Upfront note- I wrote this over the weekend (April 15) with the stock price at $1.80, and went long CAGAQ at $2.00 this morning. I had planned on posting this tomorrow morning, but the stock price has run up so I figured I’d get this out there (at the current price of $2.25, there’s much less MOS and I’ve sold some of my position at these levels). As I mentioned in yesterday’s post on AGUNF, I have limited experience in the bankrupt equity space. Please do your own research and be very careful.
Cagle’s (CAGAQ) is an interesting equity play. It first came to my attention through a reader, who mentioned he had seen it written up on VIC (unfortunately, I’m not a VIC member and can’t see it, but if anyone could send the write up my way so I could test it against my assumptions, I’d be grateful).
The first thing to note that I think really makes this interesting is that the Cagle family holds 50%+ of the outstanding equity (page 5). Obviously, them going bankrupt has put a serious ding in the family fortune. But it also means that they will be very, very motivated to maximize recovery for the equity.
Anyway, the company is in bankruptcy and has agreed to sell themselves to the highest bidder as part of the bankruptcy proceedings. They’ve also already entered into a “stalking horse” agreement with a potential bidder, meaning we know what they will sell for in the absence of a higher bid (brief description of bid on page 5, here’s the full legal agreement).
The bid is for the following- $37m plus the value of A/R and inventory at the time of close (not including inventory more than 60 days overdue) less accepted liabilities. Whatever cash the company receives from this will the be used to pay down all of the remaining debt and liabilities at the company level, and then the proceeds will be liquidated to shareholders.
Even better, they let you know the current value of that bid. As of January 28, the bid A/R + inventory was worth ~$43m and the assumed expenses were worth $7.7m (again, p. 5). However, it’s important to note that this is not all of the assets that will be left for distribution. The bid leaves all cash with the company (as well as insurance policies and one piece of real estate, which I will assume is all worth nothing).
Also, the bid notes that those values are of January 28th. However, the company has published updated financial statements as of March 3rd, so we can use those to get a more accurate valuation of the current bid value (see Jan. 28th balance sheet here and March 3 B/S here). The two balance sheets look very similar, but overall A/R + Inventory has decreased by $0.534m, so let’s adjust the value of A/R to $42.5m. Nothing else changes.
So with the cash portion of the bid at $37m, the A/R + INV at $42.5, and the cash on hand at March 3 at $5.1m, we get a total value (less the $7.7 in assumed liabs) of $76.9. Subtract out all of the remaining liabilities ($74.355 less the $7.7m assumed by the stalking horse) and you get an equity value of $10.245m. With 4.616m shares outstanding (see page MOR-4), that’s a per share value of $2.219.
Now, it’s true that that value could shrink a little bit over the next month or so if the company operates at a loss due to bankruptcy expenses (though they were profitable in their last reported month). But given the sale has to be finished by the second week of May and how big the gap between the current price and the bid price is, I think there’s a pretty solid margin of safety here.
There’s also a bit of concern in that any of the payment in excess of $55m will be provided in the form of a 2 year note that bears interest at 8% (on page 5 and 6). But I also think I’ve been very conservative in assuming that the stalking horse only picks up the $7.7m in assumed liabilities and the rest stay at the company. In reality, I think the stalking horse also assumes some of the accounts payable and accrued expenses but does not charge the company for them (see page 6), which would significantly increase recovery value.
In addition, we haven’t mentioned the potential of a competing bidder or the stalking horse raising their bid! I’m unfamiliar with the industry or the potential for this happening, but it seems like there’s a pretty decent chance of this happening, which could drive big upside.
Finally, I mentioned this up top but I will mention it again here. The family owns 2.3m+ shares. The family company is now bankrupt, and it seemed to employ a significant percentage of them. The source of all their wealth and income is going away. They have one more month to create value and try to increase recovery- remember, every $1m increase in value equates to over $210k in recovery for the family. It would not surprise me if they found a way to get the selling price up by having a big selling month in their last month owning the company, thus increasing receivables / inventory and driving the payment formula up.
Disclosure- Long CAGAQ and AGUNF
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