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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I think you’re missing the $3m+ in cure costs? that has a big impact on final equity recover
in fact that $3m+ in cure costs actually lowers the recovery per share to the equity by ~$1 so it is a very big factor
and also looks like virtually all of the payment to the equity is from that note which needs to be discounted from face value as it’s not a high credit quality product at all, so I get equity recovery about half of what you’re showing here, owning it at $1+ is just pure speculation on a higher bid coming in, at $2+ there is ZERO margin of safety here as if no bid comes in then you could easily end up with <$1 in value that will take over a year to get and that doesn't build in any padding for higher lawyer/banker fees or other random costs that ALWAYS build up in bankruptcy and this is such a tiny estate any fees will impact the equity value very dramatically, put in another $500k of expenses (management severance?) and you'll see it takes a huge huge chunk out of equity value.
this is an interesting idea and thanks for posting but at $2+ there is no value at all here, just pure speculation imo
Hey Sean (at least I think it’s Sean),
Thanks for pointing all of this out. I think you’re right that I was overstating the MOS significantly, specifically due to the cure costs. I sold my position at a small profit today due to the mistakes you pointed out. I’d probably go long again if it came back down.
Regarding cure costs. These are already included in the pre-petition payables on the balance sheet. Compare the balance sheet and the cure costs from the initial agreement and the most recent 8-K.
For what it’s worth, I calculated the remaining equity to around 8m conservatively without the mysterious “Excluded real estate”. I couldn’t find any details about the specifics of that in the agreement.
The part about the promissory note and the ability for bankruptcy costs to chew up equity is certainly concerning though. I’ll probably be passing on this one.
http://www.kccllc.net/documents/8819200/8819200120510000000000008.pdf
2.6 Purchase Price; Allocation of Purchase Price.
(a) The purchase price for the sale and transfer of the Purchased Assets (“Purchase Price”) shall be in U.S. dollars and shall be (i) Forty-Nine Million Seven Hundred Thousand Dollars ($49,700,000.00), plus (ii) the Inventory Value (as determined in Section 2.7(a) below) and the Book Value of the Acquired Accounts Receivable of Sellers, minus (iii) the aggregate dollar amount of the Post-Petition Payables and the Accrued Expenses; provided, however, the Post-Petition Payables and Accrued Expenses shall be calculated and determined in the same manner as the Statement of Current Assumed Liabilities attached to the Balance Sheet.
am i crazy, or does this put recovery (much) closer to $4 per share than $3.50, even w/ pretty draconian assumptions regarding everything else?????
I get about $4 too, with shares trading now at $3.18 that seems compelling?
actually well above $4
[...] mentioned Cagle’s (CAGAQ) a few weeks ago as a potentially interesting bankruptcy situation. Last Thursday, the company announced the winning bid, which came in substantially above the [...]
does anyone know the status of this?