top Box Business
TRID will be auctioning off their STB business in a Section 363 sale process. Entropic Communications (ENTR) has placed a $55 million stalking horse bid for this business. The auction is scheduled to take place on February 23rd and a court hearing regarding the sale is scheduled for the 27th.
TRID provided stand alone financials for the STB business in their court filings on the asset purchase agreement with Entropic. The unit did $150.3 million in revenue and $34.6 million in gross profit from February to December 2010 and $95.2 million in revenue and $21.2 million in gross profit in the first nine months of 2011. Even if we annualize the 2011 numbers and assume $127 million in annual sales, ENTR’s bid is only .4X sales.
Beyond the current sales of the STB business, there is value for an acquirer in the IP and other capabilities that this unit can contribute to new chip designs. In both their PR and conference call regarding the stalking horse bid, ENTR made it clear that the STB business is an important strategic asset for them. In non-technical terms, ENTR’s main competitor in the STB business, Broadcom (BRCM), has developed a single chip that replaces two chips, while ENTR’s solution would still require that their customers buy two chips. (In technical terms BRCM is integrating MoCA into their SoC.) TRID’s STB technology will enable ENTR to develop an integrated chip to effectively compete with BRCM.
The stalking horse bid is low enough that the STB business will likely attract other bidders such as BRCM, STMicroelectronics (STM), or Asian players in the STB market. And given the strategic importance of TRID to ENTR I think it is likely they will be willing to pay more than $55 million if other bidders emerge.
NXP Note Receivable
As part of the NXP transaction, NXP issued a $20.9 million note receivable to TRID, which is good towards work-in-process inventory to be purchased from NXP (NXP serves as a contract manufacturer for TRID). Given that TRID will be selling its operating units as going concerns this note receivable should have value, although it is not clear