ACME Communications: A Special Dividend Story - ACME

ACME Communications is in slow motion liquidation. In 2002, ACME owned 11 TV stations. Since, the company has been gradually selling off its stations and paying special dividends with the proceeds. On September 10, the company announced the sale of its final three station broadcast licenses and associated station assets for $17.3 million.

License transfers for the three stations requires FCC approval. The company expects to receive the go-ahead for the license transfer in late 2012 or early 2013. (I view the risk of any delay as extremely low, given the small size of the buying and selling parties. There is no market concentration or monopoly issue at hand.) After the transaction is completed, ACME "plan[s] to distribute virtually all of our cash to our shareholders," said CEO Doug Gealy.

ACME Communications has 16.047 million shares outstanding with a current price mid-point of $0.86. Assuming the company dividends the entire $17.3 million to shareholders, the dividend will be $1.078 per share, or 24.5% higher than the current market price. (While the tax status of this dividend can't be fully determined in advance, previous special dividends from station sales have been treated entirely or almost entirely as returns of capital due to the company's accumulated losses and minimal current profitability.)

This dividend calculation ignores possible frictional transaction expenses like legal fees, but also ignores the $528,000 in cash on hand the company reported in its June 30, 2012 quarterly report. Taxation will not be an issue for the company as it had over $33 million in net operating loss carryforwards as of December 31, 2011.

A buyer of shares at the current price stands to realize a handsome rate of return when the special dividend is received, both in absolute and annualized terms. But the story isn't over. ACME Communications has one remaining asset, its live morning news show The Daily Buzz which it produces and distributes to 200 TV stations nationwide. The company is presently seeking to sell this asset and finish the long liquidation process. Fisher Communications owns an option to acquire The Daily Buzz which was set to expire on September 30, 2012. The company has not yet disclosed whether or not Fisher exercised its option. Whether Fisher Communications or another company acquires The Daily Buzz, any amount received will represent value for shareholders above the already substantial dividend expected from the stations sales.

Risks to the scenario include the possibility that the FCC will delay or block license transfers or that the buyers will renege on the agreements made. I view these risks as minimal, due largely to the company's historical success in selling its assets smoothly and without issue. The current market discount to a the conservatively estimated size of the upcoming special dividend can likely be explained by the company's tiny market cap ($13.8 million) and limited liquidity. What's more, this opportunity is too small to be exploited by arbitrageurs in the hedge fund community, leaving a nice opportunity for individual investors or smaller funds.

Disclosure: No position, may initiate soon.