Thanks to the efficient market we're presented with a $200 bill laying on the ground that most investors claim doesn't exist. The $200 bill is in the form of the Fortune Industries going private offer. My previous post on Fortune is in the top five for most read posts, which I find strange given this is a tiny penny stock. Since July when I last posted on Fortune nothing has changed, and yet everything has changed.
I first want to make a small note about these little tenders. A lot of investors are dismissive about making a few hundred dollars on an odd lot tender. They're considered the realm of pip-squeak investors. Sure $200 isn't going to move the needle of any portfolio, but it is real money. Step back and consider, where else can you make $200 for reading for a half hour and clicking a mouse a few times? Think $200 isn't worth much? You could buy 88 NYC Subway trips, 134 Fillet-o-fish sandwiches, or four cases of a craft beer with $200.
The basics of this deal are very simple. Fortune is going dark again and they're cashing out shareholders who own less than 501 shares at $.61 a share. Unfortunately given the company's history the unanswered questions are, who will be cashed out and will this deal actually complete?
To answer this we need to take a look at the developments over the past eight months. Originally Fortune was going to cash out shareholders who held 500 shares or less at the end of March 2012. Management who owned less than 1% of the outstanding stock engineered a deal where they would end up owning 71% of the company. Shareholders who owned 39% of the company would own 8.6% after this deal.
The company claimed that shareholders would continue to hold a consistent 'economic interest' in the company even with the reduced ownership percentage. To shareholders who just care about trading a piece of paper, the economic interest would indeed be the same. If one were to place a multiple on the current earnings, and then place the same multiple on the earnings under the new structure the same economic interest is retained. Unfortunately shareholding isn't just owning a piece of paper, it's actual ownership in a business. Management is taking control of this company, throwing up smoke and mirrors and telling shareholders everything is alright. Additionally I'm not sure how any shareholder can get comfortable with a management team that has worked so hard and creatively to outright steal the company from shareholders.
Last year everything looked like it was going according to plan for the going dark transaction until Carter Fortune's death in August of 2012. Readers of the previous post will remember that Mr Fortuned owned perpetual preferred stock that the company was trying to rid themselves of. As part of the transaction the preferred stock would be converted into shares that the current executives would control. Mr Fortune would receive payment for his preferreds.
After Fortune's death the company entered into a merger agreement with Ide Management Group a nursing home operator. In leu of the going dark the company was now planning on engaging in a reverse merger, and a divesture of the human resource company as a way to rid themselves of the preferred stock. Small shareholders would no longer be cashed out, they'd now own a nursing home operator. This transaction wasn't any better for shareholders, they would now own a different business than they originally set out to buy with different management.
The Ide deal was terminated this year for an unknown reason without consequence to the company. This left Fortune with a problem, they no longer had an exit strategy to get rid of the preferred stock, a bank owned the preferred stock, and Carter Fortune the controlling person for those shares had passed away.
So the company did pulled out the going private agreement from last year, changed some dates and filed it with the SEC. Herein lies the problem, while the filing date, and the date for the shareholder meeting to vote on the agreement have been changed nothing else has. This means the company is still claiming they will only cash out shareholders who owned less than 500 shares on March 26th of 2012 and who continue to hold those shares. A lot has changed in the past eight months, and it's likely the shareholder base has turned over a lot. Will cashing out those holders from last year still be enough to get the company under the magic 300 limit to go dark? It's unknown, and unfortunately the company's management is less than friendly when asked about this.
If after reading this you think the deal is going to close, and the current odd-lot holders will be cashed out it's worth picking up 500 shares. On something like this I consider the gamble worth it, I own odd-lots in two accounts. But keep in mind this isn't a slam dunk deal, there's a good chance the company could go dark and anyone purchasing after March 26th 2012 will still have their shares. To that there's consolation that this company is cheap. Right now they're on pace to earn about $.06 this year, and with shares at $.19 that's a P/E of 3x. Not to mention they're trading below NCAV.
One other point, in the proxy it states that shareholders are allowed to request the full copy of the fairness opinion on the original deal. I have a digital copy of the full fairness opinion if anyone's interested.
Talk to Nate about Fortune
Disclosure: Long some odd-lots of Fortune