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)
I would hope there would be some protections for shareholders. If the sale is to a related entity and the sale will be accomplished by a vote, I would expect there to be a requirement of a majority of the minority in approval. If the sale is via a tender, then they would need to have over 90% of the shares in the end in order to force out the other 10%. If the process is via a reverse split then shareholders may be on the short end of the stick; the latter process seems to be the real thorn in minority shareholders’ sides.
The sale is to an entity created by the controlling family for this purpose. I don’t see a majority of the minority provision in the documents. It looks like just a majority of the voting power needs to vote in favor of the merger for it to go through. You can dissent and then seek appraisal at the Delaware Court of Chancery.
Why invest in companies where management are Rats? I know we are “value” guys and like cheap things and margin of safety, but partnering in a business with people who steal from public shareholders is foolish.
I agree. It’s often tough to make that judgment accurately though. It’s also a question of how brazen management dares to act. And they might not start out acting like this at the beginning of their careers.
I do think that it is a red flag when the management insists on shareholders signing a NDA. Yes, they are maybe trying to hide the presence of substantial value, but they are a lot more likely to treat outside shareholders poorly.
Outrageous.
Now trading at $3.17 on large volume. Buyer is probably looking to exercise his appraisal rights and confident he’ll be able to get more than the current price.
It’s an interesting situation and one where large investors, especially those who are lawyers themselves, have a big advantage compared to small shareholders. I think DBM Global (OTCMKTS:DBMG) is a similar situation. At least some small shareholders can get a better price in the market than what management is offering.
I am no lawyer but I feel it makes a strong argument if you can show to the court that prior to a bogus sale being completed there were bids in the low $3 range and yet shareholders would not sell even at those prices. If I was going to have my day in court I would make sure the bid/ask and last trades looked like the current situation because it would have to help my argument that the price paid was far too low.
Yes, that could be a strategy that could help your argument in court.
I think in a case like this, where management requires shareholders to sign a NDA before giving access to financials, the market price should be largely disregarded by any judge looking at this.
In cases where management is throwing up hurdles to prevent people from getting the information they are entitled to, you can get extreme mispricings. Kahala Brands was trading at $10.75 (1x earnings) in 2016 shortly before an offer came in to acquire the company at $149: https://alphavulture.com/2016/06/06/kahala-brands-the-merger-arbitrage-idea-of-the-year/
Are dissenters’ rights consolidated by the court if multiple shareholders file? Or does an individual shareholder get included automatically in the determination of value if somebody else files a petition?
I have no idea.
I think shareholders who want to go for appraisal should unite, to keep their costs down. That said, I have no idea how you’d go about that. Especially here, since management required the signing of a NDA before giving shareholders access to the financials. There are probably many shareholders who were completely in the dark here. One site that could be helpful in this process is “The Shareholder Forum”: http://www.shareholderforum.com/
Edit: just noticed there’s now also a topic on the Corner of Berkshire & Fairfax forum: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/wxmn-waxman-industries/
I think the fairness opinion may be suspect. Why would you even consider a liquidity analysis when this is a going concern? They have a life insurance contract that will pay the company 8,160,000 when first of 3 people pass. I believe one of them is in their eighties.
And their is no mention of the salaries/bonuses the executives are earning. Are they comparable to other companies this size?
One of the one-offs (a 527,000 hit…of which ebitda analysis is being done on):The Company was named as a defendant in a lawsuit by KeyBank N.A. against the Co-Chairmen of the Company and various Waxman family members, alleging that the Company was the “alter ego” of those defendants and should be responsible for the settlement of approximately $2.7 million in promissory notes owed to the bank by those individuals. The Company defended its position and, without any admission of guilt, the claim was settled and dismissed without prejudice in July 2017. The Company incurred approximately $527,000 in the defense and settlement of this matter.
I think whomever loaded up on the 30,000 shares recently will most likely assert his/her appraisal right. I like their odds at getting a significantly higher price.
Great points. Yes, the fairness opinion has many elements that most outside shareholders would strongly disagree with. It’s almost comical to read really.
This is highway robbery. Breach of fiduciary duty to minority holders. And to write a fairness opinion with at under 1.90
With the stock at 2.45. 4.50 and worth 5 times that in a sale after taking it Pvt These 85 yr old geezers think they can bye us with bubkiss
Let’s show them and demand right of appraisal and contact the govt protective agencies requesting relief from these hold harmless hires writing fairness letters that are absolutely insane and unfair
A shareholder on CoB&F mentioned that the meeting was cancelled and the take-under is not happening at this point in time: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/wxmn-waxman-industries/msg330348/?topicseen#msg330348.
It looks like Waxman will be staying dark.
Almost one year after this post was published, the deal is officially terminated: https://www.prnewswire.com/news-releases/waxman-industries-inc-terminates-plan-of-merger-300781414.html
A final update on Waxman: the company basically went bust in 2022! I received a letter from them (I held a single share to receive mail) informing shareholders that they were winding down the company.
It turns out Waxman began to sell hand wipes during the Covid pandemic. They received a large order of $16.6m from Kroger, but the order was ultimately cancelled. Waxman had already paid $10m to its suppliers to produce the products. They got into financial trouble as a result. They broke a bank covenant and a chief restructuring officer was brought in. He sold off two business lines. The bank and most of the inventory creditors were paid with the proceeds.
The company brought arbitration proceedings against Kroger, but the ruling went against Waxman. It turns out they initially labeled the products wrong, and even though they corrected that error, the arbitrator ruled that Kroger had the right to cancel the orders.
There are a few assets left inside the company, but from the sound of it there won’t be anything left for shareholders. The shares were already delisted from OTCMarkets a few months ago.
A pretty shocking outcome. It goes to show that one screw-up can kill an entire company. In the end shareholders would have been financially better off by taking the offer for 12% of book value in 2018. Who could have predicted that?