MRV Communications: Expect 75% Upside, Potentially More In A Buyout by Dane Capital Management
- Despite its recent run, shares of MRV Communications remain meaningfully undervalued at 0.9x EV/2015 sales, with a fair value, in our view, close to $30, 75% above current prices.
- The recently announced sale of its non-core Tecnonet S.p.A. network integration business should draw attention to its high-margin, growing, packet and optical solutions focused on the metro market.
- MRV is well-positioned in a rapidly consolidating industry. If purchased at the same 2.5x EV/2015 sales multiple as recently acquired comps Cyan and Transmode, shares would fetch ~$42, ~150% upside.
- Well-regarded activist fund Raging Capital owns 31% of MRV. We see a sale is the most probable outcome – fortunately, there are numerous multi-billion dollar companies that are potential acquirers.
- Catalysts for shares include its ongoing repurchase program, an appearance at the Craig-Hallum conference/research coverage, new program announcements, and eventually a buyout.
In the world of micro-cap stocks there are occasions when one finds oneself looking at a company whose valuation appears detached from those of its comps. We believe that MRV Communications fits this profile. In situations like this, we ask ourselves what the market is missing. In this case, there are several observations:
- MRV has no sell-side coverage,
- it was bulletin board listed for 5 years and out of date with filings for 6, and
- it has two distinct businesses until last week’s announced sale of its low-margin, low-growth Italian Tecnonet S.p.A. network integration business, which was obfuscating MRV’s higher margin optical networking business.
We believe this asset sale marks a seminal moment in the company’s history. Now, as a pure-play optical company focused on the metro market, shares should quick trade at levels of two highly relevant comps: Cyan, recently acquired by Ciena, and Transmode, which is being acquired by Infinera in a deal scheduled to close this week. Assuming MRV trades up to the same revenue multiple Cyan and Transmode were at prior to being acquired, shares would trade at about $30, 75% above current prices. If they are bought out for the same multiple, the price would be $42, not including potential additional value given their near $400 million in NOLs. Given Raging Capital’s 31% stake in MRV, the pace of industry consolidation, and the numerous multi-billion dollar potential buyers, we’d be surprised if MRV is still an independent company in 18 months.
We believe that as a pure-play optical supplier into the metro market, following the sale of Tecnonet S.p.A., investors will take notice of its similarities to Cyan and Transmode and award it a higher multiple. Further, with Raging Capital owning ~31% of the company, including upping its stake by 9% at the end of June, we believe the highly probable outcome is a sale of the entire company. Finally, while we are waiting, we are hopeful the company will receive positive research coverage as it reengages with Wall Street, and continues to use its excess capital to retire shares.
As value investors, we generally don’t like writing about stocks near 52-week highs, but we believe shares of MRV remain well below fair value, with catalysts that are likely to move shares higher in coming months. In addition, it’s a stock that we’ve been doing work on for almost 2 months, since Rimmy Malhotra of Nicoya Capital, a talented value investor, first introduced it to us and discussed it with us at VALUExVAIL in June.
MRV has a long troubled history, which explains why it’s not on many investors’ radar screens. It spent much of the early part of the 2000s on a spending spree, making acquisitions that exceeded $600 million in cost. The company’s massive NOL position, is in part due to sizable write-offs. In 2008, the company disclosed that its historical results could not be relied upon. On August 31, 2009, shares were de-listed after multiple warnings, when the company could not file financials in a timely manner. By 2010, 3 different groups, including Raging Capital, had filed 13-Ds on the company, for its egregious corporate governance. It wasn’t until March 19, 2014, that the company regained compliance and was re-listed on Nasdaq.
On December 15th, 2014, after a revolving door of different management, the company named Mark Bonney, a Board Member since 2013, and CFO since August 2014, as CEO. Probably not coincidentally, the company announced an $8 million repurchase program the following day. The program is more than half completed.
When we first started looking at MRV, they had two business units, a low margin, low growth, network integration business that was focused on Italy, and a high margin, faster growing network equipment segment that had recently introduced new optical transport solutions that offer a full end-to-end solution to customers.
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