Tuesday, December 23, 2008

Dryclean USA

Tuesday, December 23rd, at 9:01 PM, it came across the Business Wire that the Steiner family tried to get an early Christmas gift when they offered $0.85/share for all remaining common stock in the company. Fortunately, the offer was withdrawn. The process regarding the offer is subject as follows:

"The proposal is subject, among other things, to (i) entering into a definitive agreement with respect to the transaction, (ii) approval of the transaction by a special committee of the Company’s Board of Directors and the full Board of Directors, (iii) receipt of satisfactory financing for the transaction and (iv) receipt of a fairness opinion from a financial advisor to the special committee of the Board stating that the proposed transaction is fair, from a financial point of view, to the public stockholders."

Dryclean USA (DCU) is a debt free, cash rich, nano-cap company that I have a small investment in. The company, as has been indicated by my friend John, at shadowstock is crazily undervalued. Since John's article, revenues have shot up, and the business is doing quite well. While I feel that the Steiners are very capable of managing the company, and are actually doing a superb job of it, they were trying to screw the other shareholders.

Here are a few brief stats on the company:

Market Cap: $5.27 Million
Cash: $4.225 Million in "... highly liquid investments with original maturities of three months or less." Which I am guessing have shot up in value due to the t-note bubble.
Debt: 0
Revenue: $24.72 Million
ROE: 10.82%
Quarterly Earnings Growth: 84.9%
Insider Ownership: 68.15% (which, ironically, is the problem)

The company has 7 directors, 2 of which, are members of the Steiner family, who are making the tender offer. Michael Steiner is a Board Member, President, and CEO. While William Steiner is Chairman of the board. 2 other Board Members have been involved with the company for over 30 years, with the remaining 3 being involved for roughly a decade.

After an approval by the Board, there will be a proxy shareholders (keep in mind that the Steiner family alone owns 57% of the stock) in which the offer will either be accepted or rejected. While the transaction is supposed to be approved by the Board, a committee appointed by the Board, and a financial adviser, I have my doubts as to the fairness of this process. After all, 2 of the acquiring parties are on the board, and when a persons paycheck has been coming from a the acquiring family for over 3 decades, why would you go against them? This being the case, there are 4 votes on the board to approve the transaction!

By my reading, there could be an argument made that members of the Steiner family are in violation of the company's Code of Ethics and the Code of Ethics for Principal Executive Officer and Senior Financial Officers. Especially since there is virtually no way that they can be on one side of a transaction, while telling the people on the other side that it is "fair"; which is only exacerbated by the growth prospects and cash horde the company is sitting on. Not only this, but there are a whole host of other issues, such as insider knowledge, and voting rights. In addition, there are fewer than 75,000 shares that have been purchased at a price less than the offer-I don't see how in the world anyone could construe this to be "fair" or even "prudent" for anyone other than the Steiners.

Regardless, it seems pretty apparent that the Steiner family wants to own the whole company, and is unable to purchase it all in the market place, due to the partnership that they share with long term owners (people like myself). The company is worth well over 1.50/share, so who can blame them for wanting to buy the company on the cheap? It will be interesting to see how the stock preforms, or if there will be another offer to purchase shares. I will note that I am still waiting on a call back from the company in regards to the offers.

Disclosure: Long DCU


ShadowStock said...

Important original insight and research with this write-up,

I love this one

“there are fewer than 75,000 shares that have been purchased at a price less than the offer-I don't see how in the world anyone could construe this to be "fair" or even "prudent" for anyone other than the Steiners.”

Jeff, I recently added a few more to my original shares after the recent tender offer withdrawal in the belief they will have to make a fair offer and the margin of safety is real. But there are lots of other bargains.

Jeff said...

thanks for the props.

Obviously, the margin of safety is real... And there are a lot of bargains out there. It never ceases to amaze me how many companies are out there that are trading at or close to their cash, while making money, and have no debt.

My only wish is that I had more money to invest; people like you and I will be (and are presently) making a killing. I am betting that there will be some big article in Business week in the coming years called "when value investors ruled the world"!