Truett-Hurst (THST) – Odd Lot Tender Offer – Upside $27

Current price: $2.11

Offer: $2.4

Upside: 14% ($28 for odd lots)

Expiration: 11th of February, 2019

 

Couple members reached out with this odd-lot tender opportunity.

Truett-Hurst (THST), Californian wine producer and vineyard owner, has sold its wine wholesale business in August 2018. The company is now using the proceeds to buy back 14% of its stock at $2.4/share, which is just above its liquidation price. For further details on the situation and the company see SA articles here and here.

My main question is whether this situation could be played with larger amounts than odd-lots. And a quick answer is probably not as proration will be high and I expect shares to drop after the tender.

But for odd-lots this seems to be $27 lying on the sidewalk. The risk of odd-lot provision getting cancelled is very low as company seeks to eliminate small shareholders and reduce total shareholder count below 300, potentially aiming to deregister from SEC and delist from NASDAQ.

The disposed wholesale business accounted for 72% of the revenues and now the company operates only the directly to customer business as well as sales of 3 brands to national retailers. Remaining hard assets are 25 acres of land (out of which 15 acre are used for growing grapes) and two tasting rooms with some additional retail and office space. Wine crushing facility is not owned but on short term lease. Walk-in visitors generate 25% of sales and remaining 75% are from sales to Wine Clubs with 6000 members (from these disclosures in the 10k I understand that e-commerce and national retail operations are negligible).

THST reported FY2018 and FY2017 financials excluding the operations of the sold assets. Continuing operations (c. $6.5m in sales) appear to operate around breakeven. The latest quarterly report (Sep 2018) shows material loss, part of which was driven by the expenses related to disposal of the wholesale business. On a positive side revenues continued to grow (+13%) and gross margin improved.

The company is trading at $16m market cap with $5.5m in cash. So market is valuing current operations with $6.5m in sales at around $10m (1.6x revenues). Another listed winery WVVI is 3x larger with similar gross margins but with net profit of c. 10%-15% (vs breakeven at THST). WVVI trades also at around 1.6x revenues. So even if THST managed to achieve similar profitability levels, any upside in valuation seems to be already incorporated in the current share price, especially keeping in mind that THST generates sales through walk-ins and 6000 wine club members and appears to have limited franchise value.

Asset wise there is not much of incremental value either – $5.5m of cash, $6.1m in inventory and further $6.2m in property and equipment (resulting in BV of $2.4/share, in line with the tender offer price). The only undervalued asset on the balance sheet could be 25 acres of vineyards, however a quick research (here, here and here) suggests that vineyards in Sonoma county rarely sell for more than $150k/acre (planted), putting the valuation of THST land at $1.5m-$3.5m max with some additional value for the tasting room buildings.

All in all, I do not see much of incremental value above the $2.4/share tender offer and therefore believe that this tender offer will be oversubscribed and share price will drop after the expiration.

THST is owned by pre-IPO investors (40%), North Star Investment Management (17%), Bard Associates (10%), Richard Blum Trust (9%), Twinleaf Management (6%) and Management (3%). Twinleaf indicated intentions to tender and I am guessing other institutional investors will follow suit.