Description

Elevator Pitch

ContextLogic (“Logic”) is a cash & NOL shell currently trading at a 7% discount to its net cash and likely worth 2x its current price within the next two years if it follows the path of precedent NOL maximization strategies.  Logic’s valuation represents a free call option on an attractively structured deal that monetizes their NOL.

Description & Background

Logic is a shell company whose assets consist solely of cash and NOLs.  It previously owned Wish.com, an online dollar store that went public in late 2020 at a market value of $10.7B.  It peaked a month later at $21B only to rapidly slide into oblivion.  It never turned a profit and was sold earlier this year for $173MM (lol as long as you weren’t long).  Logic is now nothing more than a corporate shell with $155MM in net cash and $2.8B in Federal NOLs.

Logic’s stated intention is to maximize the value of their NOLs via acquisition of a business that generates substantial taxable earnings.  A key component of the strategy is partnering with a financial sponsor that can provide the additional capital needed to make an acquisition big enough to use the NOLs and pull the value of them forward, thus maximizing their present value.  

As a reminder, under Section 382 of the Internal Revenue Code NOLs cannot be used following a change of control (i.e. NOLs cannot be acquired), thus their efforts to do what is essentially a reverse merger.  In order to avoid violating IRC change of control rules, Logic has instituted a Tax Preservation Plan where no shareholder can acquire >4.9% of the company ($6.9MM).  

Logic’s NOLs consist of:

That’s a lot.  And they are based in the People’s Republic of California which, in this case, doesn’t hurt.  (Given the complexity and highly uncertain nature of using the State NOLs, I will leave them out of our analysis.)     

Importantly, management has stated they will return the cash to shareholders if they cannot find a suitable deal within a reasonable amount of time.  

Valuation - Scenario one 

There are two components of value - net cash and the present value of the tax assets (going forward I will mainly refer to the present value of the tax assets as PV10-DTA, shorthand for the present value of the deferred tax asset at a 10% discount rate).

I am going to present two valuation scenarios. 

1. Scenario One assumes they make an acquisition funded with no additional equity and a 50/50 debt/equity capital structure.  It is highly unlikely they will make an acquisition with such little funding because it doesn’t maximize the PV of the NOL and goes against precedent NOL maximizing strategies.  However, it is useful for illustrative purposes, setting a conservative baseline value for the PV10-DTA using only existing equity.  

2. Scenario Two will assume an acquisition funded with a 50/50 debt/equity mix but with a substantial (and expected) capital raise that allows them to fully utilize their NOL.

Let’s start with Scenario One: no equity raise.  

Logic currency has $159MM in net cash, equal to $6.15 per share.  They have guided to $155MM at year-end, or $5.99/share.  They expect minimal cash burn, if any, going forward.  I have assumed $1MM/quarter in net cash burn for 2025. (My interpretation of completing a deal “within a reasonable period of time” means by year-end ‘25.)

I assume they raise $150MM in debt capital, giving them a 50/50 debt/equity mix and ~$300MM in total capital for an acquisition.

With this $300MM they will make an acquisition, most likely in the financial services sector (bank, consumer finance, insurance)  because 1) they generate a lot of taxable earnings relative to their stock prices and 2) it is easier to deploy excess capital into these businesses than many other sectors (e.g. excess capital can be used to expand the loan book, buy MSRs, buy insurance blocks, etc.).  Multiples here are 7-11x.  We are going to be very conservative and assume they pay 12x for an acquisition.  A 12x P/E is 9.5x pre-tax.  Deploying $300MM at 12x after--tax earnings implies $32MM in pre-tax earnings, and $20MM in after-tax earnings after accounting for interest expense on the additional $150MM in debt. 

Their annual NOL usage should equal their pre-tax income until the NOLs are fully utilized.  Starting with $19.6MM in annual pre-tax earnings and NOL usage in 2026 I grow them at a 10% CAGR and then discount them back to the present at 10% to get a PV10-DTA of $3.09/share, as summarized below.  Also, I assumed $550MM of their NOLs are lost because they couldn’t use them all by the 2030-37 partial expiration.  

Let’s talk about these assumptions.  10% earnings growth will strike some as high but keep in mind this is not an organic growth rate.  They will almost assuredly retain 100% of their earnings and deploy it back into the business via acquisitions or organic opportunities.  Growth rate = ROE * (1-DPR), so with a DPR of zero Logic’s growth rate will equal its ROE.  A 10% incremental ROE is a very normal base rate for the equity returns of a company reinvesting all of its earnings.  

The discount rate used to calculate the PV of NOLs should theoretically reflect the probability that the company can generate pre-tax income sufficiently positive to utilize the NOLs.  The steadier and more reliable the income, the lower the discount rate.   The risk they don’t generate sufficient positive earnings to use their NOLs is very low imo.  The timing may be an issue, but that should not be reflected in the discount rate.  Most academics say the appropriate rate is the risk-free rate plus some premium, or the cost of debt, or WACC.  So my 10% discount rate assumption is very conservative.  Theoretically we see a strong case to use a very low discount rate, but practically we think investors may not distinguish between operating cash flow and cash flow from tax benefits.   

Lastly, we only discount 80% of the annual NOL.  The 80% NOL rule was introduced by the Tax Cuts and Jobs Act of 2017 and limits net operating loss carryforwards to 80% of each subsequent year’s net income.

With all that out of the way let’s take a look at total company value under this illustrative scenario.  Cash/share of $5.84 plus $3.09 for the PV10-DTA equals $8.93 in proforma book value, or intrinsic value, 65% upside from here. 

Again, this is an unrealistically conservative scenario but helps illustrate the NOLs value and hopefully represents a floor.

Now let’s take a look at Scenario Two, a much more realistic scenario where Logic issues substantial equity.  It is complex to calculate the value in this scenario because there is potential for circularity.  To estimate the value of the PV10-DTA you need to know the price of equity issuance to estimate dilution, but to estimate the price of an equity raise you need to have some estimate for the value of the PV10-DTA.  Using a precedent NOL maximization strategy as a guide (WMIH), I think I’ve solved this puzzle, however, it involves quite a bit of spreadsheet gymnastics and is not guaranteed to be perfect or even right.  Let’s take a quick detour to see how financial sponsors (KKR in this case) valued a shell company’s NOLs.

The Precedent - WMIH and KKR

WMIH (written up twice on VIC), was an NOL shell formed from the ashes of the Washington Mutual bankruptcy.  WMIH began its public life in 2012 with a market cap of ~$160MM and an EV of ~$100MM.  They owned little more than $60MM in net cash and a massive $6B NOL.  They partnered with KKR who essentially took a controlling stake over the course of two funding rounds in 2013 and 2015.  The capital came primarily in the form of a large mandatorily convertible preferred bond, and also some warrants.  Details on WMIH’s capital raising activities are in the appendix.

WMIH ended up acquiring NSM in 2018, a mortgage originator and service provider, now known as Mr.Cooper (COOP) for 7.4x earnings.  To raise the capital needed to acquire NSM WMIH did three funding rounds, two with KKR and one with NSM shareholders when they closed their acquisition.  As you can see below, KKR invested at a big premium to WMIH’s book value.  Why?  Because they saw the potential value in the NOLs.

*assumes all converts are converted and warrants are exercised 

Notable observations:

1. In 2013 KKR bought equity (via warrants) at $16 when WMIH’s book value was only $3.57 and the stock was ~$9.  In 2015 they invested in WMIH again, paying $27 (via a convert) when the book value was only $6.86 pre-money and $16.62 post-money.  However, proforma book value accounting for the PV10-DTA was WAY higher, as you can see above.  On a proforma post money basis, including the PV10-DTA in the definition of book value, KKR only paid 26% of book in the first round and 61% in the second round.  

2. Tangible book value per share grew after every KKR round, and the PV10-DTA/share fell, as WMIH was essentially monetizing its NOL.  It’s not shown here, but WMIH went from ~$9 to ~$40 after the first funding round as investors caught on to the potential.

3. WMIH’s intrinsic value is the ending (2018) Proforma BV shown above (BV plus the DTA).  The acquisition funding required a ton of dilution - proforma BV started at $76 in 2013, declining to $22 at deal close, a necessary part of monetizing the NOL. i.e the $76 beginning proforma BV was not realizable without substantial capital raising needed to fund the NOL monetization.

4. The decline in the price from the second round to the third/deal round is entirely attributable to the Trump tax cuts in 2017, which reduced the value of the NOL by 40%.  This is highly unlikely to reoccur.  It is more probable that corporate tax rates move higher over the life of Logic’s NOLs.

To estimate the price KKR put on the PV10-DTA, we calculated the difference between the price of each capital raise less the tangible book value per share on a post-money basis.  This price difference between book value and issuance price gives us the implied value of the NOL, shown below.

Finally, we divide this implied NOL value by its actual PV10 value to get the price KKR paid for the tax assets as a percent of its actual value.  The money shot is the weighted average price KKR (and NSM shareholders in the final round) paid as a percent of the DTA, highlighted in yellow above.  This is the number we will use to help estimate the cost of equity and expected dilution at Logic.

Post-mortem: WMIH was a homerun.  The deal was highly accretive to NSM’s earnings and BV.  They used all of their NOLs in the first five years.  The stock has 10x’ed from ~$9 pre-funding in 2013 to $18 upon deal completion in 2018 (despite the 40% decline in their NOL value due to the tax cuts) to ~$90 today. In hindsight WMIH was significantly undervalued then, so using them as a precedent could be too conservative.

If you are still with me I am impressed.  You are through the hardest part!

Valuation - Scenario Two

Back to valuing Logic keeping the approach above in mind because we will be using it.  

Step one: how much capital does Logic need to make an acquisition big enough to fully utilize their NOLs?  $2.7B in NOLs used over 15 years equals $180MM in annual NOL usage.  So they need $180MM in pre-tax earnings to fully utilize their NOLs. Assuming they pay 12x earnings for an acquisition, or 9.5x pre-tax, they need $1.7B in total capital for their acquisition.  Let’s assume they use a 50/50 debt/equity mix, which is what WMIH used.

The 50/50 mix equals $853MM in new debt and $703MM in new equity, plus the cash on hand gives them $1.7B.

Before calculating the PV10-DTA we need to estimate pre-tax income after the interest expense on the new debt.

So we have ~$112MM in pre-tax income and annual NOL usage.  We can now calculate our PV10-DTA.

Before any equity dilution the PV10-DTA on Logic’s $2.7B NOL is $8.44/share.  

But how much dilution will they take on to capture this value, and what then is the proforma value of the DTA?  This is where the WMIH math comes into play.   Recall that WMIH was able to raise equity capital at a weighted average cost of 45.2% of its post-money PV10-DTA value.  If we assume Logic raises money at this same 45.2% of its post-money proforma book value (book value plus PV10-DTA), then they would issue 73MM shares at a cost of $9.62 per share, likely issued in the form of warrants and converts.  The PV10-DTA value gets diluted down from $8.44/share to only $2.20/share; however, because Logic is raising capital at prices above book value (as WMIH did), tangible book value rises from $5.80 to $8.62.  All in, book value of $.8.62 + PV10-DTA of $2.20 = $10.83, or 99% upside.    

FTI consulting conducted a fair value analysis of Logic’s NOLs.  Frankly I don't agree with many of their assumptions so I’m choosing not to include it here; however, if you would like to see the summary please refer to the thread on Alpinist’s pitch on Logic here on VIC (under the ticker WISH).   

Management 

Logic is primarily a bet on capital allocation so the people allocating our capital are super important.  The capital allocators are the CEO and four independent board members.  Not a lot is known about them so this is a potential weak spot.  The CEO is Rishi Bajaj, a hedge fund manager and founder of Altai Capital Management based in West Hollywood.  They appear to be a highly concentrated value-oriented fund.  Their most recent ADV shows $228MM in AUM.  They appear to have had some success many years ago, but AUM has declined materially in recent years, presumably on performance based issues but I don’t know.  Prior to joining the company as CEO in November, 2023, Bajaj and his fund owned no shares in Logic.  While he admirably works for a $1 salary, in August the Board paid him a $620,000 bonus, 50/50 cash & RSUs.  These are the only shares in Logic he owns which I find quite odd but possibly explainable by the fact that they have probably been in a black-out since he joined.  His journey from hedge fund manager to hedge fund manager with a side gig as a CEO of a shell company he previously had no apparent relationship with is quite odd too.   

The four non-employee directors have a general private equity flavor.  They make $150,000 annually.  So we are looking at around $2MM annually for total company compensation.  At present it is a bit higher.  They currently have 10 employees.  I expect that has to do with WISH wind down and see no need for more than 3-4 employees.  Through their commentary they have essentially guided to roughly zero cash burn.   

Risks

It’s a sellers market - They may not find a decent business to buy at an attractive valuation.

Capital allocators - they are a bit of an unknown, but I think the downside is protected by the $6/share in  net cash.

Short interest - 14% of the float is short.  I am not sure what the thesis could be here other than index deletions, but it is puzzling.

Complexity - I did a lot of math gymnastics on this one and could have made big mistakes.  

Appendix

Available Universe of Companies <12x earnings

Management and Board Bios

Rishi Bajaj, age 44, Founder, President and Chief Investment Officer at Altai Capital Management and current director at ContextLogic. Bajaj joined the ContextLogic Board in November 2023 and played an active strategic role in structuring the Asset Sale. Prior to founding Altai Capital in 2009, Mr. Bajaj held positions at Silver Point Capital, L.P. and Gleacher Partners, LLC. Mr. Bajaj previously served on the boards of directors of MobileIron, Inc. (formerly, NASDAQ: MOBL) in 2020 and ServiceSource International, Inc. (formerly, NASDAQ: SREV) from 2014 to 2016. Mr. Bajaj graduated from The Wharton School at the University of Pennsylvania with a B.S. in Economics. 

Michael Farlekas, age 58. Mr. Farlekas has served as the Chief Executive Officer of Onit, Inc., a provider of legal workflow software and solutions, since January 2024. Prior to serving in that role, he served as the Chief Executive Officer of E2open, LLC, a provider of cloud-based, on-demand supply chain and execution software, from 2015 to 2023. Prior to serving in that role, Mr. Farlekas held positions at Roadnet Technologies, Inc., a provider of fleet management software solutions for private fleets, and RedPrairie Corporation, a provider of warehouse management solutions. Mr. Farlekas graduated from Fairleigh Dickinson University with a B.S. in Mechanical Engineering and from Jacksonville University with an M.B.A. in International Business. Mr. Farlekas brings to the Board 20 years of experience in executive leadership for enterprise software companies. 

Marshall Heinberg, age 67. Mr. Heinberg is the founder and has served as the managing director of MAH Associates, LLC, a provider of strategic advisory and consulting services to companies evaluating financing and strategic alternatives, since 2012. He also serves as the chair of the board of directors of Custom Truck One Source, Inc. (NYSE: CTOS) and as a director of Union Carbide Corporation, a subsidiary of Dow Inc. (NYSE: DOW). Previously, Mr. Heinberg served as the chair of the board of directors of PAE, Inc. (NASDAQ: PAE) from 2020 to 2022 and on the boards of directors of Galmed Pharmaceuticals Ltd. (NASDAQ: GLMD) from 2018 to 2022 and ChannelAdvisor Corporation (NYSE: ECOM) from 2019 to 2022. Further, Mr. Heinberg previously served as the chair of the board of directors of Ecology and Environment, Inc. (NASDAQ: EEI), a subsidiary of WSP Global, Inc., from 2017 to 2020, as a director of Universal Biosensors, Inc. (ASX: UBI) from 2010 to 2021 and as an advisor to Burford Capital Limited (NYSE: BUR) from 2015 to 2020. Mr. Heinberg began his investment banking career in 1987 in the corporate finance division of Oppenheimer & Co., Inc. and served as head of the investment banking department and as a senior managing director of Oppenheimer & Co., Inc. from 2008 until 2012. Mr. Heinberg also served as the head of U.S. investment banking of CIBC World Markets from 2001 until 2008. Mr. Heinberg graduated from The Wharton School at the University of Pennsylvania with a B.S. in Economics and from Fordham University School of Law with a J.D. Mr. Heinberg brings to the Board over 35 years of capital markets, business and financial experience in complex and regulated industries. 

Elizabeth LaPuma, age 45. Ms. LaPuma most recently served as the Head of the Balance Sheet Advisory Group at UBS Group AG (NYSE: UBS), serving as a Managing Director, from 2020 to 2023, particularly focused on representing financial institutions. She also ran Alvarez & Marsal Holdings, LLC’s Asset Management Services group, from 2013 to 2020, managing a portfolio of assets including a $2.5 billion portfolio of debt and equity investments and approximately another $3.0 billion of international assets. Prior to that, Ms. LaPuma worked in the Financial Advisory Group of BlackRock, Inc. (NYSE: BLK), as well as at Lazard, Inc. (NYSE: LAZ), the global investment bank. Ms. LaPuma currently sits on the boards of directors of WeWork Inc. (OTC: WEWKQ); Digital Media Solutions, Inc. (OTC: DMSL); Ebix, Inc. (OTC: EBIXQ); Enterra Solutions LLC, a private market-leading industrial scale artificial intelligence value chain solutions provider; Foundation Home Loans, a privately held specialist UK mortgage lender; Ionic Digital Inc., a privately digital mining company; Round Hill Capital, a private real estate fund; and Ventura Capital, a private equity firm. Ms LaPuma previously served on the board of directors of Surgalign Holdings Inc. (formerly, OTC: SRGAQ), a global medical technology company before it was acquired in 2023. Ms. LaPuma graduated from The Wharton School at the University of Pennsylvania with a B.S. in Finance and an M.B.A. and from The School of Arts and Sciences at the University of Pennsylvania with a B.A. in International Relations. Ms. LaPuma brings to the Board over 20 years of experience advising on and structuring complex financial transactions, including securities offerings, mergers and acquisitions, and restructurings. 

Richard Parisi, age 49. Mr. Parisi is the founder and managing partner of Catania Capital Partners LLC, an investment firm formed in 2020 focused on private equity and other junior capital investments across a range of industries, including telecom, media & technology, financial services and gaming. Prior to serving in that role, Mr. Parisi served as a senior investment professional at Silver Point Capital, L.P. from 2005 to 2020. He currently serves as the chairman of the board of directors of American Broadband Holding Company (d/b/a Fastwyre Broadband), a private broadband, video and voice service provider and a portfolio company of Madison Dearborn Partners, LLC, and Catania Capital. Mr. Parisi previously served on the board of directors of iPCS (formerly, NASDAQ: IPCS), a publicly traded telecom company that was ultimately sold to Sprint Nextel Corporation, from 2006 to 2007, and as the chairman of the board of directors of Affinity Gaming, a locally focused casino operator with properties in Nevada, Missouri, Iowa and Colorado, from 2013 to 2015. Mr. Parisi graduated from Duke University with a B.A. in Chemistry and Economics and received his M.B.A. from the Stanford University Graduate School of Business. Mr. Parisi brings over 25 years of investment and transaction experience to the Board.

WMIH numbers

DISCLAIMER: THIS IS NOT A RECOMMENDATION. The securities described are neither a recommendation nor a solicitation. There are no assurances that securities identified in this note will be profitable investments. The stated opinions are for general information only and not meant to be predictions or an offer of individual or personalized investment advice. This information and these opinions are subject to change without notice. Security information is being obtained from resources I believe to be accurate, but no warrant is made as to the accuracy or completeness of the information. Any type of investing involves risk and there are no guarantees. The author may or may not have material positions in the securities mentioned in this note and will not be obligated to give notice of any changes in their views or positioning. The author makes no representation or warranty, express or implied, regarding the accuracy, completeness, or adequacy of the information. The author accepts no duty of care to you in relation to investments. Past performance cannot be relied on as a guide to future performance.

Catalyst

Capital raise, monetization of NOL, and acquisition.