An interesting third party news release on Redline Communications (TSX: T.RDL, Stock Forum) hit the wires late Friday night. It was a forced disclosure because Vecima Networks (TSX: T.VCM, Stock Forum) went over 10% (ownership status) as they've been quietly accumulating RDL in the open market. From the news release:
Vecima Networks Inc. has acquired common shares of Redline Communication Group Inc. through the facilities of the Toronto Stock Exchange, following which, Vecima now owns 1,742,600 or 11.37 per cent of the common shares of Redline Communication Group (based on 15,327,140 common shares reported by Redline Communication Group as outstanding).
The shares were acquired for investment purposes. Vecima believes its investment in Redline Communication Group will ultimately pay off as the financial markets stabilize and technology roadmaps become clearer with Redline Communication Group. Vecima Networks, which is acting alone in its investment acquisition, may increase its investment to less than 20 per cent of Redline Communication Group's common shares. Vecima Networks has no confidential information with respect to Redline Communication Group.
It is not hard to understand why Vecima is buying and why it is very likely it could take a full blown run at RDL, or someone else will step in during 2009 and buy RDL out for something close to cash value. If this occurs, the acquiring company picks up world class technology, the inventory, the large client base, the frequency licenses, and almost $30 million in revenue. If you combine this with the synergies of another well run tech, the purchasing company (someone like VCM) is literally stealing the company out from under them.
Consider the following:
Redline for the period ending June 30/08
Cash: $15 million
Accounts receivable: $16 million
Accounts payable and all loans: $12 million
Inventory: $13 million
Shares outstanding: 15 million
Theoretically if you liquidated RDL near year end they should have close to $15 million in the bank ($1.00/share) + another $13 million in inventory. That’s in addition to having what appears to be some of the best WiMax technology and hardware on the planet - which generates almost $30 million in annual revenue.
Yet the stock is trading volume at 30 cents - which means it has a market cap of $5 million.
Vecima is a very well run (20 year old) technology company with 900 employees. Annual sales are in the range of $120 million and the company is profitable. The company designs, manufactures and sells products that enable broadband access to cable, wireless and telephony networks.
In addition, they have a WiMax division but it’s possible their technology cannot compete with Redline and they recognize the synergies that could be created here. WiMax is forecast to be a large growth industry in coming years.
I suspect Vecima will try to keep accumulating RDL from under them. Senior managers of RDL are now at risk of losing their jobs. With this forced disclosure I will not be surprised to see RDL go into defensive mode which means they must either get their share price dramatically higher, or quietly put it on the market.
Either way you slice this one, the current price range offers tremendous value that well run companies like Vecima recognize.
MicroCap.com establishes a Virtual VULTURE FUND - Targeting $3 billion in cash rich MicroCaps
This has been the most devastating market of the century and while it has created tremendous financial hardship, it may have also created amazing opportunities. Smallcap and microcap companies that were beaten beyond recognition (and beyond cash value) may provide tremendous investment opportunities over the next 12 to 18 months.
Cash is currently king and as credit markets and venture capital remains tight, those companies sitting on very large cash positions are clearly in the drivers seat.
Through our paid newsletter (MicroCap Premium) we have set up a "Virtual" MicroCap Vulture Fund. We will be tracking 63 Canadian Microcaps with $15 million to $200 million in net cash and investments (after removing debt). Surprisingly, the total cash available to this group is over $3 billion!
The huge majority of these companies are trading far below cash value. Our thought process is that if they control burn rate, we are simply buying discounted cash. We have filtered out many companies with significant offsetting liabilities as we do not want the risk of debt involved.
Just one such example of the powerful leverage these companies provide - last week we featured Phoscan Chemical (TSX: V.FOS, Stock Forum) to paid subscribers at 26 cents. Although it’s now risen almost 30%, they have approx. $70 million in the bank (46 cents/share). In June, they closed a $55 million dollar financing at $1.90! Those poor investors have lost 86% of their investment in four months but we have already gained 30% in a week.
Once these markets stabilize, this basket of stocks has the potential to generate dramatic returns. This is a market environment we haven't seen in the history of the TSX and the rules that have applied (and often worked) with penny stocks in the future, no longer apply.
We will be publishing on Stockhouse the 1st and 3rd Monday of every month and hoping to feature some of these companies. For those who prefer to see the entire list and start their own research early, subscription information to MicroCap Premium can be found on our website at www.microcap.com (annual cost is C$154).
RDL mentioned above is one such company in our Virtual Fund.
Read more Stockhouse articles by Danny Deadlock.