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Services Acquisition Corp.
SVI & Jamba

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By TMFOpie
March 27, 2006

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Hi gang,

Upon reading Tim's Baby Breaker article last week, I decided to spend some time looking at the purchase of Jamba Juice (JJ) by SVI.

My conclusion is that it could be an interesting investment opportunity, although I'm concerned about the lack of recently audited SEC filings and the significant amount of stock/warrants that will be out there after the merger is completed. For me, I'm comfortable waiting for the merger prospectus to come out so I can read more about the financials and the intentions of management.

Enjoy.

Fool on,
Andy
TMF Opie

So here goes...

Date: 3/22/06
Stock price: $9.84 per share
Diluted Market Cap: $679m
Diluted EV: $481m

Summary

Services Acquisition Corp. International (AMEX: SVI), a special purpose acquisition company (SPAC), recently announced a merger with Jamba Juice, Inc. (JJ) for $265 million in cash. On 3/21, the shareholders of JJ approved the merger, which will be completed by April 30.

SVI currently has a market cap of $207m on 21m shares outstanding (not counting 17.25m shares in warrants). After the merger is complete, there will be ~ 69m diluted shares outstanding (including warrants) for a market cap of $679m with ~ $198m in cash and no debt. So future enterprise value is ~ $481m.

Based on relative multiples (P/Sales, P/EBITDA, P/EBIT) and DCF, the intrinsic value of the company ranges between $12 and $14. At a current price of $9.84, the stock is trading at a discount between 40% and 50%, including cash on the balance sheet.

The Companies

SVI is a SPAC (also known as a "blank check" company) formed by an IPO in June 2005, raising $127 million on 15 million units. Each unit consists of 1 share of common stock and 1 warrant. Warrant holders have the right to purchase shares at $6 after the merger closes (assuming the stock price trades above $11.50 for 20 of 30 days). The shares and the warrants trade on the AMEX.

Investors form SPACs specifically to make acquisitions. In this case, SVI is buying JJ in a sort of back-door IPO, without the 7% fees to investment banks. Once the acquisition is complete, SVI will change its name to Jamba, Inc.

Jamba Juice was founded in 1990 by Kirk Perron, an avid cyclist who was looking for a post-ride beverage to quench his thirst. Not liking the options, he created his version of the smoothie. He soon after opened the precursor to JJ, called The Juice Club. The company is now named after the African word "jama," which means to celebrate.

There are now 533 Jamba Juice ventures, consisting of 324 company-owned and 209 franchises in 26 states. In calendar 2005, the company reported sales of $345 million, including $230 company locations (~$710k per store). (Note: these facts come from a press release and are not audited).

Two of JJ's board members have ties to SBUX. Jamie Shennan, a general partner of Trinity Ventures, sits on the boards of SBUX and PF Changs. Craig Foley, a managing partner at Wickham Capital, previously sat on SBUX's board.

JJ's Management

Paul Clayton, CEO
Clayton joined Jamba Juice as CEO in 2000. Formerly, Clayton was President, Burger King, North America, where he was responsible for all operations, development, marketing and administrative functions for the company's more than 8,000 restaurants. From 1993 to 1997, Clayton served as Senior Vice President, Worldwide Marketing for Burger King Corporation.

Don Breen, CFO
As Chief Financial Officer of Jamba Juice, Breen leads the Finance, Accounting, Supply Chain, IT and Legal functions. Breen brings over 20 years of management experience to Jamba Juice. He has held key financial and leadership positions at Northeast Utilities, Adolph Coors Company and Brothers Gourmet Coffees. He was most recently with Fresh Enterprises, the Parent Company of Baja Fresh Mexican Grill, where he was the Senior Vice President and CFO. Breen received his Bachelor's degree and MBA from the University of Connecticut and also attended the Investment Management Program at The Wharton School of Business.

Karen Kelley, VP Ops
Kelley first joined Jamba Juice in 1998 as a District Manager in West Los Angeles. In 1999, she became Director, Regional Operations in Southern California and in 2002 was promoted to her current position. Kelley brings more than 20 years of restaurant experience behind brands such as Taco Bell and Boston Market.

Beth Lombard, VP Development
Lombard joined the company in 2004 and oversees four areas essential to the company's successful growth: real estate, store design, construction and facilities. In her 20-year career, Lombard has worked extensively in each of the four areas she oversees. Most recently, she was Director of Concept Development at Brinker International. Prior to that, she was Director of Real Estate for Gap Inc.'s Banana Republic brand.

The Merger

SVI is buying JJ for $265m in cash. JJ shareholders approved the merger on 3/22. All JJ common/preferred/warrants convert to cash or are wrapped into the private placement common.

Post-merger capital structure
1. SVI IPO shares out: 21m (15m IPO + 2.25m over allotment + 3.75m pre-IPO)
2. IPO Warrants: 17.25m
3. 30.9m (or 27.4m based on press release - i'm using the 30.9 b/c i'm not sure where they get the 27.4m) private placement (institutional and JJ shareholders)
4. Total shares outstanding = ~ 69m

Post-merger cash position
1. Purchase price = -$265m
2. Private placement = $232m
3. Warrants = $104m
4. IPO Cash = $127m
5. Net Cash = $198m (or $2.87 per share)

Valuation
1. From 2004 JJ financials filed in California:
a. Rev = $175m (95% from owned stores)
b. EBITDA = $16m
c. EBIT = $8.3m
d. NI = $8m

2. From merger press release, calendar 2005 rev = $345m (67% from owned stores � why so different than 2004?)

3. 2005 EBITDA estimate based on '04 margin and 8x multiple for JJ investors = ~$34m.

4. Relative valuation
a. P/S = 3x => $1b or $15 per share
b. P/EBITDA = 25x => $850 or $12.30 per share

5. DCF
a. Assuming similar but lower revenue growth rates to SBUX '95-'04
b. Margins increase a few percentage points every few years
c. Start fully paying taxes in year 4
d. CapEx as % of revenues ranges between 15% and 6%
e. DnA as % of revenues ranges between 6% and 5%
f. Discount rates range between 18% early to 12% in year 10 to a 10% terminal rate.
g. I'm accounting for the entire cap ex, not just maintenance as many analysts might. I'm also assuming the company does not take on debt.
h. DCF = ~$13.55 (assuming no significant dilution)

6. Conclusion. The long-term value of SVI post-merger seems to be between $12 and $14. Accounting for the almost $3 in cash, investors can purchase this company at a discount of 40-50%.

The Investment Case

On a personal note, I've been looking forward to investing in JJ ever since I had my fist one in California in the late 90s. Now we finally have that chance, albeit in a little unusual fashion.

SPACs are not too familiar to most investors. We hear more about Chipotle and Tim Horton-type IPOs than we hear about unusual "blank check" mergers. Nevertheless, that is what we have here, and we may have an opportunity to buy shares in a growing health brand at a discount.

SVI is hitting this at the right time. Just this week, Colgate purchased Tom's of Maine, a natural health and oral care company, for 3.3x sales and 48x EBITDA. Whole Foods and Hansens Natural are growing like blockbusters. Even fast food joints, like McDonald's and Wendy's, are offering more healthy alternatives to the standard burger and fries. Jamba Juice is a natural beneficiary of this lifestyle transition.

A compelling valuation (see "The Merger" above) makes this an interesting opportunity that investors should consider for a tiny slice of their portfolios. However, it is not without risk.

4 Risks

1. JJ's future success is based on aggressive growth assertions. To value this company at $14 per share, JJ must grow revenues aggressively for the next few years and then at SBUX-type levels for years 5-10. It's important that investors understand that they are paying 30x+ earnings for this company, and expecting very high growth rates.

2. CapEx estimates. I really have no idea how much capital expenditures JJ will have to make to meet the revenue growth rates needed to value $14. It may be more significant than I'm estimating, which means the intrinsic value may be lower.

3. Share private placement. We don't have great insights into who is buying the private placement offer of 31m additional shares at $7.50 per share. These investors may be inclined to liquidate their holdings for a quick profit. Of course, if they are former JJ shareholders then they may want to hold for the longer term. But the risk is definitely there and one that concerns me.

4. No SEC financials, yet. The data I'm using for my models are based off of non-audited 2004 filings with the state of California. SVI has not yet filed a prospectus for the pending merger. Lower audited 2004 revenue and EBIT numbers will lower my intrinsic value.

5. Future plans for JJ. We don't have any insights into management's plans for JJ (or even how much stock management will own of the new Jamba, Inc., which concerns me). These will obviously impact the value of future cash streams.

6. Capital structure. If the company takes on debt to meet the estimates I'm using, then obviously net income will be lower and thus the intrinsic value. And if the company takes on additional common shares or preferred, the ROIC will be lower.

Conclusion

SVI is not an investment for everyone. It comes with fairly high risk because we don't have insights into management's future plans or access to current audited financial statements. However, based on what we do know and think, the company may be selling at enough of a discount for aggressive investors to take a chance.

Of course the other option is for investors to exert a bit of patience until we see the merger prospectus. We may miss the chance to get in before any additional hype, but we will also sleep better having seen the audited financials and then building our models. I personally fall into this camp.


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