Rubicon Technology trades at an eensy-weensy discount to net cash, with some real estate thrown in for free. The previous CEO followed a strategy of selling dollars for 80 cents. This strategy was more popular with customers than shareholders. Fortunately, the board of directors fired prior mismanagement in favor of Timothy Brog, who hiked prices and downsized left, right, backwards and sideways.
Rubicon plans to use the losses reaped by prior mismanagement to shield future profits from taxes. Brog milked the legacy sapphire operations for cash, and built up a substantial war chest, with the idea of using it to buy up other companies, which will (hopefully) make tax free profits. The US corporate tax rate is 21%, so the earnings of anyone Rubicon acquires will instantly grow by 27%.
Timothy Brog used to run an investment bank, so I imagine he gets plenty of phone calls about
potential acquisitions, and since he's run a value investing activist hedge fund for 15 years, I doubt he'll overpay for the latest shiny fad.
So far, he has closed on a deal to buy Direct Dose Rx. The purchase price? After a bit of rounding, $0. Rubicon bought Direct Dose off of the corpse of Wellfount Corporation, which raised $50 million from investors, made several "fastest growing innovator" lists and reached peak revenues of $20 million.
Wellfount's main business was putting RedBoxes in hospitals and nursing homes, but with prescription drugs instead of movies. This worked until it didn't - pharmacies caught on and built their own vending machines. Meanwhile, Brog gleefully took Direct Dose off Wellfount's hands. Direct Dose made up only 10-15% of Wellfount's revenue, and it wasn't the part that went bad. Timmy and his BrogBots will need to restart Direct Dose from scratch, so this is somewhere between a startup and a distressed takeover.
And now to the fun part, the Breakdown by Division:
First, let's get the carcass of the old sapphire business out of the way. This is no one's idea of an economic franchise, but at least it spits off more cash than it takes in. In a true stroke of genius, Rubicon's new overseers started requiring positive gross profit margins on new contracts, but that doesn't show up as profits because they're liquidating antediluvian inventory at a loss to free up cash.
The sapphire business uses an unpronounceable technology that creates a quality advantage, but price is all customers care about. The balance sheet shows $2.8 million of inventories and accounts receivable for this division, as well as well as $2.7 million in property plant & equipment. Using highly sophisticated DCF analyses, I arrived at a value of $5.5 million. That might be on the high side.
Second, they own a tract of land in Batavia, and a 65,000 square foot plant in Malaysia. They're trying to sell these, but Batavia isn't the most exciting place to do business, and Malaysia is a bit too exciting. The accountants say it's worth $4 million.
Third, they own 25 million crisp one dollar bills. Take cash, subtract $1.5 million in total liabilities and you're left with $23.5 million in net cash, compared with a market cap of $22.5 million. Add in real estate, inventories, and accounts receivable and you get $33 million. Since they can reinvest the cash tax free, the cash is really worth in the neighborhood of $30 million.
Now, time to talk about the acquisition. Direct Dose Rx mails prescription drugs to sick, dying, and very old people. Specifically, Direct Dose Rx contracts with hospitals and nursing homes to send drugs to patients being discharged, under contracts with the institutions. Timothy Brog's minions check up on these poor people every few days, and when the meds run out, the BrogBots ask the customer if he (or she, you never know) would like the Overlord to send next month's pill pack. From there on out, autorenewal takes over.
Direct Dose conveniently packages drugs by dose instead of by med. Instead of going out of their way to fulfill traditionally packaged prescriptions at Walgreens or CVS, subscribers magically find meds in the mail whenever they run out. Since Direct Dose doesn't have to lease huge stores and hire clerks to populate them, I believe Direct Dose's subscriptions are cheaper than filling prescriptions at traditional pharmacies, though I'm not 100% on this. Direct Dose Rx serves two constituencies:
Sick or chronically ill people
Hospitals and nursing homes
The sick people stick with the service for convenience, but hospitals and nursing homes like it for a different reason. Sick people returning from captivity feel fine enough, after being doctored up. What's another couple of days? Besides, if I start feeling sick again, I can always make a quick trip to Walgreens. I deserve a break, and my favorite Netflix show just released a new season. This line of reasoning sends hospitals straight back to square one, wrecking readmission stats. For nursing homes that want a helping hand, Direct Dose Rx steps in, earning a nice cut.
It doesn't take much capital to grow a mail order pharmacy, so Direct Dose Rx could generate free cash even as it expands. Direct Dose has recurring revenues, nice margins, and an excellent value proposition for both the sick people and the hospitals. Under new management, Direct Dose intends to offer its services to retail customers as well as patients discharged from institutions. This gives it a shot at growing much larger than its predecessor. As Sir Tim said in a press release, “Although this type of transaction was not exactly what Rubicon was looking for, the low risk and high rewards of this investment are compelling.”
Rubicon isn't going to make any of us millionaires, but it's a decent cash replacement, especially with Brog allocating the cash. Rubicon is ideally placed to capitalize on a recession, as it could buy up companies on the cheap and cut out the taxes. We pay for the cash, and get Direct Dose Rx and the real estate for free. Meanwhile, Rubicon is busy buying back shares.
Jeff Gramm, Timmy's pal and the author of Dear Chairman, owns 9.5% of Rubicon through Bandera Partners. My only concern is the BrogBots...
I own shares of RBCN.
