Lifeway Foods Inc. (LWAY, Financial) is a small producer of kefir, an eastern European yogurt-like fermented dairy drink which is popular as a health food. Lifeway's market capitalization is $85.40 million and it is based in Chicago.
The company describes its origin story as follows:
"The Lifeway story begins in 1986, when Russian immigrants Michael and Ludmila Smolyansky began making Kefir in the basement of their Skokie, IL home. The cultured dairy drink had been popular in Eastern Europe for centuries, but the Smolyansky family was determined to share their delicious health secret with their newfound home. Two years later, they took the company public and it debuted on the NASDAQ exchange under the ticker symbol LWAY."
The Smolyanskys found a fertile market for Kefir in the U.S., growing it to its peak in 2015, but since then sales have stalled and so has the market cap. The company's current CEO, Julie Smolyansky, is the daughter of the founders. Ludmila Smolyansky is one of the founders and is the Chair of the Board.
The company has a strong balance sheet with no net debt. GuruFocus give the company a financial strength ranking of 8 out of 10. The company is profitable with a current price-earnings ratio of 24.
What really caught my attention about this company is that Lifeway filed a form 13D with the following statement dated Feb. 25, 2022:
“On February 21, 2022, the Reporting Persons notified the Board of Directors of Lifeway Foods, Inc. (the “ Company”) of their belief that the Company should replace the Company’s Chief Executive Officer, and commence an exploration of the Company’s strategic alternatives.”
The reporting persons were Directors Ludmila (also Chair) and Edward Smolyansky, and the CEO they want to replace is Julie Smolyansky.
The major share ownership is as follows:
| Ownership | Name | Shares | Current Value (millions) |
| 22% | Danone S.A. | 3454756 | $19.1 |
| 21% | Ludmila Smolyansky | 3313960 | $18.3 |
| 16% | Edward Smolyansky | 2505112 | $13.9 |
| 13% | Julie Smolyansky | 2038060 | $11.3 |
| 3% | Smolyansky Family Holdings, Llc | 500000 | $2.8 |
Ludmila Smolyansky and son Edward Smolyansky own 39% of the shares, while Julie Smolyansky owns 13%. Danone S.A. (XPAR:BN, Financial), a French multinational company, owns 22%.
Ludmila Smolyansky and Edward Smolyansky were dismissed from their roles as Consultant and Chief Operating Office in the company by CEO Julie Smolyansky recently. To clarify the family relations here, Julie Smolyansky is Ludmila Smolyansky's daughter and Edward Smolyansky's sister. Now Ludmila Smolyansky and Edward Smolyansky are in turn seeking to oust Julie Smolyansky from the CEO role and put the company up for sale.
Given the family dispute and the company's lack-lustre revenue performance in recent years, this is likely for the best. While I have no inside information about the cause of the dispute, the company's stagnating top line likely had a role to play. Perhaps the family disagreed on how best to return the company to growth.
Compensation for the family members is quite good given the small size of the company, and a buyer will likely have lower management expenses.
| Tenure (years) | Compensation (millions) | ||
| Julie Smolyansky | CEO, President | 19.67 | $2.32 |
| Ludmila Smolyansky | Chair | 19.25 | $1.60 |
| Edward Smolyansky | Director | 4.67 | $1.06 |
A reasonable value estimate of Lifeway is given by the 10-year median price-sales ratio of 1.66. This indicates a fair value of $10.74 per share. Plus, the family will expect a control premium, which could put the value of the stock in the neighbourhood of $15 for a potential sale. For reference, Danone's price-sales ratio is 1.57, so this estimate looks reasonable to me. A large company like Danone could put serious marketing and distribution muscle behind Lifeway, and the brand could become worth a lot more than it is currently.
Conclusion
Lifeway is a small business family success story, but a family dispute has made the company consider putting itself up for sale. The company's top-line performance has stagnated in recent years. I am expecting the company will be sold within a year.
Danone, which already owns 22% of the shares, is a likely buyer. Regardless of who buys it, I estimate the company's shares could appreciate 100% or more as the sale process progresses. The downside is limited given the company's low valuation and strong balance sheet.
