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Impco Hopes Unit Spin-Off Will Boost Investment Focus

Impco Hopes Unit Spin-Off Will Boost Investment Focus

Corporate Focus by Anthony Palazzo

There was a time when so-called concept stocks were popular on Wall Street. In the case of Cerritos-based Impco Technologies Inc., the concept calls for a future when people will be driving around in cars powered by hydrogen fuel cells.

It’s a dream that stands a good chance of coming true, but the question is when. Automakers are targeting 2003 for limited production in test fleets of the first fuel-cell-powered vehicles, which would emit only water as exhaust. The most optimistic forecasts envision mass production of these vehicles by around 2010, more conservative projections put it in 2020, perhaps.

That pace hasn’t been fast enough for investors in Impco, which began a major fuel-cell development program six years ago.

Its stock went as high as $52.88 in March 2000, but since then capital markets have turned cautious about funding futuristic ideas that aren’t yet delivering tangible results. Recently, Impco traded around $13.

The price drop has affected Impco’s ability to keep raising capital for both the budding fuel-cell business and its traditional business making storage and electronic control systems for alternative fuels such as natural gas and propane, which was growing until a slowing economy sandbagged revenues there as well.

For the third quarter ended Jan. 31, Impco lost $7 million (64 cents a diluted share), compared with a loss of $4.4 million (42 cents) for the like year-earlier period. Revenues fell to $17.3 million from $22 million. Results for the fourth quarter ended April 30 haven’t yet been released.

Last July, Impco filed to raise $50 million in stock, partly to fund the operations of its fuel-cell division, Quantum Technologies. But it wasn’t able to complete the offering. It was withdrawn shortly after Sept. 11. Instead, Impco was forced to raise more-expensive private-placement money, twice this year. In January, it raised $22.5 million to finance Quantum, and in May it raised another $18.8 million from institutional investors to fund acquisitions and debt reduction at the traditional Impco business.

Quantum spin-off

Earlier this month, Impco’s board approved a spin-off of Quantum, after which General Motors Corp. will own a 20 percent stake.

Quantum’s chairman and chief executive, Robert Stemmler, believes the spin-off will result in a higher valuation for both companies. Independent valuation analyses commissioned by the company put Quantum’s equity value at $150 million as an independent entity, and the remainder of Impco at more than that. Impco’s stock price gives it a valuation of $164 million in its current incarnation.

“When we make presentations to the financial community it’s very difficult for them to separate the company into two different businesses,” Stemmler said. “There was a lot of what we felt was pent-up value in the companies that if we split them off would be recognized.”

Stemmler also said that dealing with the oversight and fund-raising needs of both companies was taxing to the management and board. Quantum is essentially a developing company requiring a large research and development budget. (It does have revenues, but most of those relate to components that are currently being used to help power internal combustion engines using natural gas or propane.)

The other part of Impco, its Gaseous Fuels Products division, has been eyeing acquisitions to increase its presence in a market for fuel systems used on gas-powered bus fleets or indoor forklifts a market that’s weakened, but has been on a long-term growth trajectory for a number of years.

“We agree with the company that by splitting them into the different trading entities will be the best way to get the right investors into each piece of the company,” said Eric Prouty, an analyst with Adams Harkness & Hill in Boston. His firm was an underwriter of the failed public offering last year, and acted as placement agent for the May offering.

Argument against spin-off

Not everyone agrees that breaking the companies apart is a good idea. Brett Hendrickson, an analyst with B. Riley & Co., thinks Impco should further ratchet down spending at Quantum and keep it in-house until it can raise money in an IPO that will put more money in its bank.

Quantum’s burn rate has been reduced to $1 million a month from $3 million eight months ago, according to Stemmler. It will take $15 million with it when it becomes independent.

Hendrickson believes that isn’t enough to ensure Quantum’s viability. It will need to raise money again in the next six to 12 months and again thereafter until the fuel cell market develops which makes it vulnerable to a market that’s turned more and more negative.

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at

tpalazzo@labusinessjournal.com.

Summary

Business: Systems for engines and fuel cells.

Headquarters: Cerritos

CEO: Robert Stemmler

Market Cap: $165.2 million Dividend Yield: N/A*

Total Liabilities: $46.4 million P/E Ratio: NA

Long-Term Debt: $5.9 million

*Impco Technologies does not pay a dividend

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