Essex Rental (ESSX) – Liquidation – 67% potential upside

Current Price – $0.21

Expected Payout – $0.17 – $0.35

Upside – 67% (at high end of the expected range)

Expiration Date – TBD

Essex Rental was a struggling and over-leveraged crane equipment rental company. Over the last year the company has liquidated/agreed to sell both of its operating divisions and shareholders approved plan of dissolution on the 5th of June. The proceeds for equity holders are expected to be in the range of $0.17 – $0.35 per share.

With shares trading close to the bottom of the expected distribution range, there is 67% potential upside with only 20% likely downside. Liquidation is expected to start right after the sale of Coast Crane division is finalized (was due by Q2 2017).

Proxy document

 

Background

ESSX was value investor’s darling back in 2015, when shares traded materially below the estimated liquidation value. Many saw multi-bagger potential, including this highly rated write-up on VIC. However, operations continued to disappoint, rental equipment utilization declined, management did not deliver on their promises and orderly liquidation value estimates (OLV) kept on dropping. Eventually, ESSX deregistered from SEC which caused collapse in the share price. As can be seen from the division sales, asset valuations were sufficient just to cover the debt with only negligible amounts left for equity holders (equity valuation were as high as $2-$5/share back in 2015).

 

Expected distributions

The calculations of the estimated proceeds are outlined on the page 60 of the proxy.

Liquidation estimates

Worth noting that:

“The amounts set forth in the table below have been calculated assuming the Coast Sale is consummated on June 5, 2017 and as such, the actual amount of distributions to our stockholders, if any, will be adjusted to reflect the actual closing date of the Coast Sale. “

The sale of Coast Crane seems to have been delayed (no information provided as to why), which might mean that working capital adjustment might be different from what is indicated in both of the scenarios above. Also management’s estimates of the transaction and wind-down expenses might appear overly optimistic – management has already dissapointed investors before.

Assuming management’s estimates (at least for ‘Low’ scenario are correct), then upside will depend on the release of the amounts held in Escrow. Out of the $2.5m held in escrow, $0.5m is reserved for WC and other potential purchase price adjustments and the remaining $2m for other indemnification obligation purposes. My understanding is that if the management represented the true and correct state of the company at the time of signing the Purchase Agreement, then this $2m should be eventually released.

 

Timing of distributions

Management expects that distributions of between $0.17 and $0.25 per share will be paid to shareholders within sixty days of the closing of the Coast Sale, and then shareholders will have the potential to receive additional distributions of up to approximately $0.10 per share upon release of funds held in escrow.

Escrow release will be done in three stages:

- $0.5m within 100 days post-closing;

- $1m after 12 months post-closing;

- $1m after 24 months post-closing;

 

Risks

- Coast Crane sale might not close – it already takes longer than expected. However, when the eventual closing is announced and final purchase price (including WC adjustments) determined, it might serve as a potential catalyst.

- As the Coast Crane sale process is delayed working capital adjustments and other incurred expenses/indebtedness might be larger than estimated in the Low scenario.

- Management’s estimates of dissolution and asset sale related expenses might turn out to be overly optimistic.

- Coast Crane credit facility has been extended till the 14th of August 2017 – if closure takes longer than this, then additional expenses might be incurred to extend the facility again.

 

Bottom line

This is a bit of a blind bet as payout expectations fully depend on management’s estimates and their track record on that account has so far been quite poor. However, executive officers and directors own 19% of the stock which should be sufficient to align the incentives. On an absolute basis this translates into payouts of $1.3m-$1.6m for low-high scenarios, not a trivial amount. On the other hand, this compares to c. $1m in combined golden parachutes for CEO and CFO. In any case executives are at least incentivized to close the sale of Coast Crane which will trigger initial distributions for shareholders.

No position currently, but might initiate one opportunistically if shares drift closer to $0.17.

11 COMMENTS

  1. greg lia

    dt, did you mean to suggest a 17-37 range in expected payout or did you mean 26-37? or are you suggesting the amount in escrow is somehow at more risk than the rest of the deal? Also, I they have not issued any press releases lately and Coast sale is couple months overdue. You have any additional info?

    1. dt

      I meant to suggest 17-35 range. The escrow amount is more risky and release will be delayed. Also there is a reason why certain amount of funds are put in escrow – meaning that not all of them (potentially even 0) might be released.

      I do not have any further updates regarding coastal sale – it is clearly taking far longer than management expected.

  2. Dave Anderson

    Ok, apologies in advance if I am missing something obvious, but didn’t the Coast Sale close on June 8?

    June 08, 2017 12:15 PM Eastern Daylight Time
    BRIDGEVILLE, Pa. & BUFFALO GROVE, Ill.–(BUSINESS WIRE)–Maxim Crane Works, L.P. (“Maxim”) and Essex Rental Corp. (OTC: ESSX) (“Essex”) today jointly announced the successful completion of the acquisition by Maxim of Coast Crane Company (“Coast”), an indirect subsidiary of Essex. Founded in 1970 and based in Seattle, Washington, Coast is one of the largest providers of bare crane rental and related lift solutions servicing the West Coast of the United States. Maxim’s acquisition of Coast meaningfully enhances Maxim’s full-service, nationwide crane rental and lifting solutions platform and expands its operations in one of the nation’s fastest growing crane rental markets.

    Press release: http://www.businesswire.com/news/home/20170608005994/en/

    1. dt

      Thanks Dave. Do not know how I have missed this – it was not reported under ESSX press releases and I obviously failed to google for it.

      This removes couple of risk factors from my list but at the same time raises question why there have been no distributions yet – as per proxy these were supposed to happen within 60 days of closing of Coastal sale.

  3. davea500

    agree on the question of dist timing as we are beyond the 60-day period. And it is weird that ESSX website did see fit to post this news…onward.

    1. dt

      This is quite positive:
      - Liquidation is finally happening;
      - Initial distribution is above the $0.17 minimum estimate;
      - Judging from this, there is a chance that something will be leftover from the escrow account as well.

      $0.2/share distribution now and possibility to receive another $0.08/share over the next two years. Thus, those who acquired shares at $0.21/share will be left only with $0.01/share investment which has potential to return 8x over the next two years.

  4. Alex

    Sounds like a very interesting chance now with a high return. I was asking myself the the following questions.

    When will the $0,20 per share be paid to investors? June 8+60bdays?
    Is any of this taxable or is the payout tax free?
    How likely is it that they will payout less than $0,08 per share? What could reduce the escrow account at this stage?
    Jumping in now would mean investing $0,03 and hoping to get 0,08 back within two years. Not a bad deal.

    1. dt

      Alexander, the trading in ESSX has already been suspended, so there are no possibilities to enter the position now. To be entitles for distributions, one had to enter the position before the trading suspension.

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