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Oddball News Roundup
- Tim Bergin (of On Beyond Investing newsletter) wrote a post on Life Insurance Company of Alabama. See our earlier posts on this: Life Insurance Company of Alabama, Shareholder Activism at Life Insurance Company of Alabama, and Letter Sent to Life Insurance Company of Alabama (LICOA) Shareholders. Also see the Concerned Shareholders of LICOA website. There was a hearing in the federal court cases against LICOA on Wednesday, and the court rejected LICOA's motion to dismiss which means that LICOA will have to file an answer and discovery will be proceeding.
- Management at First United Corp (FUNC) won the proxy contest against activist investor Driver Management. Unfortunately, Glass, Lewis & Co. and Institutional Shareholder Services Inc. both recommended that shareholders support First United's management, which resulted in the Vanguard and DFA index funds voting for management. Be sure to see the letter that Driver wrote to the Maryland Commissioner of Financial Regulation about FUNC's efforts to derail activism.
- We posted updates on results from Hanover Foods, Pardee Resources, Coal Creek, as well as a proposed reverse split at York Corrugating. We are working on the June 2020 Issue of the Oddball Stocks Newsletter, which will be our 30th. It will have updates on annual results for tons of the Oddball companies. If you are curious about trying it we have back issues available a la carte as well as a Highlights Issue which we released in February.
- Tesla (which we have written about in the Newsletter) broke $1,000 per share and has a market capitalization and enterprise value second only to the far larger and more competent Toyota Motor Corporation. If you have never delved into Tesla before, check out some links... Tesla Deaths, podcasts like TeslaCharts and Quoth the Raven, Crowdsourced Tesla Research (which shows things like sudden unintended acceleration Vehicle Safety Complaints), Elon Musk Today (which has unfulfilled Elon Musk promises and predictions), PlainSite (with a comprehensive report).
Hanover Foods Reports Quarterly Results
Hanover Foods is a name that is familiar to Oddball investors. We have covered this one four times on this blog (in 2012 twice and in 2013 and 2016). It has also been written about on Corner of Berkshire and Fairfax, Credit Bubble Stocks (twice), and other blogs.
Hanover A shares traded as low as $55 in March and are currently $68, which is where they traded as long ago as 2003. Back then, with about 1.07 million A and B shares outstanding, the market capitalization was $73 million. Now with only 715k A and B shares the market capitalization is down to $49 million.
Shareholder equity then was $95 million. Now, as you'll see below, it is $242 million! Current assets net of all liabilities was only $13.6 million. Now it's $126 million. (So, the price to book is now 0.2x and the price to NCAV is 0.39x.)
Part of the problem is that earnings have declined. In the 2003 fiscal year, Hanover earned $9.8 million on $290 million of sales. In fiscal 2019, earnings were only $2.6 million on $395 million of sales.
The 1% return on equity translates into a 5% earnings yield thanks to the 80% discount to book value.
Will Hanover ever return to greatness? We will be writing about some ideas in the upcoming Issue of the Oddball Stocks Newsletter.
Hanover A shares traded as low as $55 in March and are currently $68, which is where they traded as long ago as 2003. Back then, with about 1.07 million A and B shares outstanding, the market capitalization was $73 million. Now with only 715k A and B shares the market capitalization is down to $49 million.
Shareholder equity then was $95 million. Now, as you'll see below, it is $242 million! Current assets net of all liabilities was only $13.6 million. Now it's $126 million. (So, the price to book is now 0.2x and the price to NCAV is 0.39x.)
Part of the problem is that earnings have declined. In the 2003 fiscal year, Hanover earned $9.8 million on $290 million of sales. In fiscal 2019, earnings were only $2.6 million on $395 million of sales.
The 1% return on equity translates into a 5% earnings yield thanks to the 80% discount to book value.
Will Hanover ever return to greatness? We will be writing about some ideas in the upcoming Issue of the Oddball Stocks Newsletter.
Hanover Foods Financials 03... by Nate Tobik on Scribd
Letter Sent to Life Insurance Company of Alabama (LICOA) Shareholders $LINS $LINSA
We originally posted in November 2019 about Life Insurance Company of Alabama (LICOA), and then did an update last month about a new shareholder activism effort, which includes lawsuits by investors such as Jeff Herr, Mitchell Partners, and Trondheim Capital Partners. The latest development is a letter from Trondheim to shareholders of the company.
We'll have more on this situation, and other activist investing situations, in the upcoming June Issue (#30) of the Oddball Stocks Newsletter.
licoa shareholder letter Ma... by Nate Tobik on Scribd
We'll have more on this situation, and other activist investing situations, in the upcoming June Issue (#30) of the Oddball Stocks Newsletter.
York Corrugating Company Reverse Split $YCRG
Be sure to read a great post this morning by Value Investing Blog on a YCRG reverse split squeeze-out:
York Corrugating Co. is a classic Oddball (it's in the Century Club) although we have not written about it on the blog before. It is based in West York, PA; a half hour or so from the headquarters of Hanover Foods, but pretty close to little York Airport where Hanover keeps its Cessna Citation jet!
Whatever is in the water in southeastern Pennsylvania does not seem to promote friendliness to minority shareholders. In fact, in looking for case law on squeeze-outs, we see some old friends: a 2012 Supreme Court of Pennsylvania opinion in Mitchell Partners, LP vs Irex Corporation:
Good for Mitchell for fighting so long and hard - Irex paid a big tax for not asking for minority shareholder blessing of what it wanted to do before doing it. But that 4+ year battle points to something important.
In his post, Value Investing Blog alludes to a problem that minority shareholders have in these situations: a high fixed cost of fighting what the management and/or controlling shareholders are trying to do. It can be a significant cost in terms of time and attention, and for someone to rationally pay that cost upfront he would have to anticipate a higher expected benefit. An appraisal action is likely going to require dissenting shareholders to have an expert report.
That suggests something important for corporate governance theory. The ownership structure of a company matters, and can be very important for the ultimate returns of shareholders. At the limit, if a company were to be owned by a large group of shareholders each holding a single share of de minimis value, it might be possible for the management to convert all of the company's equity to their benefit and rational for the shareholders to acquiesce. (In theory, the shareholders could resist as a class, but in practice those efforts have to be initiated and organized by a shareholder with an economic incentive to do so.)
Speaking of reverse splits, yesterday's post was about shareholder activism at Life Insurance Company of Alabama. On the Concerned Shareholder website, there is mention that LICOA was considering a reverse stock split in 2015 and met with state regulators about it. No word on what happened with it though (or why it didn't happen).
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.He did not post a copy of the letter to shareholders, but we are trying to track it down.
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. [...]
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.
York Corrugating Co. is a classic Oddball (it's in the Century Club) although we have not written about it on the blog before. It is based in West York, PA; a half hour or so from the headquarters of Hanover Foods, but pretty close to little York Airport where Hanover keeps its Cessna Citation jet!
Whatever is in the water in southeastern Pennsylvania does not seem to promote friendliness to minority shareholders. In fact, in looking for case law on squeeze-outs, we see some old friends: a 2012 Supreme Court of Pennsylvania opinion in Mitchell Partners, LP vs Irex Corporation:
Mitchell Partners, L.P., was a minority shareholder of Irex Corporation, a privately-held Pennsylvania business corporation. In 2006, Irex participated in a merger transaction structured so that some minority shareholders would be “cashed out” and would not receive an equity interest in the surviving corporation, a wholly owned subsidiary of North Lime Holdings Corporation. Mitchell objected to the acquisition, as it viewed the transaction as a “squeeze out” of minority interests at an unfair price. The merger proceeded nonetheless, and Irex commenced valuation proceedings in state court, per Section 1579 of the BCL, to address the dispute with Mitchell.Notice that the Irex merger closed in October 2006, Mitchell sued in federal court October 2008, and the case went to the federal court of appeals and the Supreme Court of Pennsylvania, because the federal court certified a question of state law for them to answer. The 2012 state supreme court opinion was a victory, establishing a legal precedent in Pennsylvania: "shareholders [can] bring a non-appraisal action, after the closing of a merger, asserting fraud or fundamental unfairness."
Meanwhile, Mitchell pursued common law remedies in a diversity action in federal court, naming as defendants Irex, its directors, most of its officers, and North Lime. The complaint asserted claims for breach of fiduciary duties, aiding and abetting breach of fiduciary duties, and unjust enrichment. The defendants sought dismissal on the ground that, under Section 1105 of the BCL, judicial valuation is the sole remedy available to dissenting shareholders in the post-merger timeframe.
Good for Mitchell for fighting so long and hard - Irex paid a big tax for not asking for minority shareholder blessing of what it wanted to do before doing it. But that 4+ year battle points to something important.
In his post, Value Investing Blog alludes to a problem that minority shareholders have in these situations: a high fixed cost of fighting what the management and/or controlling shareholders are trying to do. It can be a significant cost in terms of time and attention, and for someone to rationally pay that cost upfront he would have to anticipate a higher expected benefit. An appraisal action is likely going to require dissenting shareholders to have an expert report.
That suggests something important for corporate governance theory. The ownership structure of a company matters, and can be very important for the ultimate returns of shareholders. At the limit, if a company were to be owned by a large group of shareholders each holding a single share of de minimis value, it might be possible for the management to convert all of the company's equity to their benefit and rational for the shareholders to acquiesce. (In theory, the shareholders could resist as a class, but in practice those efforts have to be initiated and organized by a shareholder with an economic incentive to do so.)
Speaking of reverse splits, yesterday's post was about shareholder activism at Life Insurance Company of Alabama. On the Concerned Shareholder website, there is mention that LICOA was considering a reverse stock split in 2015 and met with state regulators about it. No word on what happened with it though (or why it didn't happen).
Shareholder Activism at Life Insurance Company of Alabama
We posted in November 2019 about Life Insurance Company of Alabama (LICOA), a micro cap insurance company with two share classes, one of which (LINS, the fully voting shares) trades at a modest discount to book value and the other of which (LINSA, with limited voting rights) trades at a gigantic (70%) discount to book value.
As we mentioned in that post, the State of Alabama Department of Insurance periodically examines the insurance companies that are licensed there and publishes a report about them, and the examination report on LICOA from May 2005 had some interesting revelations on the conduct of the family that controls and manages the company. In particular, we thought it was amazing that the report referred to "an issue with nepotism" and said that "this issue stands to harm the Company due to potential shareholder and/or policyholder lawsuits".
Well, there are now two lawsuits against the company and directors by LICOA shareholders. The first one was filed on August 28, 2019 in the US District Court for the Northern District of Alabama and it is Trondheim Capital Partners LP et al v. Life Insurance Company of Alabama et al.
The second lawsuit was actually a proposed complaint in intervention filed on April 29, 2020 in the same case; it has claims by a second group of LICOA shareholders that includes Mitchell Partners, LP and Jeffrey Herr. The company did not oppose the complaint in intervention and the court has ruled that it will proceed. Here is an excerpt from the opening of that second complaint:
One very interesting thing mentioned on the website was that "LICOA has made offers to settle litigation with some of the plaintiffs via buying them out. In March 2020, they offered some plaintiffs the equivalent of $25 per LINSA share." The LINSA shares are currently offered for $12.00 per share on the OTC...
Obviously there is no way of knowing whether that deal is still on the table or not, or whether it would apply to all comers or not. But it is interesting. Presumably it was not taken because the shareholder plaintiffs thought it was a "lowball" offer.
This reminds us of a dynamic we have seen in micro cap activism, which is that shareholders are rarely well-served by sitting passively on the sidelines while these things are going on. One thing that can happen is management will settle with unhappy shareholders by buying them out, and the remaining shareholders will be stuck in the company. At that point, they have fewer potential allies, and management will probably view them as oblivious or acquiescent.
We'll have more on this situation, and other activist investing situations, in the upcoming June Issue (#30) of the Oddball Stocks Newsletter.
As we mentioned in that post, the State of Alabama Department of Insurance periodically examines the insurance companies that are licensed there and publishes a report about them, and the examination report on LICOA from May 2005 had some interesting revelations on the conduct of the family that controls and manages the company. In particular, we thought it was amazing that the report referred to "an issue with nepotism" and said that "this issue stands to harm the Company due to potential shareholder and/or policyholder lawsuits".
Well, there are now two lawsuits against the company and directors by LICOA shareholders. The first one was filed on August 28, 2019 in the US District Court for the Northern District of Alabama and it is Trondheim Capital Partners LP et al v. Life Insurance Company of Alabama et al.
The second lawsuit was actually a proposed complaint in intervention filed on April 29, 2020 in the same case; it has claims by a second group of LICOA shareholders that includes Mitchell Partners, LP and Jeffrey Herr. The company did not oppose the complaint in intervention and the court has ruled that it will proceed. Here is an excerpt from the opening of that second complaint:
This lawsuit arises from the gross mismanagement and nepotistic practices of the Director Defendants and their oppression of the shareholders of LICOA and suppression of share values for their own purposes. Plaintiffs now sue to enforce their statutory rights, for breaches of fiduciary duty, for securities law violations, and for dissolution of LICOA. [...]There is also a website with information called Concerned Shareholders of Life Insurance Company of Alabama with all kinds of details. The shareholders discovered that the company paid $4,787 for a "desk chair" for President and Chairman of the Board Clarence Daugette last year.
As detailed below, these massive salaries that cripple LICOA’s income are part of sham “compensation structure” that is really a family jobs program for LICOA’s Directors and their families. They are unqualified and wasteful and these salaries are completely unjustified. Moreover, they have purposefully overcapitalized LICOA to keep share value down so they can repurchase them cheap and to keep a nest egg to perpetually fund their exorbitant salaries, luxury offices, and lifestyle while the LICOA shares do not even trade at liquidation value.
One very interesting thing mentioned on the website was that "LICOA has made offers to settle litigation with some of the plaintiffs via buying them out. In March 2020, they offered some plaintiffs the equivalent of $25 per LINSA share." The LINSA shares are currently offered for $12.00 per share on the OTC...
Obviously there is no way of knowing whether that deal is still on the table or not, or whether it would apply to all comers or not. But it is interesting. Presumably it was not taken because the shareholder plaintiffs thought it was a "lowball" offer.
This reminds us of a dynamic we have seen in micro cap activism, which is that shareholders are rarely well-served by sitting passively on the sidelines while these things are going on. One thing that can happen is management will settle with unhappy shareholders by buying them out, and the remaining shareholders will be stuck in the company. At that point, they have fewer potential allies, and management will probably view them as oblivious or acquiescent.
We'll have more on this situation, and other activist investing situations, in the upcoming June Issue (#30) of the Oddball Stocks Newsletter.
Pardee Resources Company - 2019 Annual Report
We've mentioned Pardee Resources before on the blog in The Problem With "Sum of the Parts", "What is an Oddball Stock?", and a brief mention last year of their share repurchase. Pardee was the main idea that Nate wrote up in Issue 1 of the Oddball Stocks Newsletter. We write about them fairly frequently in the Newsletter and they were in our recent Highlight Issue.
Pardee is normally a great annual meeting to go to - the only one that serves lunch - but it won't be happening in person this year. The virtual meeting is scheduled for Friday, May 22nd.
According to the proxy statement, there were 654,191 shares outstanding on April 1st, which was up from the year-end count of 649,448.
The increase is from stock compensation. Pardee has high SG&A cost some of which seems to stem from compensation. The non-employee directors of the Company get a board retainer of $50,000, and equity award of $50,000, and $3,000 for each board meeting. There are seven non-employee directors. The non-executive chairman receives a retainer of $125,000 and an equity award of $50,000. That's a total of $875,000 not counting the meeting fees and other additional retainers paid to committee chairs.
At a share price of $123, the Pardee market capitalization is now $80.5 million. So the board compensation alone is a 1% annual drag.
Stay tuned for the June 2020 Issue (#30) of the Newsletter coming up next month where we will share more thoughts about Pardee.
Pardee is normally a great annual meeting to go to - the only one that serves lunch - but it won't be happening in person this year. The virtual meeting is scheduled for Friday, May 22nd.
According to the proxy statement, there were 654,191 shares outstanding on April 1st, which was up from the year-end count of 649,448.
The increase is from stock compensation. Pardee has high SG&A cost some of which seems to stem from compensation. The non-employee directors of the Company get a board retainer of $50,000, and equity award of $50,000, and $3,000 for each board meeting. There are seven non-employee directors. The non-executive chairman receives a retainer of $125,000 and an equity award of $50,000. That's a total of $875,000 not counting the meeting fees and other additional retainers paid to committee chairs.
At a share price of $123, the Pardee market capitalization is now $80.5 million. So the board compensation alone is a 1% annual drag.
Stay tuned for the June 2020 Issue (#30) of the Newsletter coming up next month where we will share more thoughts about Pardee.
2019 Pardee Annual Report -... by Nate Tobik on Scribd
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