1. 1 Asset Value Analysis Chris Argyrople, CFA Concentric

2. 2 TCI Ventures (TCIVA) 11/10/97

3. 3 TCI Ventures (TCIVA) 4/6/98

4. 4 Is there Arbitrage in TCIVA? Publicly traded securities are worth $24.43 and the stock is trading at $23 PLUS, the value of the other stakes TCIVA has no debt and some cash Bull Case: there is arbitrage and the discount will narrow Bear Case: holding company structures deserve to trade at a discount due to their inefficiency

5. 5 What about the Tax Issue? This analysis is not complete without knowing TCIVA’s cost basis in these firms. The real value per share is the after tax equivalent, not the pre-tax. Does the tax issue invalidate the analysis? Probably not, because John Malone is famous for not paying taxes. TCIVA probably could obtain a tax free spinoff in all these entities, realizing the arbitrage value.

6. 6 There is still Risk, Discount or Not

7. 7 “Stub” trades “Stub” trades isolate the arbitrage opportunity by shorting out the publicly traded stakes in the proper share proportions. For TCIVA, you could short all 5 publicly traded stocks to isolate the 20+% discount. Note that shorting out the stocks is not risk free either because the discount could widen or you can lose the borrow.

8. 8 Stub Trades, Review TCIVA (parent) shares 460 TCGI shares 49.79 49.79/460 = 0.11 ratio Current Prices 4/13/98: RN $29 NA $51.75Stub = - $4.38 YOU GET THE TOBACCO FIRM FOR NEG. $4.38 !!!

9. 9 Benjamin Graham Trades Legendary Ben Graham said that you should try to buy stocks that are trading at less than net working capital. Purchasing a company less than liquidation value means you get the company for free. Since the market is picked over, there are not too many of these out there nowadays. Key: Positive Free Cash Flow (or not neg.)

10. 10 Harding Lawson (HRDG) Apr. 96 HRDG was an E&C (Engineering & Construction) firm trading at a discount to Current Assets - All Liabilities Was there a catch? The firm had thrown off free cash flow, historically at least. A call to the company indicated a significant downturn in business, and a few quarters of slightly negative FCF was likely

11. 11 HRDG Balance Sheet

12. 12 HRDG sells < Liquidation Value April 1996, HRDG was selling for less than liquidation value. CAVEATS: The carrying amounts on the balance sheet may be flawed, or maybe some of the cash is restricted etc. Maybe you can’t collect all the recievables, or maybe the inventory needs to be written down.

13. 13 Rules of Thumb (some at least) Ben Graham stocks are awesome if Free Cash Flow is Positive If the company is burning cash, then the asset value is not a valuation floor. NOTE: CASH BURN IS NOT THE SAME AS FREE CASH FLOW. Cash burn is the net cash receipts less net cash outlays. Companies burning cash have deteriorating balance sheets.

14. 14 Weaknesses of Traditional Measures HRDG is an example of where Enterprise Value is not the best valuation metric. It is better to compare the value of the stock to Current Assets - All Liabilities. HRDG is also an example of where Free Cash Flow could be misleading. Big CAPEX projects could eat into the $17 million cash they have on the balance sheet. REMEMBER, EXPANSION CAPEX MATTERS TOO.

15. 15 Historically HRDG Positive FCF Check out the differences between Free Cash calculation and Cash Flow pre- Financing -- Acquisitions can be large

16. 16 Gantos (GTOS) Another Value Play Like HRDG, GTOS was selling below balance sheet liquidation value As of 5/3/97, Working Capital - Net Debt was $2.50 per share. The stock got as low as $2 offered during summer 1997. Was this stock cheap? New Mgt that said the old management stunk (5 straight years of same store sales declines).

17. 17 Was GTOS cheap? Under the “lousy” management: –7.6 million shares –12 million debt –EBITDA $11 million –FCF $4 to 5 million easy at $11 million EBITDA –lots of NOLs -- not a taxpayer –this company could have minimal CAPEX. OVER $0.50 OF FREE CASH FLOW, THIS LOOKED CHEAP, BUT, WITHOUT A SAME STORE TURNAROUND, IT GOES TO ZERO

18. 18 GTOS Balance Sheet

19. 19 GTOS Same Store Sales

20. 20 Gantos Update 4/6/98 Current Assets$50.6 Current Liab$16.2 Debt$27.4 Net$ 7.0 Shares7.6 million Ben Graham Value$0.92 / share Price a few days ago = $0.32 (today = 0.50)

21. 21 Gantos Lesson Lousy Management Same Store Declines Asset Value CASH BURN RULES OVER ASSET VALUE No bargain unless a turnaround (then the stock would be up huge)