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A Business Selling For Free

Tikcro Technologies (TIKRF) trades for just $7 million, but it has $7.4 million of cash on hand against just $240K of total liabilities. In addition, Tikcro owns between 20% and 30% of a public company in Israel named Biocancell (BICL). Tikcro's stake in Biocancell is worth about $8 million.

One way of looking at the above situation is as follows: upon purchasing a share of TIKRF, the investor is getting the rights to an amount of cash equal to his investment, and in addition he is receiving a stake in another public company for absolutely free. For the value investor, a free stake in a business comes at just the right price, as it offers good downside protection. Unfortunately, this investment is not without risks.

First of all, the free business is very much unproven, having shown no revenues as of yet. The company has some cancer-fighting products undergoing Phase I and Phase II FDA trials. Anyone familiar with this process knows that the progression from trials to a prescription-ready drug is a long and far-from-certain process. This isn't the type of business that one can put a value on easily, in contrast to a company that sells nuts and bolts for example. The company could be completely worthless in the near future. (On the other hand, it could also be worth a whole lot.)

Second, it is not clear what Tikcro management will do with the company's cash, as no definite plans have been offered. Should that cash be invested in another risky business, the investor's margin of safety is gone just like that.

Finally, this stock does not trade on a regular exchange. As such, it does not have the safeguards (which would be costly for a company of this size) that are offered to investors of companies on exchanges such as the Nasdaq or NYSE.

Despite these risks, some value investors might find this to be an offer too tempting to resist. For now, downside protection is present (e.g. even if the Biocancell business goes bust, the cash still protects the shareholder's entire investment). Should the drugs under study work safely, however, shareholders will be rewarded many times over.

Disclosure: None

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to my feed.