Most readers of this site have probably seen some examples of unfair treatment of minority shareholders in buyouts. The MBO at Japanese company Uehara Sei Shoji which I wrote about last week is a recent example from my portfolio.
Every now and then you come across something that seems extreme though. The buyout price offered to minority shareholders of Waxman Industries (OTCMKTS:WXMN) looks like one of those. I only received the information statement today, so this is a very recent offer.
Waxman is a supplier of specialty plumbing, floor and surface protection, leak detection & mitigation and other hardware products to the repair and remodeling market in the US. The company is “dark”, which means it does not release financials to the public. The company required you to sign a NDA before you could receive financial statements. I own a couple of shares just to be able to receive stuff like I received today, but I have not signed the NDA, which means I was in the dark as well until the financial information was released in the information statement.
Management and directors own 52.3% of the common shares and 93.2% of the Class B shares, which have 10 votes per share. In total there are 1,321,000 shares outstanding. The buyout price is $1.87 per share, valuing the company at $2.47 million.
Candlewood Partners issued a fairness opinion and confirmed the offer was fair from a financial point of view. I disagree.
The company’s book value on Sept. 30, 2017 was $19.9 million. The company had cash of $6.8m, receivables of $17.8m, inventories of $12.5m and (depreciated) property and equipment of $7.0m. There are no intangibles on the balance sheet. Total liabilities were $31.7m. So the company and Candlewood think that a valuation of 0.12x book value is fair. That already looks highly unlikely, but OK, perhaps the company is losing money hand over fist?
No, it is not. The company has reported a very small loss of $10k in its latest quarter and there was a loss of $789k for fiscal 2017 as well. Operating income was still positive that year, at $166k. There are some indications though that Waxman’s business is a lot better than these latest figures suggest. The company made a net profit of $2.1 million in fiscal 2016 and a profit of $1.8 million in 2015. I can’t judge whether the 2017 results were particularly weak or if the previous years were especially strong, but the appraiser should be able to. Candlewood only used the last 12 months in considering the fairness of the merger consideration.
You need to come up with a very good explanation to justify a price that is made at 1.2x the 2016 earnings and 0.12x book value. I didn’t read a convincing explanation. Candlewood makes a number of assumptions that, in my view, are overly conservative.
For example: for the peer analysis it used a EBITDA multiple of just 4.9x, using the depressed(?) 2017 EBITDA. And in the liquidation analysis, it valued the net cash at 51%, because a substantial portion is held overseas. The net fixed assets were valued at just 30%. There might be a lot more value in the company’s land and property than the depreciated value on the balance sheet suggests. You would need to take the market value into account.
It looks to me that the minority Waxman shareholders are getting an extremely low price for their shares. Unfortunately management holds a majority of the shares and votes. Shareholders will have to assert their appraisal rights and take this to court if they disagree with the offer. For most investors this will be a path that is much too expensive and time consuming to pursue. Those are the dangers of investing in “cheap” dark stocks. Sometimes you get a price that is inadequate, although this seems like an extreme example.
Disclosure: long a couple of shares in Waxman Industries (OTCMKTS:WXMN)