Paradise (PARF) – Liquidation – 28% Upside

Current price: $37.5

Liquidation Value: $33 - $48

Upside: 28%

Expiration Date: TBD (expected 2020)

Asset Sale Proxy

This case was shared by Eric.

 

Paradise (illiquid nanocap - zero volume on some days) is selling it's main candied fruit business and then plans to liquidate the whole company. Shares trade below the value of the expected shareholders' distributions (potential 28% upside). Liquidation timing and final proceeds are uncertain as it will require disposal of plastics business as well as sale of owned real estate. This will take at least till 2020.

Despite prolonged timeline the risk of capital loss here appears to be small as the largest part of distributions will come from cash on hand + cash from fruit business sale ($17m or $32/share before liabilities and liquidation expenses). Upside will come from the realized value of real estate (appraised at $7.7m-$9.9m) and plastic business sale (1xBV = $3.2m). Liquidating distribution estimates already include significant expenses ($4m-$6m) for severance and other liquidation/asset sale related costs.

Paradise is a family business and has been managed by farther in son since the 60's.  Family owns 40% of the stock and likely wants to retire and cash-out (Founding chairman is 85 years old and CEO 63 years old).

The buyer of candied fruit business is Seneca Foods (234m market cap), which over the last few years has made a number of acquisition in the candied fruit and glazed cherry areas (and over 50 acquisitions during its 70 years of operation). Negotiations to acquire Paradise have also been ongoing for over a year before the final agreement was signed. The risk of Seneca walking away is very low.

 

Liquidation Value

Management has handily posted estimates of likely shareholder distributions in the proxy.

Parf Liquidation analysis

Parf liquidation analysis 2

Worth noting that in the latest proxy statement, the expected liquidation range has been changed from $35-$48 per share to $33-$48 per share. It is not clear what affected the low end, as the figures in the reconciliation table remained the same ($35-$48 as copied above).

I think the low end range is quite unlikely as it values real estate at only $2.7m whereas it has been appraised at $8.2m for tax purposes. Also most of the real estate has been acquired/built back in 1961 and 1985 and therefore its value is likely to be materially above book.

Molded plastics business generated $0.4m in operating profits during 2018 (up from $0.28m in 2017 but significantly below $1m+ back in 2015-2016), and thus valuation of $2.4-$4.1m looks reasonable, however no buyer has been found yet. It is also not entirely clear whether the plastic business valuation also includes some of the real estate or just the operations/contracts part.

Additionally, the excerpts from the proxy statement validate management's estimates.

On April 17, 2018, Parent submitted a second term sheet to the Company for an all-stock purchase, with a price equal to the Company’s tangible net book value, which would have been $44.89 per share based on the December 31, 2017 balance sheet. However, the Board determined that the term sheet included terms that were not acceptable for the stock purchase of a public company, did not address the fees and expenses of the transaction and did not take into account the costs of, and taxes payable in connection with, an eventual sale of the Plastics Business and the Real Estate, neither of which Parent was interested in retaining

On June 29, 2018, the Company received a real estate appraisal showing a range in value of the Real Estate from $7.7 million to $9.9 million. At the time, the book value of the Real Estate was $2.7 million.

The Board determined to make a counteroffer to Parent for a stock purchase at a price of  $50 per share.

On October 3, 2018, Parent submitted a revised term sheet reflecting the result of negotiations between Parent and Hyde Park Capital, the terms of which had previously been presented to the Board at the September 30, 2018 Board meeting. The term sheet contemplated a stock purchase at $40.00 per share, plus a contingent payment tied to the proceeds from a sale of the Real Estate and the Plastics Business. The lower price per share compared to previous term sheets was a reflection of the inclusion of fees, expenses, and taxes, which were being addressed for the first time.

What is slightly concerning is that there have been no other bidders that would be interested in Paradise businesses or real estate assets.

The marketing summary provided on April 12, 2018 showed that Hyde Park Capital had contacted 111 potential buyers, that confidential information memoranda were sent to 11 of such buyers, and that Hyde Park Capital had contacted 35 potential targets, of which 20 were companies in the plastics industry and 15 were companies in the food industry.

One company might still be interested in buying the plastic business at least the proxy does not say the talks with the company ended.

On August 13, 2018, the Company was contacted by representatives of a container and packaging manufacturer, which we refer to as “Party D,” about the Plastics Business. The Company informed Hyde Park Capital, and representatives of Hyde Park Capital had a telephone call with Party D to respond to the inquiry.

On September 13, 2018, Party D signed a non-disclosure agreement with the Company.

On September 18, 2018, representatives of Party D visited the Company’s offices in Plant City and toured the facilities of the Plastics Business. Between September 19, 2018 and November 6, 2018, Party D requested diligence information on the Plastics Business, and the Company responded to all such requests.

 

Real Estate

Real estate owned by the company is marked on the map below and further details can be found here. It comprises almost half of the industrial/commercial area that is located centrally in Plant City (short drive from Tampa) surrounded by residential districts. Plenty of other businesses with manufacturing/warehousing facilities nearby and my uneducated guess is that such real estate should be quite liquid and easily repurposed by potential buyers. Paradise owns almost 12 acres of land and 350,000 sq ft of warehousing and production facilities.

Buildings and Land

For comparison purposes some other industrial/commercial properties for sale and lease nearby can be found here and although there are no easy/direct comparable, management's estimates of real estate value look reasonable even at high end.

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