A couple of days ago, ContextLogic( WISH 0.00%↑) announced it’s selling its Wish ecommerce platform for ~$173M in cash or ~$6.50 per share to Qoo10, an Asian ecommerce platform. From the press release, it sounds like after the sale closes, the company will have a very clean balance sheet with ~$173M cash and no debt. In addition, the company has ~$2.7B of net operating loss (NOL) carryforwards. (Ouch! They really did burn through that much money!!) After the sale to Qoo10 closes, they can in turn merge the company with a profitable company which could then use the NOL to offset its profits. The exact wording from the company’s release is shown below
Following closing of the transaction, ContextLogic will have limited operating expenses and a balance sheet that will be debt-free, with net cash proceeds from the asset sale, approximately $2.7 billion of Net Operating Loss (“NOL”) carryforwards and certain retained assets. The Board intends to use the proceeds from the transaction to help monetize its NOLs. The Board also intends to explore the opportunity for a financial sponsor to help ContextLogic realize the value of its tax assets. If the ContextLogic Board does not identify opportunities that will allow it to effectively monetize the value of its NOLs to the benefit of shareholders, it intends to promptly return all capital to shareholders.
Given the current corporate tax rate of 21%, $2.7B could potentially be worth ~$500M of tax savings or $18 per share for the WISH 0.00%↑ stock. But after further digging, it appears that there are quite a bit of limitations on the tax deductibility of NOL in M&A situations. Although $1.7B of ContextLogic’s NOL will never expire, it could take the acquirer 100+ years to use up all the losses due to Section 382 limitations. Say the company got acquired for $350M. With the current IRS long-term adjusted rate of 3.3%, only $350M*3.3% = $11.55M of NOL can be deducted per year. It will take ~147 years to use up the $1.7B of NOL and the annual savings will only be $11.55M*21% = $2.4M. If I were an acquirer and I want a 15% IRR and let’s say the payback period is 100 years with the annual tax savings of $2.4M, the purchase price of the carryforward will be $16M (=PV(0.15, 100, 2.4)), which is an insignificant premium to the company’s $173M cash reserve. In summary, the NOL carryforward is unlikely to be worth much unless the acquirer has a way to circumvent the Section 382 limitations.
As predicted in my previous post, Wish will either liquidate or file for bankruptcy. The current situation looks like an orderly liquidation. The amount of capital the company burned through is staggering. But we are going to see a lot of ZIRP zombie unicorns officially perish this year. Invitae just files for bankruptcy this past Tuesday. Former Decacorn Bolt slashed its valuation by 97% and it sounds like they could wind down after returning investor money. I hope this reset period happens quickly so we can restart, rebuild and leave the baggage of the ZIRP period behind.