Can stamp-and-coin-trading firm Escala (NASDAQ:ESCL) survive the fallout of its majority shareholder AfinsaBiene Tangibles being charged as a criminal enterprise by Spanish authorities?
If you listened to company management on its 15-minute public relations conference call yesterday morning, you'd think so. The company took no questions, using the time to essentially reiterate what everyone already knew from the news reports. One tidbit management did reveal: Without the Afinsa relationship, instead of reporting $16.6 million in operating income, Escala would have a $1.7 million loss. Even with the company's insistence that it still hasn't been charged, and that it can operate even without Afinsa, where will the money come from in the future?
More importantly, investors who bid up Escala's shares more than 15% at the start of trading yesterday ought to be asking themselves what Escala will be worth if Spanish authorities seize its assets. Two weeks ago, I expressed doubt that the top stamp dealer was bankrupt. Considering its other assets like A-Mark's precious metals, which contribute plenty of revenues but little profit, I believed it still had some value.
As more details become available, though, I'm not so sure anymore.
Spanish authorities have assumed control over Afinsa, as well as the other stamp-trading firm caught up in the scandal, Forum Filatelico. Afinsa is Escala's majority shareholder, owning 67% of its stock. Since the Spanish administrator has full control over Afinsa, he essentially also controls Escala. And while Escala's management is currently independent, that might not last very long. Executives and directors have been fleeing Escala like cockroaches scattering when the kitchen light turns on. The CFO resigned. One vice chairman has been arrested and jailed, an Afinsa-linked director resigned, and one of three independent audit committee directors resigned, even though he was asked to stay on to help deal with the mess.
Vice Chairman Greg Manning, who founded Escala back when it was called Greg Manning Auctions, has not been heard from since the scandal broke, and he did not participate in today's conference call. Perhaps there's a reason he was sent packing off to Asia.
The authorities have charged Afinsa with running a pyramid scheme. The people arrested so far in connection with the scandal are charged with embezzlement, money laundering, and tax evasion. According to the complaint filed by Spanish authorities, Afinsa is technically insolvent. That means the receivables it owes Escala may never be collected. Moreover, I find it quite conceivable that the administrator may call a special shareholder meeting to oust current management.
Finally, it's my opinion based on the formal complaint that a worst-case scenario for Escala shareholders is quite possible. Escala's assets -- including the 18 disparate operations like precious-metals trader A-Mark; stamp-trading houses Aucentia, H.R. Harmer, and Heinrich-Koehler; and coin wholesaler Spectrum Numismatics -- could very well be appropriated to make whole the Spanish investors swindled by Afinsa. In addition, the value of the stamps that it carries on its books may not be worth what Escala says; Spanish authorities have charged that Afinsa's stamps are vastly overvalued.
Interestingly, Escala in both word and deed continues to distance itself from the events in Spain. For example, it no longer mentions Afinsa in the disclosure statements at the bottom of its press releases. That's a notable change from when it was apparently proud to be associated with what was then the third-largest collectibles company, behind Christie's and Sotheby's (NYSE:BID).
It appears that U.S. investors are oblivious to the very clear and present danger Escala poses. As I'd thought, they seem to view this scandal as something happening "over there," of little immediate consequence to the company's operations here. Yet with Spanish authorities in full and complete control of Afinsa, it might not be long before the administrator's reach is felt on this side of the Atlantic.
A full sheet of further Foolishness:
- Escala Is Stamped Out
- Is Escala Licked?
- Auction House Rolls Out New Identity
- Dreadful Stocks to Avoid
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
