A liquidation with a huge hidden asset

Liquidation..that elusive thing all net-net investors hope for but never expect to happen.  A friend sent me a note a few weeks ago suggesting I take a look at Alpine Group (APNI), he said they were cheap at 44% of NCAV and profitable.  We traded a few notes after I looked at the company and then he sent an email last week saying they announced they were liquidating.

Alpine Group is nothing more than a collection of four companies, Exeon, Wolverine Tube, Synergy Cables, and Posterloid.  Posterloid makes signboards like the ones you'd see at the McDonalds drive-thru.  Wolverine Tube manufactures copper tube used in HVAC, refrigeration, and power generation applications.  Synergy Cables is an Israeli traded company that manufactures power cabling, and Exeon manufactures copper wire.

The company has had a turbulent history of profitability, but in a liquidation that doesn't matter much anymore.  The company recently released their 2012 annual report which contained an adverse opinion from their accountants.  It appears that Alpine Group refused to consolidate Synergy Cables even though they owned 50.4% of the company.  Instead they chose to record their Synergy Cables holding using the equity method.  The accountants point out this isn't allowed under GAAP,  management responded that they intended to sell down their stake so they shouldn't be required to adhere to the letter of the law.  What management doesn't seem to understand is that financial statements are not meant to reflect management's intentions but rather take a snapshot of the company on a particular date.  Management did stay true to their word reducing their stake below 50%.

The company invested in Wolverine Tube at the top of the housing market, the exact wrong time to invest in a housing related stock.  Wolverine eventually went bankrupt, Alpine ended up with a pile of options on Wolverine in exchange for their worthless equity investment.  Additionally the company purchased 4.5% of the company on the open market after it re-emerged from bankruptcy.  Alpine wrote off their initial Wolverine investment, and subsequent options as well.  Wolverine is held at zero on the balance sheet, but the holding is worth something.  The company has been profitable since emerging from bankruptcy.  It's hard to know what the company might receive for their 4.5% stake in the company.

Alpine has had a long history of continued capital commitments to Synergy Cables.  This is most likely because the CEO of Alpine is also the CEO of Synergy Cables.  To make a long story short Alpine loaned a lot of money to Synergy over the years all of it which was subsequently lost.  This resulted in the write down of their Synergy investment to zero.  From the financial statement perspective there is no value to the Synergy investment, but this isn't accurate from an economic perspective.  Alpine owns 40% of Synergy Cables, and since Synergy Cables (SNCB.Tel Aviv) is actively traded on the Israeli stock exchange it's fairly easy to determine how much their stake is worth, it's close to $5m.  This is considerable for a company with a market cap of $8m.

Valuing Alpine is very straightforward, determine the value of the assets and subtract the liabilities.  Most liquidations take longer than expected, Alpine expects theirs to be mostly complete by mid-2014.  Many liquidating companies are burning cash which needs to be taken into account when doing a valuation.  Alpine is cash flow positive, although barely.  Looking through the cash flow statement it's entirely possible that the company won't burn cash as they liquidate.  After all Alpine is simply a holding company, their holdings will continue to operate and conduct business next year as they are today.  The only thing being dissolved is the holding company.

The first valuation is the most aggressive, I took Alpine's equity value and added the value of their Synergy Cables holding.

If this valuation holds there is clearly a lot of value here, liquidation value is $1.24 a share and the company is trading for $.73.  Both of these valuations don't include Wolverine which could be worth something.

The problem with book value is it's opaque, the company has close to $1m in PP&E, but investors have no idea what it is.  They own $27k worth of land somewhere, maybe a few acres, a $232k building and then $1.7m worth of machines.  Are these components part of a consolidated subsidiary or the holding company?  What will happen to them?  We don't really know, so I created a conservative scenario based off of NCAV and a discounted NCAV:

The company is trading right around unadjusted NCAV, and well above a discounted NCAV.

To determine if this is a good investment at the current price an investor needs to assess whether the company's long term assets have value, and whether the company will realize their full current asset value.  If they do both and their holdings continue to generate profits up to the end of the liquidation this is an extremely attractive investment at the current price.  If neither of these assumptions pan out then someone buying today could end up with a loss.

Disclosure: No position

1 comment:

  1. First Distribution is scheduled for end of month at $.25/share.