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 Fortunately, the offer was withdrawn.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

Friday, December 19, 2008

We Are Barely Surviving...

I just read a good article on how the recession/depression that we keep hearing about is effecting our fellow countrymen (and women). I was shocked as to a few things:

1)We are looking at a holiday season in which consumer spending will be down (year over year) for the first time in around 40 years. I was pretty shocked at this, especially with how bad journalists make the S&L crisis and the dot com bubble sound.

2)Finlay Fine Jewelry, which I had at one point (right before they made a retarded acquisition) thought was a value play, is now probably not going to be able to make payroll. Which is interesting... Bailey, Banks, and Biddle is a really nice store that sells incredibly nice, yet overpriced jewelry... While I have not read anything on them in the past year, I am guessing that a bankruptcy would do them a ton of good. I am willing to bet that they are carrying a crap ton of gold on their balance sheet at prices of yesteryear, which in the event of liquidation, would bring in a bunch of cash flow.

3)There is a guy that is "cutting back" spending to $2,000 on presents, from last year's $3,000... I am shocked that people actually spend this much on others for the holidays. I suppose it is apparent that I either come from a cheap family, one that doesn't really love each other, or we are one that does not buy gifts for too many people. I would be shocked if anyone in my family typically spends more than a grand on presents (and that is probably a high figure, which is only applicable to the members with kids). I guess that this is in good relation to the paradox of thrift. While being smart for my family to be frugal during the holidays, it would cause the economy to crumple if everyone would be like us... The very people being frugal would be out of work quite quickly.

Regardless, this is a very interesting time to live in... quite frankly, I am happy to be a value investor in this environment. While I have no idea or regard for what the markets will be doing in the short run, I have a hard time believing that earnings and cash flow have been so inflated by the leverage of the housing bubble that it would justify companies trading at levels that are close to cash less debt. After all, with the T-Bill bubble that is occurring as I type, it shows that there is a ton of money that is waiting to be deployed in the next bubble, and the bubble after that.

My bet is on alternative energy-though, I would never invest in an industry that relies on government regulation and cronyism to stay profitable.

Wednesday, December 3, 2008

So let me get this straight: they are trying to artificially inflate home prices... AGAIN!?

Here are 2 articles for you to check out from the AP and the WSJ. In summary, the Treasury-via Fannie and Freddie-are planning to buy up/issue mortgages at an interest rate that less than banks are currently willing to lend at, and less than people are willing to pay. In addition, this is at a rate that is a mere 1% above the inflation that we have experienced in the last year-at the rate we are printing money, it will probably be less than inflation in the coming years.

It seems to me that mortgage originators are going to make out like bandits with all of this new business, while the community banks, which keep mortgages on their books-being the most honest form of banking-are the ones getting screwed since they can't compete with a segment of the banking industry that is essentially being subsidized by the government. You have to love artificial monopolies that use our taxes and destroy the value of our money!

What I don't understand, is why we are trying to play God by manipulating markets in such a way that is only going to screw them up more. After all, the Federal Reserve, Fannie, Freddie, and government lending laws created this whole problem. So really, it seems pretty dumb to not let the Treasury try their hand at 'fixing' things... Right?

I figure that the over all plan that the government is hatching is to make inflation such an issue that it will raise the price of everything. In turn, real estate prices stay as they are-being a real dollar loss, but a nominal stagnation-which feels better to lenders and homeowners a like.

As I tend to rant about, all of this comes at a cost, which David at the Bluegrass Policy Blog posted a link to. This bailout, as a whole is damned expensive. Check it out.