Value stripping at the finance auctions – SPK (mBlox)

Altruism does not fuel yachts.  As a forager, I never look for value amongst the glitzy headlines, flowery chairman and CEO statements or illuminated facts and figures.  I prefer to rummage around the opaque, obscure and understated items in the published reports and other regulatory disclosures. The Tianamen Square nightmare scenario for investors, which is not inconceivable, would be if SPK’s management sells off the bargain basement investments labelled ‘Others’ to Spark Venture Management Holding Ltd (SVMH) for £600k, as valued in the 2013/14 interim report.

mBlox is one of the ‘Others’ whose value has been recently reported by SPK as not being greater than £500k and, as such, this investee company is worthy of attention. mBlox describes itself as the largest Application to Person (A2P) mobile messaging provider in the world specializing in the unique demands of large-scale mobile messaging programs.  Who should be believed, the trumpeter or Cinderella’s stepmother?

SPK was involved in the early funding rounds when mBlox was still a UK start-up with the ambitious plans to be the global leader in mobile messaging technology before the company headquartered in the US to realised its vision. So why did this ambitious investee company find itself in SPK’s bargain basement. Let’s examine the journey from early funding target to bargain basement reject by reviewing SPK’s annual reports from 2003/04 to 2013/14 alongside mBlox annual revenue and funding history to date.

SPK’s mBlox annual equity holding | annual valuation | mBlox annual revenue | mBlox funding rounds
2003/04 | 1.6% | £268k | mBlox 12/03 revenue $n/a | 06/03 round B funding – $8.1m – angel investors
2004/05 | 1.6% | £268k | mBlox 12/04 revenue $n/a | 07/04 round C funding – $11.2m – venture capital
2005/06 | 0.5% | £500k | mBlox 12/05 revenue $n/a | 03/06 round D funding – $25.0m – venture capital
2006/07 | 0.5% | £n/a | mBlox 12/06 revenue $62.5m | n/a – no VC dilution event
2007/08 | 1.0% | £500k | mBlox 12/07 revenue $87.5m | 12/07 round E funding – $22.5m – venture capital
2008/09 | 1.0% | £500k | mBlox 12/08 revenue $100.0m| n/a – no VC dilution event
2009/10 | 1.0% | £250k | mBlox 12/09 revenue $111.0m| n/a – no VC dilution event
2010/11 | 1.0% | £500k | mBlox 12/10 revenue $115.0m| n/a – no VC dilution event
2011/12 | 1.0% | £n/a | mBlox 12/11 revenue $118.0m| 06/11 round F funding – $25.0m – venture capital
2012/13 | 1.0% | £n/a | mBlox 12/12 revenue $121.0m| n/a – no VC dilution event
2013/14 | 1.0% | £n/a* | mBlox 12/13 revenue $138.5m| 04/13 debt funding – $14m – VC partner

* SPK annual report not available for 2013/14 at the time of writing.

A quick browse through the table above shows that mBlox’s disclosed revenue has increased by $76m over an 8-year period from $62.5m to $138.5m, a decent 121.6%. Further, mBlox has received term loans and equity warrants (possibly dilutive) from the Business Development Corporation of America (BDCA) and the relevance of this is the fact that the lender makes an assessment of the borrower’s net asset value which in mBlox’s case varied between $250m – $350m. mBlox is also rated by some financial commentators in the US as being in the top 10 of mature VC-backed technology companies rattling the cage for exit either in the form of IPO or trade sale.

Since it’s initial investment in 2003/04, SPK’s has valued its 1% stake in mBlox between £250k and £500k, thereby giving mBlox an enterprise value (EV) in the range of £25m – £50m or $42.5m – $85m, using an exchange rate of £1 = $1.70. If one assumes that SPK’s valuation basis is prudent, this gives a median value of $63.75m which could serve as a ‘pessimistic’ EV for mBlox. Without sight of mBlox profit figures, the 31st December 2013 year-end revenue of $138.5m could be adopted as a ‘most likely’ EV.  And an ‘optimistic’ EV of $300m can be assumed from the BDCA’s net asset estimates for mBlox.  With these 3 estimates, a revised EV for mBlox could be calculated as {1 x pessimistic + 4 x most likely + 1 x optimistic} / 6 or {$63.75m + $554m + $300} / 6 giving a resultant EV of $152.96m or £89.98m.  Therefore, SPK’s 1% stake in mBlox could be restated as approx. £900k or a NAV per share of 0.22p compared with an implied NAV per share ranging from 0.06p to 0.12p, based on 418,850,000 shares in issue, as per SPK’s 2013/14 interim report.

In summary, there’s a fair chance that mBlox is conservatively valued in SPK’s books. However, a true value for this investee company can only be determined by SPK’s sale of its 1% stake to an existing VC investor or realised via IPO or trade sale prior to 31st March 2015.

Oodutty