Stanley Furniture (STLY) – Delisting and Forced Selling – 30% upside

Current Price – $0.58

Unaffected share price – $0.7 – $0.8

Upside – 18%-30%

Expiration Date – TBD

This idea was shared by Vladimir.

 

Stanley Furniture in its press-release on March 2, 2018 announced that it approved to sale mostly all of its assets becoming effectively cash shell. The company will also be delisted from Nasdaq on March 15th, which likely caused the recent sell-off.

The math is simple:

- Cash portion of proceeds $10.8m

- Notes: $7.4m at 6% interest rate, principal paid in 5 year since Completion (take at face value)

- Retained cash $0.8m (out of which $0.6m is restricted cash)

- Credit repayment $1.3m

- Transaction costs: $2.7m

- Golden parachutes: $2.0m (info on page 47)


This results in net-net value of $13.0m ($0.87 per share) and also add NOL value (total NOL accounts for $21.8m) of c. $4.6m.

Historical SG&A was around $0.4-0.6m, but I believe company can shrink its cost below the historical levels.

The interesting part in this situation is company notice on March 8, of delisting from Nasdaq, which caused a sell off from institutional players. Surprisingly for such micro cap you will find out that traditional investment managers account for 26% of share capital (Blackrock, Vanguard, UBS asset management, etc.), which probably are forced to sell in case of company delisting.

So, I believe that upside here is at least previous level of market cap ($10-11m or $0.7 per share or 18% upside) before the news of delisting.

8 COMMENTS

  1. dt

    I just started looking into this, so sharing couple thoughts/questions – would appreciate to hear other opinions on these.
    - It is not clear whether Golden parachutes are included in $2.7m transaction costs. If yes, then NAV per share increases by $0.13. Also not all of the golden parachute consideration will be paid in cash – $0.5m is vesting stock.
    - I assume the stock will continue trading OTC, but did not find any info on this yet.
    - Repayment of the note will be driven by performance of the previous STLY business (furniture wholesaler) in the hands of new owners. Note will be secured by all assets of the Buyer, but my guess is that Buyer has only the acquired STLY business and this business was cash flow negative in 2016 and 2017. Revenue dropped by 25% YoY. On top of that, customer accounting for 25%-30% of the revenue has cancelled contract in Sep 2017. So I see a huge risk that the note will not be repaid if there is no successful turnaround of the underlying business.

    If the above concerns are some way addressed then this might indeed be an interesting shell company for the longer term:
    - New CEO agreed to work for $1 salary annually. CFO will only be receiving $85k per annum.
    - Shareholders’ and management’s interests are well aligned – CEO has 15% ownership through his hedge fund.
    - Board of directors avoided selling assets to management at lower price.
    - I haven’t yet looked into the track record of the new CEO and his hedge fund.

  2. Eric S

    I take a totally different view here:
    The $2.7m in transaction costs relative to the deal size is alarming from the point of view of a new shareholder thinking about management running a ton of expenses through the shell. Its not encouraging.
    Why would a 6% note backed by a horrible furniture business be worth par? I think that needs a big discount, it could be a zero.
    It could work out, i’ve heard the CEO has done well in his fund, but IMO this traded down for a reason.

    1. dt

      If this $2.7m includes also Golden Parachutes of $2, then the transaction costs no longer seem excessive. Basically around 4%-5% of the acquisition costs, which is rather normal investment banking fee.

      Agreed on the valuation of the note – looks quite risky.

  3. over2u

    Some additional thoughts on the situation:
    - I think $2m is a part of $2.7m of transaction fee. It is not clear from circular itself, but if you look on pro-forma there is no separate obligation on parachute expense, which will be there otherwise
    - On business itself – the transaction was a part of M&A process with 5 bidders, so I think there should be some value in business. Management itself (who knows a lot about business) made an offer
    - I am a little bit struggling with an entity of the buyer. It is Endurance capital (specialized in small cap Vietnamese companies) and Walter Blocker, Chairman of Vietnam Trade Alliance.

  4. Michaelx

    The proxy notes that the golden parachute payment to the former CEO has already been paid. Since they include their cash and debt balances in the recent 8-K, I don’t think that needs to be deducted again. I agree with the poster above that it makes sense that would be included in the transaction expenses, since it wasn’t listed separately in the pro-forma balance sheet in the proxy, and otherwise should have been.

    I also agree that a 6% loan to a negative EBITDA furniture import business (which is subordinated!) isn’t worth par. The market terms on debt like that would be high teens at least, if you could get someone to fund it at all. I don’t think pay back is hopeless (lots of inventory at the new entity at least) but it isn’t a slam dunk.

    1. dt

      I think that only small part of the golden parachute payment was paid right away. There rest was due upon closing of the transaction. So my read in this is that majority of golden parashutes will be included within transaction costs.

      “The Separation Agreement provides for a severance payment of $255,000 to be made to Mr. Prillaman within two business days of the effective date of his resignation and for the immediate vesting of the 491,607 shares of unvested restricted stock held by Mr. Prillaman. The Separation Agreement further provides for Mr. Prillaman to receive an additional payment of $510,000 within two business days of either the closing of the Asset Sale Transaction or the Asset Purchase Agreement being terminated”

  5. over2u

    On promissory note – I would agree that it shouldn’t be taken at par, but also think that Buyer will pay interest on the note at least for some time even if turnaround will be eventually unsuccessful.
    Also good point on inventory – book value is c. $25m, which helps to make at least several interest payments.

  6. jason kravitz

    Just wanted to see if Vladimir still felt this was compelling. I have not seen much news one way or the other on this shell

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