Blessed by the Potato

I first got interested in Indigo as a potential value investment in the spring, and ended up buying some at $13. It’s fallen a lot since then, and I averaged down once on the way down, so my average cost is in the $11 range (yesterday’s close was a painful $6.73).

My investment thesis was based on two planks: that Indigo would continue to be a profitable company for some time, even if just barely (this has not been a good year for that), and that Kobo was not being properly valued on their balance sheet and would be a source of value.

Well, one out of two ain’t bad: Indigo announced today that they are selling their stake in Kobo for what amounts to about $6/share. The whole company was barely selling for that today, so I anticipate that it should be a big day tomorrow on the news, possibly it’ll hit $11-12. Unfortunately with one of the value planks taken away, and the other not quite going according to plan, I will likely start looking for an exit, and in the end may barely break even.

As for that target price of mine: since the company hasn’t managed to stay profitable so far this year (though the big holiday quarter is yet to come), there’s no reason to pay a premium above tangible book, which would be ~$4.25 on the balance sheet plus an additional $6 from the Kobo sale.

Update:

I really thought the Kobo sale was to create shareholder value, and was expecting a special dividend out of it or something. Instead we get this:

After making a $315-million (U.S.) deal to sell e-reader maker Kobo Inc., Ms. Reisman is in a stronger position to make acquisitions and expand non-book ventures, to offset Indigo’s shrinking book business. She will invest heavily to shore up her new product design and development studio in New York City, which is focused on home decor and gift items.

One direction she won’t be heading: handing out some of the Kobo windfall to shareholders in the form of a dividend.

Ms. Reisman said that in expanding into affordable gifts and home items, she’s counting on creating “an experience” for the customer.

“I’m not interested in selling a bowl,” she said. “That’s not the business I’m going to be in. I am interested in creating an experience around the table for the customer … There is so much about what inspired and created Apple – the conviction about creating an end experience for the consumer … the commitment to beauty and simplicity.”

I have very little interest in investing in “an experience” or her personal New York “development studio”. Damn. I was almost starting to think I was getting good at this investing thing.