I first mentioned The Stephan Co. (SPCO, Financial) here. The company's stock price has stubbornly remained well below NCAV, and that plus an email from a reader caused me to do a deeper dive into the company.
And the deeper dive revealed quite a bit. In fact, at today’s prices (anything below $2.50) I think investors are being offered a stock with good downside protection and substantial upside.
(*Update: I wrote this about a month ago and was going to hold off on posting until I acquired more shares. However, given my post on Jim Grant discussing a stock trading below NCAV that was taken out after the CEO died, I thought it was only fitting to put in a present-day example.*)
So let’s start with some history. Management tried to take SPCO private twice at the beginning of the decade. In 2003, they tried to go private for $3.25 per share plus a $1.25 promise note (see 2003 SC 13E-3 here and proxy statement here). Then, in early 2004, they upped the ante and offered a flat $4.60 per share (see 2004 SC 13E-3 here and proxy statement here). An activist objected (see objection letter), saying the bid dramatically undervalued SPCO. Eventually, management dropped the bid and paid out a special dividend of $2.00 per share. The activist, Richard Barone, had several board members elected and is currently the chairman of the company.
Now, one of the key points of the activist objection was:
So here’s what we know: An activist who was actively pushing for the company to sell itself is the chairman of the board. The big sticking point preventing an acquisition was the CEO’s severance package in the event of a sale, which was huge relative to the company’s size.
And that brings us to the morbid catalyst: The CEO recently passed away.
Now, I don’t mean to make light of the situation. Obviously, it’s very sad. But I think his passing clearly puts the company in play. The chairman clearly wanted the company sold, and with the CEO’s takeover package gone (I can’t find any death benefits in their last proxy), SPCO should make for an attractive acquisition candidate.
So now let’s talk valuation. SPCO has net cash of $1.56 per share, NCAV of $3.10 per share, and tangible book of $4.23 (book value including intangibles is $6.25). They’re consistently profitable (though profits and revenue have been declining a bit), and the balance sheet is strong. If they were to get sold, I don’t see any way it would be for less than tangible book, and it’s likely closer to book value than tangible book value (remember, the chairman anchored on book value when pushing for a higher sales price as an activist).
But could there be even further upside?
Actually, I think so.
The situation is strangely reminiscent of former perennial net-net Parlux (PARL), which got taken over by a competitor for a huge premium. What makes the situation so strange is that PARL was actually listed as a comparable company in the fairness opinion for SPCO’s management takeover (see page 26).
So why don’t we use PARL’s recent takeover to try to assess potential takeover multiples for SPCO?
PARL’s merger proxy, p. 73-74, has some nice tables clearly detailing comparable companies multiples and comparable companies deal multiples. They suggest a “market price” of 0.7-1.2x EV / Sales and 7.5-9.0x EV / EBITDA. “Takeover” prices come in at 1.0-1.5x EV / Sales and 8-12x EV / EBITDA.
I think using an EV / Sales multiple for SPCO is more relevant, mainly because earnings have been dragged down by excessive CEO compensation to the founder, and an acquirer would quickly back that out of earnings when calculating deal price. If we use the “market price” sales multiple, SPCO would be worth between $4.71 and 6.96 per share. If we use the “takeover” multiple, they’re worth $6.06 and 8.31 per share.
So, in sum, SPCO offers good asset protection (NCAV well above today’s prices, net cash per share not far below today’s price), huge upside and a good catalyst.
Disclosure: Long SPCO
And the deeper dive revealed quite a bit. In fact, at today’s prices (anything below $2.50) I think investors are being offered a stock with good downside protection and substantial upside.
(*Update: I wrote this about a month ago and was going to hold off on posting until I acquired more shares. However, given my post on Jim Grant discussing a stock trading below NCAV that was taken out after the CEO died, I thought it was only fitting to put in a present-day example.*)
So let’s start with some history. Management tried to take SPCO private twice at the beginning of the decade. In 2003, they tried to go private for $3.25 per share plus a $1.25 promise note (see 2003 SC 13E-3 here and proxy statement here). Then, in early 2004, they upped the ante and offered a flat $4.60 per share (see 2004 SC 13E-3 here and proxy statement here). An activist objected (see objection letter), saying the bid dramatically undervalued SPCO. Eventually, management dropped the bid and paid out a special dividend of $2.00 per share. The activist, Richard Barone, had several board members elected and is currently the chairman of the company.
Now, one of the key points of the activist objection was:
If the merger is adopted, shareholders will receive only $4.60 per share, which is far below Stephan's book value of roughly $8.50 and far below the price that we think shareholders could receive an arm's length transaction if an acquirer did not have to contend with Mr. Ferola's large severance package.How big was this payment?? Ferolla was owed $8 million in the event of a takeover (see page 13), or almost $2 per share. This means that, at today’s prices, the CEO’s takeover package was roughly equivalent to the value of the business!!
So here’s what we know: An activist who was actively pushing for the company to sell itself is the chairman of the board. The big sticking point preventing an acquisition was the CEO’s severance package in the event of a sale, which was huge relative to the company’s size.
And that brings us to the morbid catalyst: The CEO recently passed away.
Now, I don’t mean to make light of the situation. Obviously, it’s very sad. But I think his passing clearly puts the company in play. The chairman clearly wanted the company sold, and with the CEO’s takeover package gone (I can’t find any death benefits in their last proxy), SPCO should make for an attractive acquisition candidate.
So now let’s talk valuation. SPCO has net cash of $1.56 per share, NCAV of $3.10 per share, and tangible book of $4.23 (book value including intangibles is $6.25). They’re consistently profitable (though profits and revenue have been declining a bit), and the balance sheet is strong. If they were to get sold, I don’t see any way it would be for less than tangible book, and it’s likely closer to book value than tangible book value (remember, the chairman anchored on book value when pushing for a higher sales price as an activist).
But could there be even further upside?
Actually, I think so.
The situation is strangely reminiscent of former perennial net-net Parlux (PARL), which got taken over by a competitor for a huge premium. What makes the situation so strange is that PARL was actually listed as a comparable company in the fairness opinion for SPCO’s management takeover (see page 26).
So why don’t we use PARL’s recent takeover to try to assess potential takeover multiples for SPCO?
PARL’s merger proxy, p. 73-74, has some nice tables clearly detailing comparable companies multiples and comparable companies deal multiples. They suggest a “market price” of 0.7-1.2x EV / Sales and 7.5-9.0x EV / EBITDA. “Takeover” prices come in at 1.0-1.5x EV / Sales and 8-12x EV / EBITDA.
I think using an EV / Sales multiple for SPCO is more relevant, mainly because earnings have been dragged down by excessive CEO compensation to the founder, and an acquirer would quickly back that out of earnings when calculating deal price. If we use the “market price” sales multiple, SPCO would be worth between $4.71 and 6.96 per share. If we use the “takeover” multiple, they’re worth $6.06 and 8.31 per share.
So, in sum, SPCO offers good asset protection (NCAV well above today’s prices, net cash per share not far below today’s price), huge upside and a good catalyst.
Disclosure: Long SPCO
