Premier Exhibitions, Inc. (PRXI): The Great Bull Vs. Bear Debate On Premier ...

Before the debate begins, I would like to ask readers whether or not you agree with the resolution. Do you? Please indicate your view here.

To debate the question before the house, I turned to PRXI bull Whopper Investments and bear Squeeky Wheel.

First Whopper, who discussed PRXI in an article published earlier this year:

The operating business certainly has some value, though the poor recent results suggest it has much less than I had previously believed. I would peg it somewhere in the $20m range, or just less than 1x sales.

I think the Titanic assets are worth $100-120m and take roughly 9 months to monetize. Maybe I’m crazy, but I just can’t see how such iconic assets are selling for less than $100m given the valuation it seems gets put on all “trophy” assets in this day and age.

Your telling me some uber-rich oil prince from the mid-east wouldn’t pay that much and then park them in a museum with his name on them? In terms of time line, it took them roughly 9 months to find the original buyer (who backed out), so I would think restarting the process takes a similar amount of time. I could see arguments for both shorter and longer amounts of time, but I think 9 months is a good ball park.

A recent commenter on another article mentioned the idea of “merging PRXI and OMEX into a global powerhouse of random underwater crap”. Thoughts?

I have literally no idea what OMEX’s business model is aside from the recent short pieces on the company, so I’ll refrain from commenting on this question for the most part. I’m guessing a merger would need to be an all-stock deal given the state of both companies’ balance sheets, and given how undervalued I feel PRXI is I would guess the said merger would create huge value for OMEX and destroy value for PRXI.

Now I turn to Squeeky Wheel, who has also written about PRXI:

Should management be replaced?

Yes. The early RMST management was a terrible choice. They managed to anger most of the enthusiastic Titanic fans who 1) keep up the public interest and 2) might have the connections and interest to incentivize a buyer – in some cases, like James Cameron, they might have been buyers. The attitude was far too focused on short term profit at the expense of preservation, and angered those interested in the Titanic’s future. Fortunately the RMST management was eventually replaced and relations with the community have improved. But how much did that set back a potential sale just a couple years later?

The 100th anniversary sale was an unmitigated and preventable disaster. First, management should not have hired a second tier auction house for the biggest auction of the decade. Why wasn’t Sutherby’s running the auction? Or Christy’s? I can only presume, but it appears that PRXI management tried to cut costs and ended up with an auction house that couldn’t deliver the bidders. While a sale of RMST has a number of constraints, those two houses have dealt with many ‘unique’ circumstances.

Once met with the auction, management should have been prepared to lower their price if bidders didn’t meet it. The 100th anniversary was the best possible time to sell. The recovery was (relatively) recent; the movie was still in the minds of the public; ticket sales for Titanic exhibits were at their peak – likely ever. Whatever the top bid at the auction was, it was likely the best they’ll ever get. Failing to realize that and lower the reserve price suggests irrational greed on the part of the management; they may have made themselves into the greater fool.

Management has yet to demonstrate that they can reliably turn a profit on exhibitions outside the special circumstances of the Titanic anniversary. The exhibit industry is essentially museums. My understanding is that no museum is profitable – all depend on government or philanthropic support. Management don’t have museum, exhibition, or similar event experience, why should we believe they can buck this trend? The board should be looking for someone who has managed to run a museum with an operational profit.

A quick read of the management background shows that PRXI is run by hedge fund owners/managers. Weiser is an accountant with extensive ties to hedge fund industry and particularly Sellers. It appears that Weiser was appointed not for relevant experience but for good connections. The same is true of the other executives.

Interestingly, the independent board members are all media – mostly music industry – people. While this is obviously relevant to the creation of the exhibits, someone with extensive experience in arranging the shows seems to be lacking.

Weiser’s pay seems nearly astronomical compared to recent performance. Base pay was $360k (not so bad); he was given a retroactive bonus of $140k on renewing his contract; stock options were $700k (these are likely worth less now). Additionally, Weiser was paid $100k in consulting fees for consulting provided by his personal firm. Why on earth does a CEO hire himself to give consulting services – what possible advice could he give the company which is not covered by his position? I have to count this as an addition to his salary.

Will they be replaced?

No. The largest shareholder is Sellers. He controlled 40% in mid year but recently distributed 6% to investors in his funds, leaving him with control of 34% of the stock. Given that he appointed his friend, I doubt he’ll vote for a replacement. Greggory S. holds about 6% and is clearly riding his emotions and is in favor of the current management (though perhaps that could change).

Does the operating business have any value? If so, what?

No. As mentioned earlier this is a travelling museum business run by people without background. Looking over the last few years, PRXI has only managed to be profitable during the Titanic anniversary. Thus a pessimistic valuation of the operating business is negative.

What are the assets worth?

No one has any idea. First, these are depreciating assets. They are expensive to maintain and require an endowment of $5million, creating a high cost of capital. The asking price of $189 million has proved to be outside what the market will pay, so we can start with “less than $189 million”. I suggested that they are cash flow negative over the long term, so discounted cash flow can’t be used to value them. I keep think of the Belitung wreck recently brought up from Indonesian waters. It’s not a very close comparison – it’s even close to as well known, but the historic/archeological value is much higher – but at least the Smithsonian was interested in exhibiting it. The Belitung wreck was sold to the Singapore Tourism Board, funded by an Asean philanthropist for about US $30 million. The STB placed it in a maritime museum attached to a casino. Let’s take that as a lower bound. A brief search suggests that museum purchases at this scale are not common. And unfortunately, there is just nothing truly comparable on which to estimate a price. I’ll go out on a limb and suggest a monetized value of 50 to 100 million. But that could be wildly wrong. Being lazy, I looked back at my discounted cash flow article. I had a table for 100million. Taking that, and removing 0.50 to adjust for a negative operating value, it looks like a sale is needed in less than 5 years to make the current price worthwhile.

What is the route and timeline for monetizing them?

No idea. The OMEX salvages are not relevant here. Those are cases of a nation giving away salvage rights where there is a commodity asset to sell. While OMEX pulls up unique wrecks, it concentrates on readily monetizable assets – it earns profit on silver and other precious items not protected by court order.

Instead, the Belitung wreck is a better example – we are looking at a philanthropist helping a government or non-profit to acquire and display the Titanic for the public interest. In the case of a government, similar to STB, there might be knock-off economic value to nearby business, thus a community/government purchase makes more sense than a corporate entity. Thus the timing depends on when some philanthropist feels like spending 8-9 figures on this item.

I can’t figure out who would be the most likely government/community to take interest. The British Maritime museum? Belfast? Who among the super rich are over the top Titanic fans? James Cameron is one – National Geographic mentions he is familiar down to details of descent slopes, material stress ratings and so on – who might be interested in preservation in a structure which allows academic study. Who else?

Does the “global powerhouse of random underwater crap” have merit? Should PRXI merge with OMEX?

PRXI is now out of the marine salvage acquisition business. OMEX is not in the salvage display business. A partnership or merger could be very interesting to both. PRXI could use a good source of historically interesting stuff to display, which OMEX could provide. OMEX would benefit from monetizing more than just the commodity recovery. I don’t see much cost-cutting synergy – operationally there is no overlap between them now. I don’t see the benefit for OMEX of a merger over a partnership. As a merged entity, OMEX would take on considerable risk related to RMST and the difficulties of the exhibition business. As a partnership they could either sell, or take royalties on, assets they would otherwise get nothing from. Why take on more risk than necessary. It could provide nice branding for PRXI – the world leader in exhibiting sunken wrecks. Is that a valuable brand? As a sailor and diver, I’m highly biased. Are their enough sailor-divers to make it profitable? Another interesting merger could be PRXI with Seabed Explorations (who pulled up the Belitung wreck) in NZ. At least Seabed has experience selling historic wrecks!

If a merger were pursued, who should be the combined company’s CEO? What should the new company be named?

I don’t see a OMEX merger happening. PRXI is trying to be more than just one exhibit, so I think a partnership is more sensible than a merger. A Seabed merger would likely end with PRXI as the head, simply for size reasons. However, we might argue that Seabed is far more successful at monetization, and hence they should head the merged company even if that’s an unlikely result.

Squeeky Wheel, any reactions to Whopper’s points?

Ironically Whopper uses the same value I used in the PRXI-bear article. The issue however is that some oil prince is unlikely to have a sufficiently reputable science team to meet the NOAA requirements for an owner. And it turns out that buying a science team is not easy, as the Qatar campuses of various US universities found out.

My concern on the down-side is that PRXI runs at a loss, can’t find a qualified bidder with money and ends up in a fire-sale. It’s not clear to me that PRXI ever found a qualified bidder with money. My guess is that they’ve found one or the other. That said – one could show up at any time. I would vote for more than a year, perhaps more than five, but that’s all guessing.

Whopper, would you like to take issue with anything that Squeeky Wheel said?

Looks good to me. I think Squeeky Wheel makes some great points!

I am grateful to both participants for their time and attention to this project. Now that readers have had the chance to hear from a top investor on both sides of this debate, I would like to turn to them again to see if any opinions have changed. Has yours? Please answer here. We vote for fun, but the real test will only be answered over time – whether or not this has a positive expected value and is a worthy addition to a long-term, adequately diversified portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)

Premier Exhibitions, Inc. (PRXI): The Great Bull Vs. Bear Debate On Premier ...