Saturday, November 3, 2007

The true worth of Viceroy Homes

To be absolutely clear, although we are against the current privatization deal, we would be open to exploring a buyout, should the purchase price be fair and reasonable.

The current offer to take the company private for $4.25 per share is absolutely ridiculous, and should not be considered what so ever.

Evaluating the true value of a company is quite difficult and somewhat subjective. But throught he following paragraphs I will show you exactly why we feel the current offer is way too low.

Following info from 2007 annual information form


Earnings

Viceroy Homes went public in 1986.

On September 1, 1993, the Company issued 2,100,000 Subordinate Voting Shares pursuant to a private placement of special warrants. The net proceeds of the equity issue were approximately $9,654,000. So each share was purchased for $4.6

In 1997, through a sale of special warrants, the company issued 2,200,001 shares for proceeds of $20,529,000. So each share was purchased for $9.33

In 1997 the company had Revenue of 46.879 Million and Net income of $2,053,000

Now in 2007, the management would like to take the company private through a share buyout at $4.25 per share. Has the Value of the company, it's assets and its potential really dropped from $9.33 per share to $4.25 per share in ten years?

Well, in 2007, As per the 2007 Annual report, Viceroy had Revenues of 82 Million and declared a loss of 1.3 Million. So, we can see that the business has actually grown over the years by over 40 million in revenue. Although the company lost a small amount of money in 2007, in 2006 the company actually made 4.1 million dollars on revenue of 102 Million dollars. So clearly, although 2007 may have been a rough year, the company as a whole has grown considerably and in 2006 it was highly profitable.

Except for 2007 and 2005, Viceroy homes has been profitable for every year since 1997, in many cases reporting profits in excess of $5 million per year. Why should we then not assume that our latest troubles, since 2007 are not only temporary blips in an otherwise fine earnings track record.

Assets

There are currently 11,047,217 common shares outstanding (both Class A and B) and at $4.25 per share, the company is being valued at about 47 Million dollars.

If we look at the latest balance sheet of the company, we see Assets of 57.4 Million vs Liabilities of 15.5 Million and tax liability of 3.1 Million for a Shareholder equity of 38.6 Million.

In the assets, there are 25.4 Million worth of property plant and equipment. What the numbers don't tell is that most of the land was purchased decades ago, and since the land is carried at book value (purchase value) its true current worth is not reflected.

The other property and machines have been updated over the years and are still technologically current.

It would be conservative to say that the actual value of the land and property has almost doubled over the last 50 years, so even though the company is carrying the assets at only $25.4 Million, they would be appraised at least to $50 Million.

When we use this number to value the assets, we get a shareholder equity value of approximately $63 Million. Considering the 11 Million shares outstanding, we can arrive at a book value for Viceroy Homes of $5.75 per share. This is absolute bare minimum and represents no premium to book value.

Given the leading position of the company in the manufactured home industry and its well developed network of dealers, a fair offer for the company would range from $6 to $7 per share.

Our intent with voting against the privatization deal is to
either:

Stop the buyout, with the intent of returning the company to profitability, and return the dividend, under the leadership of a more competent management team,

or

Force the Class B shareholders and the Russian buyout firm to raise their bid for the class A shares into the $6 to $7 price range.

Given the level of positive response from individual shareholders as well as larger institutional shareholders who own over 25% of the Class A shares, we remain completely confident in our ability to meet our objectives.

2 comments:

Roger Anderson said...

I like the idea of possibly getting the offer price raised. If the Russians are really serious then there should be no reason not to raise the price by at least a dollar per share. The company is worth even more, so they are still getting a deal.

Or Gaylord Lindal and crew should kick in a little bit of money on their own. They have been making a fortune in salaries these last years, so they can certainly afford too. I'm sure that given Gaylord's age he certainly wants this deal to go through as well.

I say we can get at least $5.50.

Mario Rizzi said...

the idea that Gaylord Lindal might kick in some extra money to boost the privatization bid makes sense, and I've heard it before. Certainly I think it would appease enough investors so that they might be able to get the deal passed.

This is still a winning situation for him, because the Russians will still likely buy out the remaining class B shares at a significant premium once the company is private. Russian Billionaires have no reason to keep the Lindal family on board with the private Viceroy.