Summary
- Double your money or more in the next few years.
- Capital return and aligned board and management.
- New SFE is not what you remember, and it matters a lot.
Safeguard Scientifics, Inc. (NYSE:SFE) has been a poster child for misalignment for as long as I can remember. It had massive overhead and an entitled management/board that took home huge amounts of cash regardless of stock performance. On top of that, the public market is not a great place to get full value for minority venture investments. Look no further than MVC which shifted from a venture portfolio to a private equity platform only to find the same issue and more recently tried to pivot to yielding investments in an attempt to get fair value for its assets. Ultimately, it agreed to sell the company this year!
All of that has changed and the new SFE is an investable portfolio of discounted venture positions that will be liquidated by a competent and aligned management/board.
To invest in SFE, you have to believe the portfolio is worth $12-$20 over the next few years. Equally important to me believing that the culture and thinking have drastically changed at SFE. I anchor my belief on the actions taken over the last 12 months to return capital to shareholders, shrink the board, reduce overhead, and explicitly convey a strategy of winding down the portfolio as prudently as possible. The thesis rests squarely on the shoulders of the newly hired chief restructuring officer, Eric Salzman, and board member, Joe Manko. As an activist, Joe led the efforts to reshape the company, and Eric is tasked with figuring out how to best monetize the portfolio.
Below I explore what Safeguard may be worth in the coming years.
Safeguard's latest presentation has a list of the portfolio companies and a description of most of its businesses. Some of the slides may look familiar to people who have seen SFE presentations before. The difference today your investment is not being burdened with tens of millions of overhead and the company is in the process of liquidating the holdings and giving you the value back. A very different SFE indeed.
Some reasons to take a second look at SFE:
- Safeguard has an attractive portfolio of tech-enabled healthcare, digital media and companies.
- It is pursuing a focused strategy to maximize value and monetize its ownership interest..
- The company continues to reduce costs.
- Management and board compensation is now aligned with shareholders' interests.
- It has committed not to invest in any new companies.
- Most of the portfolio companies are nearing natural exit windows.
- Two companies are in the process of being sold.
- Three portfolio companies have term sheets for additional financing which may shed some light on their value if announced publicly.
Valuation is a challenge and depends on timing and end markets. However, there is a good argument it can liquidate the interests in the next three years and achieve proceeds (net of operating costs) over $12 with upside up to $20+ if the stars align for a couple of its innovative and rapidly growing portfolio companies.
Proceeds from all sales should be sheltered by the company's $300mm of NOLs, so values are roughly equal to the after-tax proceeds.
Book value does not give a good picture since most of the portfolio companies' losses run through SFE's balance sheet and reduce the GAAP book value of its holdings.
