XLMedia a Safe Bet
My First Foray into Special Situations
Warning: The following article is for informational purposes only and should not be considered as investment advice. The author is not a registered financial advisor and does not provide investment recommendations. Any investment decisions you make should be based on your own research and analysis.
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Stock: XLMedia
Ticker: LON: XLM
Share Price: £0.12
Market Cap: £30.78 million (US$39.77 million)
Summary
XLMedia, an AIM-listed gambling company, that previously operated in the US, Canada & EU. Following a strategic review, the company decided to sell all its operating assets and transition into a cash shell. XLMedia plans to distribute its available cash to shareholders and complete its wind-down by May 2025.
Based on my estimates:
If no contingency payments are received, XLMedia is expected to return 10% to shareholders, equivalent to a 21% internal rate of return (IRR).
If the full contingency payments are achieved, the return could increase to 40%, representing a 96% IRR.
How we got here
In March 2024, XLMedia announced the sale of its EU and Canadian assets for $42.5 million [1]. This deal included $37.5 million in fixed consideration and a $5 million contingent payment, contingent on business performance, payable one year after completion (April 1, 2025). The board projected net proceeds from the fixed payment at approximately $35 million after transaction costs [2].
On October 21, 2024, the company disclosed the sale of its North American division for $30 million. This amount consisted of $20 million payable immediately and a $10 million earn-out due in April 2025 [3]. The transaction closed on November 13, 2024, with the company receiving the initial $20 million payment [4]. Following the completion, XLMedia expects to net approximately $18 million in cash from the upfront payment after deducting transaction-related fees [3]. The earn-out component will depend on the division’s revenue and gross profit performance in the 2024 financial year, with full payout requiring the business to exceed current market expectations [3].
With the completion of these sales, XLMedia will no longer have any operating businesses. The company announced plans to transition into an AIM-listed cash shell, with the primary goal of receiving final payments and returning capital to shareholders. The company aims to delist by May 2025, with an additional six months allocated for share cancellation. The board has expressed hopes of making the first shareholder distribution by Q4 2024 [3].
The Numbers
The financial outlook is as follows:
Current Market Cap: $40 million
Fixed Payment Net of Costs (EU & Canada): $35 million
Fixed Payment Net of Costs (USA): $18 million
EU Contingent Payment: $5 million
US Contingent Payment: $10 million
(Estimated)Residual Costs/Tax Settlements: -$8 million
Net Without Contingent Payments: $45 million (12,5% upside)
Net With Full Contingent Payments: $60 million (50% upside)
Internal Rate of Return
In the summary of this article, I estimated an internal rate of return (IRR) between 21% and 96%, assuming all cash is distributed roughly six months from now. However, the actual situation is more favorable. XLMedia is expected to receive most of the payments by the end of this year, and the board has indicated its intention to make an initial distribution to shareholders by Q4 2024[3].
This means investors could recover a significant portion of their investment relatively quickly, leaving only the upside potential in the stock
The Board intends to make an initial distribution to shareholders from available capital in Q4 2024, the amount of which will be determined after providing for the ongoing costs and working capital requirements of the residual runoff business and outstanding liabilities (including historical tax liabilities). Further details of this distribution from capital will be published by the Company at an appropriate time.
As of H1 2024, XLMedia reported $19 million in cash and short term investments on its balance sheet. With an additional $10 million received on October 2 and $18 million (net of deal costs) received on November 12, the company’s cash balance would increase to approximately $47 million. After accounting for legacy tax costs and retaining some cash for working capital needs, it seems reasonable to expect XLMedia to distribute an amount north of $35 million in cash. This represents roughly 87% of the company’s market capitalization at the time of writing.
This means that purchasing XLMedia today carries very low opportunity cost. Investors could recover most of their purchase price within approximately one month, leaving only a small amount of capital invested to capture the remaining upside. This remaining upside is expected to materialize within six months.
The remaining upside consists of three potential payments:
Fixed Payment for the EU Business: A final $7.5 million payment due on April 2, 2025.
Contingent Payment for the EU Business: A possible $5 million payment, contingent on performance, also due on April 2, 2025.
Contingent Payment for the American Business: A potential payment of up to $10 million, based on business performance, scheduled for April 30, 2025.
Residual Cash: Any leftover cash on the balance sheet, once there is no further need for working capital, will be distributed to shareholders.
Appendix - Sources
[1] Divestment of Europe and Canada assets - [link]
[2] Completion of divestment of European and Canadian assets - [Link]
[3] Proposed divestment of North America Business - [Link]
For received cash see part 4. Use of Proceeds
For details on the contingent payment see section5 Summary of the Main Transaction Documents
[4] Completion of North America Disposal - [Link]
The risks are mainly centred on the execution of the settlement and the reliability of the management in the repayment of capital. The "market" seems to be rather sceptical here. Whether rightly or not is the question.
Would the negative working capital not have an impact on your calculations?