Friday, February 10, 2012

GSVC Update

So I noticed that GSVC is down 20% into the $15 range as they priced the follow-on offering at $15.00/share.   The stock is trading now around $15.80/share, down from $19.50 yesterday.

Why did they price this so low below the closing price?  The registration statement had an assumed price of $18.75 or something like that, so I'm not sure why they priced this so low.  Maybe they feared problems (lawsuits) down the line if they sold stock at more than a 40% premium to net asset value per share (NAV).

Anyway, I don't intend to update things for every little detail, but since this is a big event I figured I should update the situation here.

GSVC sold 6 million shares at $15.00/share.  Gross proceeds were $90 million but since the gross spread (underwriting fee/sales load) was 7.49%, net proceeds to GSVC was $83.3 million.

So before the offering, there was 5.52 million GSVC shares outstanding and a NAV per share of $13.26.

Since the stock was offered at above NAV, this was *accretive* to NAV, which is good for current shareholders (but it is dilutive to new buyers who buy stock on the offering since they are paying *more* than NAV).

Let's see how this changes the structure at GSVC:

New shares outstanding:     11.5 million
New NAV:                            $156.5 million
New NAV/share:                  $13.61

So this deal increased the NAV from $73.2 million to $156.5 million, and NAV/share from $13.26 to $13.61. 

I use the September 2011 quarterend NAV of $13.26.  The registration statement included an unaudited estimated NAV/share as of the end of December 2011. This was a range of $12.80 - $12.95/share, but to be generous, in my analysis I will keep using the higher September 2011 NAV figure.

So the offering, at $15.00/share was at a 16% or so premium to the December-end estimate.

What does this mean for GSVC as a Facebook play?
As far as we know, they still own 350,000 shares of Facebook at a cost of around $30/share.   $30/share already values Facebook at $75 billion.  So if the IPO came off at $100 billion, that's a gain of $3.5 million for GSVC.  But now that NAV is $156.5 million, the impact on GSVC is obviously much smaller.  FB will go from being 14% of the portfolio to more like 7%.

Here is a table of what GSVC NAV/share would be depending on Facebook valuations (I use 2.5 billion shares outstanding for FB; I think I used 2.3 billion in my last post):

Facebook            Facebook                GSVC
value                   price/share              NAV/share                   %gain
$75 billion          $30                         $13.61  (current NAV)
$100 billion        $40                         $13.91                           +2.2%
$150 billion        $60                         $14.52                           +6.7%
$200 billion        $80                         $15.13                           +11.2%
$250 billion        $100                       $15.74                           +15.7%
$300 billion        $120                       $16.35                           +20.1%

So from the above, you can see that for every $50 billion increase in the valuation of Facebook, GSVC NAV/share only increases $0.61/share. 

So again, all else equal, a GSVC stock price of $15.00 is already discounting a $200 billion valuation for Facebook!  Might Facebook be worth much more?  Possibly.  But even with Facebook at $300 billion, GSVC NAV would only go up to $16.35/share, still far below where it has been trading recently.

GSVC may use the proceeds from this offering to buy more Facebook shares, of course, but at this point they will be paying much higher prices since the IPO is getting much closer.

The other point to keep in mind is that even if GSVC doesn't deploy this new capital right away, they will still charge the 2.0% base management fee.  Total annual expenses for GSVC is 3.4% or so.  I typically use a 10% discount rate to value things, so this, to me, would merit an almost immediate 34% *discount* to NAV unless management proves over time that they can increase NAV at better than the market.  But the starting point for me begins at a 34% discount and then I figure out where we can go from there.

In this case, there is a special situation called Facebook, and possibly Twitter.  But the above shows that at least for Facebook, the stock price way more than discounts a complete, out-of-the-ball-park, grand slam.

Will Twitter be as hot?  Will they find other 'hits'?  I really have no idea but I would prefer to play elsewhere.

By the way, this is not a shortable stock.  Of course I tried when it got over $20/share, but the short got rejected.     Oh well...    This is why markets can get inefficient sometimes.

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