The company in question is Spark Ventures, once known as New Media Spark, which is in the process of selling off its investment portfolio and has a deadline of March 2014 to do so. It's making pretty good progress, having already returned £16.4m, or 4.1p a share, of cash to shareholders in the past three years. And, adjusted for those capital distributions, the company's net asset value (NAV) has risen by 66 per cent since October 2009 so the portfolio has performed pretty well, too.
However, despite sitting on a cash rich balance sheet, and one that is set to receive a significant boost in the weeks ahead, we can still buy shares in Spark Ventures (SPK: 9.5p) around 40 per cent below book value of 16p a share. Or put it another way, with the company only capitalised at £39m we are getting over £26m of assets in the price for free. Now that huge discount to book value would be justified if the 15 investments Spark currently holds (worth £58.7m) were of dubious quality. But this is clearly not the case as a fortnight ago, when Spark released its results for the 12 months to 31 March, the management team mandated with winding up the portfolio had some rather good news to report.
In fact, Spark increased the carrying value of its stake in semiconductor company Aspex from £3m to £7m and noted that there "is every expectation that a sale will be concluded in the near future." Aspex is a profitable enterprise producing annual operating profits of £775,000 on revenues of £3.5m. Chairman David Potter also pointed out that, in the past year, the value of Spark's holding in the world's leading music publisher, Kobalt, has risen by 69 per cent to £12.3m. Spark sold off 28 per cent of its stake for £3.5m last month, but still retains a holding worth £8.8m in a company that now controls a 14 per cent share in both the US billboard market and the UK singles publishing market.
If that was not impressive enough, Spark's stake in London-based internet market place, www.notonthehighstreet.com, has surged from £4.5m to £11m since September using the valuation Fidelity Investments bought in at as part of a recent funding round. Spark sold off 7.3 per cent of its stake in www.notonthehighstreet.com for £0.8m as part of that funding in May and retains a £10.2m holding so is well placed to capitalise on further upside from a business that now offers merchandise from more than 2,000 specialised UK-based retailers.
The investment case is even more compelling when you consider that Spark is a founder investor in Mind Candy, the company behind Moshi Monsters (pictured), a leading developer of skill-enhancing games designed to enable children to connect safely with each other in a social network. Moshi Monsters has a significant US and international client base in over 180 countries, boasting over 50m registered players worldwide and has the best-selling children's magazine in the UK. Spark sold half its holding in Mind Candy for £3.1m a year ago, but still retains a £3.2m investment (based on a £129m value placed on that business at the time) and owns a further stake worth almost £1m through its holding in Firebox, an online seller of gadgets, toys and games.
So, by my reckoning, Spark's cash pile could soon swell to around £19.3m once you factor in the proceeds of the imminent Aspex disposal; the recent sale of stakes in Kobalt and notonthehighstreet.com; a £1m loan repayment received from Aspex; and £7m of net cash on Spark's balance sheet at its March year-end. In other words, around 4.7p of the company's 16p book value will shortly be in cash, which not only mitigates risk in buying Spark's shares at 9.5p, but the 4.8p a share difference is more than covered by those holdings in notonthehighstreet.com, Kobalt and Mind Candy which have a combined worth of £23.2m, or 5.65p a share.
Spark Ventures Investment Portfolio July 2012
| Portfolio company name | Pro forma value (£m) | Pro forma value per share (p) |
|---|---|---|
| IMIMobile | 15.9 | 3.9 |
| Kobalt Music | 8.8 | 2.1 |
| Mind Candy | 3.2 | 0.8 |
| notonthehighstreet.com | 10.2 | 2.5 |
| OpenX | 2.5 | 0.6 |
| Firebox | 1.0 | 0.2 |
| DEM Solutions | 1.7 | 0.4 |
| Gambling Compliance | 1.8 | 0.4 |
| Aspex | 0.0 | |
| Academia | 0.9 | 0.2 |
| MBlox | 0.5 | 0.1 |
| Other Holdings < £500,000 | 1.0 | 0.2 |
| Total | 47.4 | 11.6 |
| Pro forma cash or cash equivalents | ||
| Balance sheet cash 31 Mar 2012 | 7.0 | 1.7 |
| Aspex Loan repayment | 1.0 | 0.2 |
| notonthehighstreet.com share sale | 0.8 | 0.2 |
| Kobalt share sale | 3.5 | 0.9 |
| Aspex share sale | 7.0 | 1.7 |
| Pro forma total cash | 19.3 | 4.7 |
| Liabilities | 1.1 | 0.3 |
| Pro forma net assets | 65.6 | 16.0 |
That means over £26m of investments are in the price for nothing, including a £15.9m holding in IMImobile, a highly profitable provider of the technology infrastructure for mobile data, voice and video services to mobile telecom operators and media companies.
It's worth pointing out that there is every incentive for the management team carrying out the disposals to get the best possible prices because they are entitled to 15 per cent of future distributions made to Spark shareholders once 11p a share has been paid out, falling to 5 per cent once 14p a share has been returned. That's potentially a £3m payout. It is also reassuring that non-executive director Michael Whitaker, who was previously founding chief executive of Spark, is one of the largest shareholders, with a 5.6 per cent stake.
Spark Ventures' director shareholdings
| Director | Shareholding | Percentage of issued share capital |
|---|---|---|
| Michael Whitaker | 22,832,153 | 5.57% |
| Charles Berry | 287,968 | 0.07% |
| Helen Sinclair | 242,400 | 0.06% |
| Andrew Carruthers | 6,587,240 | 1.61% |
| Jay Patel | 1,329,194 | 0.32% |
| David Potter | 480,000 | 0.12% |
| Total | 31,758,955 | 7.75% |
Spark Ventures' major shareholders
| Shareholder | Shareholding | Percentage |
|---|---|---|
| M&G Investment Management | 86,366,122 | 21.02% |
| RWC Partners | 45,874,424 | 11.16% |
| Michael Whitaker | 22,832,153 | 5.56% |
| River & Mercantile Asset Management | 18,688,466 | 4.55% |
| Ennismore Fund Management | 18,468,950 | 4.50% |
| Thomas Teichman | 16,434,138 | 4.00% |
| Lobbenberg Family | 16,350,000 | 3.98% |
| Henderson Global Investors | 16,312,500 | 3.97% |
| Ingot Capital Management | 15,250,000 | 3.71% |
| Total | 256,576,753 | 62.45% |
So not only are management's and shareholders' interests aligned, but with the portfolio performing well and disposals surpassing expectations, a further distribution to shareholders of 14.25p share, or £58m, over the next 18 months could prove conservative even after factoring in wind-up costs, management incentives and property liabilities. On a bid-offer spread of 9p-9.5p, I rate Spark Ventures' shares a strong medium-term buy.
