Special Situation Investing

Friday, November 10, 2006

Services Acquisition Corp (SVI)

A reader, Adam Chud, brought to my attention Services Acquistion Corp (SVI). While the situation isn't really for me, it does have potential so I thought I would pass it on.

SVI is a "blank check company", formed and financed with the sole intention of making a promising acquisition. The company has had it's sights set on smoothie-maker Jamba Juice since March. This is essentially a buyout labeled as a merger. SVI will take control of Jamba for $265 M in cash.

To obtain the cash they have a PIPE agreement with a number of hedge funds (including Soros Strategic Partners) and other investment firms whereby 30 odd million shares will be issued for $7.50 a pop. This was negotiated back in Spring of this year. On top of this, there are a number of outstanding warrants which will cause further dilution at $6 per share. All told, if all warrants are exercised, after the deal goes through you will have ~66 M shares outstanding, and ~$200 M cash remaining with no substantial liabilities. SVI, is currently trading for around $10.90/share, so this will give you a market cap of $720 million, offset by the $200 million in cash

In the year ending, June 2006, Jamba had $253 million in revenue, $6.7 M operating income, $3 M net income. Revenue has been growing at roughly 20% / year over the last 4 years. So at current prices you are paying close to 3x revenue for a 20% grower but with little earnings.

This is where I get stumped on it. 3x revenue is not bad, especially if management can turn earnings around which seems likely. SVI management has previous experience with Blockbuster and seems capable. However, at current prices there just doesn't seem to be the fat discount I like to see. To see a significant pop you are going to have to have a continuation of the 20% rev. growth and a turn-around in earnings. On the flip-side you have a long-ways down should the deal fall-through or the company turn out to be a dud. However, do your own research, if Jamba reallly is a killer franchise this would be a great opportunity to get in at a reasonable price.

Motley fool has a great and free article on SVI here.

You can get some good info on Jamba and the details of the deal from SEC filings here.


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