Disclaimer: One of us owns this and this is not a recommendation to buy or sell a stock. It’s just a fun read.
So you’ve been working hard, saving your pennies for that next value stock… but maybe you’re frustrated and want to feel richer now. Good news! For a bit over $2 you too can honestly say “Oh, I am part owner of a private California winery”. It will sound great at cocktail parties...
So here’s the story..
Truett-Hurst, Inc., is a (currently) publicly traded Calfornia wine producer. It has quite the storied history but we will focus on the past year. The Company owns and operates a 26 acre winery in California and also had a wholesale division. However, their wine empire building just wasn’t working and so they decided to simplify this year. On August 13, 2018, they “entered into an Asset Purchase Agreement with Precept Brands LLC, a Washington limited liability company (“Precept”) pursuant to which the Company agreed to sell certain assets comprising its wholesale wine business to Precept and completed the sale of such assets for a purchase price of $18,325,012 in cash, assumed liabilities and royalty payments, subject to certain closing adjustments. In connection with the sale, the Company and Precept entered into a Royalty Payment Agreement and a Transition Services Agreement. Under the terms of the Royalty Payment Agreement, Precept will pay the Company a percentage of Precept’s gross profit from the sale of certain Company brands purchased by Precept in the transaction.”
Following the transaction the Company repaid all of its outstanding debt and was left with $5.5 million in cash, a large winery, and a huge pile of wine. Here’s the latest balance sheet.
Book Value Math
Their share ownership is a bit complicated, with a Class A and B structure with LCC units.. but to keep the math simple there are 7,476,339 class A equivalent shares out. (For those that like the details – “As of January 7, 2019, there were 4,588,087 issued and outstanding Shares, 161,766 issued and outstanding stock options and awards of Shares and 2,726,486 LLC Units not held by the Company exchangeable for 2,726,486 Shares, resulting in a total of 7,476,339 Shares eligible to be tendered in the Offer.”)
Based on everything at book value, their book value per share is $2.30 (~$17.2M / ~$7.5M unrounded), compared to the current price of $2.10 (market cap of ~$9.6MM). However, their winery is carried at book value (and the offering also notes a potential lawsuit liability of $500,000; read the footnotes people).
So we did a bit of digging. How much are California wineries anyway? We found one quite close to theirs for sale.. It’s listed at $5.25MM for 15 acres = $350K acre. Truett has 26 acres = $9.1MM.
So based on napkin math their book value (with property and equipment valued at $6.2MM) is likely conservative, and this analysis also assumes no value for their brand, wholesale royalty arrangement (see offering fairness opinion projection assumptions), or the fact that there is an operating business in place.
The Trigger – “Let’s buy back shares then go private!”
On January 14, 2019, the Company put out a very comprehensive Tender Offering to repurchase 1 million shares (out of 7.5MM) at $2.40 (check Edgar for the 146 page masterpiece) with a short trigger – You have to tender your shares by February 11th. And the rationale is simple, they want to get rid of shareholders:
“We believe that the Company currently has fewer than 300 holders of record of the Shares, making it eligible to deregister the Shares with the SEC following a delisting of the Shares from the NASDAQ; however, we have a larger number of beneficial stockholders, which could result in eliminating our ability to do so or reinstituting our reporting obligations should all or a portion of those beneficial holders become holders of record. The Company expects that the Offer will reduce the number of the Company’s beneficial stockholders in an amount that the Company could more confidently pursue these alternatives, which may include delisting from the NASDAQ, trading on the over the counter (OTC) markets, deregistering our shares under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), ceasing our public reporting and filings and/or taking steps to discontinue any further public trading of our stock…We could purchase 1,000,000 Shares if the Offer is fully subscribed, which would represent approximately 22% of our issued and outstanding Shares and 14% of our issued and outstanding Shares (including Shares issuable upon exchange of the LLC Units) as of January 7, 2019”.
The rationale for going private is focused on the cost of being listed, and frankly given their simpler smaller business we understand the logic. Per the memorandum – “The significant cost savings that we expect we could realize as a result of the termination of the registration of the Shares under the Exchange Act. For the fiscal year ended June 30, 2018, we spent an estimated $593,087 on costs solely related to being an SEC reporting company.”
Here’s the play
Given this exciting opportunity, there are two plays: Either 1) buy for short-term gain (stock is trading at $2.10, below offer of $2.40 for a 14% return if fully allocated) or 2) be part of company going forward and tell all your friends you part own a private winery.
Option 1: The Risks
With a tender like this there are two key risks: 1) it won’t close due to lack of resources or some other hiccup or 2) it will be oversubscribed (i.e. too many people want to get out) and you get handed back some shares that you would have to sell at an unknown price. In this case, they have cash on hand, are very motivated (management and key shareholders are on board) and the offer seems fair so it will likely close. However, as for the second part.. it’s your judgement call. As per the offering, “Spencer Grimes, a former member of the Company’s Board of Directors who resigned on January 4, 2019, and certain of his affiliates, have indicated that they intend to participate in the Offer.” That takes up about half.. Here’s a full list of insiders per the offering:
Option 2: Post-the-Offer
After the offering you’re going to be left with a clean debt-free winery with no wholesale noise and about 6.5 million shares outstanding. If you take the offering at face value, they say that their income last year from continuing operations (i.e. excluding the wholesale division) were ~$2 million. That plus listing savings of ~$500K gets you to about $2.5M. $2.5M/6.5M is about $0.38/share and at today’s price that is a P/E of 5.5x ($2.10 / $0.38). This also excludes the royalty stream and the cachet of being able to say “yeah, I co-own a private California winery”). However, it also includes a one-time insurance gain of $1.8MM last year.. Do your own analysis. (Note: The Offering also has a fairness opinion that includes projections through 2023 on page 136).
Maybe it’s worth cracking a bottle of wine and mulling over the details…
Additional Detail: Company Numbers
The Company was kind enough to put together Pro Forma financials as well. The Offering also includes a fairness opinion with projections.
Per the Company: “The following Unaudited Pro Forma Condensed Consolidated Balance Sheet and the Unaudited Pro Forma Condensed Consolidated Statements of Operations are derived from the historical consolidated financial statements of the Company. The pro forma amounts have been calculated assuming that we complete the Offer to repurchase 1,000,000 shares at the price of $2.40 per share. The selected unaudited pro forma financial information is intended for informational purposes solely for the purpose of providing stockholders with information that may be useful for purposes of considering and evaluating the Offer and does not purport to be indicative of the results that would have been obtained if the Offer described above had been completed at the dates indicated or that may be obtained at any date in the future.”