Every now and then I like to highlight a transaction that to me looks unfair to minority shareholders. For example, two years ago, Waxman Industries tried to buy out shareholders at a ridiculous price that amounted to just 12% of book value. Apparently so many shareholders asserted their appraisal rights that the company ended up cancelling the whole deal about a year later.
This week I received the financial statements of York Corrugating Company (OTC:YCRG). The company is a manufacturer of precision metal components and sheet metal products. York began operating 118 years ago. The company was also listed in the 6th edition (2002-2003) of Walkers Manual of Unlisted Stocks. There it was noted that the company had, over time, repurchased a whopping 85% of the originally outstanding shares. Currently, they’re up to almost 90%.
In previous years I only received financials and the notes to the financial statements. There was no letter from the CEO describing how the business performed that year. This year there suddenly was a letter. It was even titled “Important Letter to Shareholders”, so that made me curious.
Unfortunately the letter announces an attempt from the company’s management to cash out the remaining minority shareholders. They plan to do this by way of a reverse split at a ratio of 2960-for-1. Every shareholder holding less than 2960 shares will see their fractional shares (post-split) cashed out at a price of $308 per share, determined on a pre-split basis.
The company has obtained a valuation from Baker Tilly Virchow Krause LLP to deterimine the “fair market value” of the minority shares. Their report is not included, nor is there any explanation offered why this price is deemed fair.
The company only had 20,841 shares outstanding as of December 31, 2019. At a price of $308, the Board of YCRG thinks that $6.4 million is a fair valuation for the company. Looking at the balance sheet and the company’s recent earnings, this valuation looks much too low.
YCRG holds cash and cash equivalents of $1.6m and $3.75m in certificates of deposits. Another $250k is invested in debt securities. Total liabilities are just $547k. Tangible book value is $8.6m. The company has held large cash and investments on its balance sheet for years. It’s safe to say that most of this cash is not needed in the operation of the business and should be considered excess cash. This total amount of cash and investments of $5.6m should already make you very skeptical when management says that $6.4m is the fair value of the company.
Perhaps the company is losing money hand over fist? No. This is the company’s net income from 2016 to 2019:
The company had a defined benefit pension plan that was terminated on May 4, 2018. The company contributed $1.3m to fund the accrued pension liability and recognized the remainder of the net periodic pension cost. I think this is what impacted the 2018 results, but I’m not sure. I believe the pension liabilities are now fully settled and won’t weigh on the company any more.
So the company does make money fairly consistently and it is clearly worth something. The exact number is not that important here, but it should be way more than the $0.8m (net of $5.6m of cash) that management is now effectively valuing the operating business for.
Shareholders do have the opportunity to assert their dissenters rights under Pennsylvania Business Corporation Law. YCRG’s management mentioned this explicitly in the letter and have even included the relevant section in the materials they sent to shareholders. I think any shareholder that holds a material investment in YCRG should vote against the reverse split and assert their dissenters rights. The question is how many shareholders can really afford to go through the time and trouble to do that?
To me it is always disappointing to see a situation like this. The company is sitting on a large amount of cash and investments that it has refused to return to shareholders (the last dividend was paid in 2012, according to OTCMarkets.com). Almost 90% of the shares are already repurchased and management probably holds a substantial number of the remaining shares, although I have no information about insider ownership. Yet, they still try to screw the few remaining minority shareholders to just get a little more for themselves. That just annoys me and this is why I feel the need to publish a post like this in the first place. It’s almost certainly not an actionable idea, because volume in this stock is virtually non-existent.
Disclosure: long a single share of York Corrugating Co. (OTC:YCRG)