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.

27 COMMENTS

  1. lngtrminvestor1

    Fruit business sale closed 7/31- suspect there will be a partial return of capital soon?

    1. dt

      Management should provide some update on further liquidation and any initial distributions shortly – potentially together with Q2 results release.

    1. Bulrathi

      well kiss the high end estimates goodbye. they are listing it bellow that assumed $9.9m high end value. that $7.7m is likely to be negotiated down. Seems that $32 is the most likely scenario for the liquidation. If that takes 2 years, then the return is not compelling enough IMO

      1. dt

        $7.7m for real estate is still above the mid-point guidance, but I agree that it will probably be negotiated down. Assuming other midpoint assumptions are unchanged and RE assets get sold for $7m (10% discount to the listing price), it would result in distributions of $33.2/share. This might be affected both positively and negatively by eventual sale prices for RE and plastic business as well as any cash burn and liquidation expenses.

        However, the key point is that one is unlikely to loose capital by buying PARF shares at $28. So it is a matter of opportunity costs. PARF situation currently offers 20% at midpoint and as you suggest it will probably take 1-2 years to complete.

      2. Writser

        Yeah, the real estate listing is a tiny bit disappointing. Mid-point guidance was the average of book value (which is completely useless for valuation purposes) and the high end of the appraisal. Seems to me that is a pretty arbitrary number. The appraisal was $7.7m – $9.9m and they list it at the lowest price (and it might even go down further).

        Still, looks interesting at $28. One point, which I’m not sure about how relevant it is for US investors but it is relevant for me, is that this is not your usual liquidation of a crap company with a huge accumulated deficit. This is actually a liquidation of a crap company built from the ground up, i.e. with retained earnings. So I don’t think the distributions count as a ‘return of capital’. A withholding tax was subtracted from the first distribution and as far as I know will be subtracted from future distributions too. Makes it quite a bit less attractive for me.

  2. dt

    Re withholding tax on the first PARF distribution. I have escalated this with IB and withholding tax has been reverted in my account and classified as cash distribution.

    1. nostradamus

      The new distribution has been taxed with withholding as well. Should it have been, or did IB make another mistake?

      1. dt

        It should not have been. Try contacting IB and clarify that this was a liquidating distribution and should not have any withholding tax.

  3. jwestern

    Could y’all share your updated views on this? Considering opening a position since current levels appear quite low at ~$20.

  4. lupolupus

    PARF declared a $4 dividends, anyone has more information on the background? They take their deregistration very seriously — no information flow at all!

  5. dt

    Would love to provide an update on PARF but I am in the same blind spot as everyone else. I am guessing we will need to wait for the 2020 annual report to get info on the price of the plastics business sale, ongoing cash burn, and any other assets besides land still on the balance sheet.

    So far I received only this letter on $4/share distribution: https://www.proxydocs.com/0/001/507/477/paradise_inc._shlt.pdf

    The land still seems to be for sale (at least the listing is active). Here is the same one on Colliers website:
    https://www2.colliers.com/en/properties/industrial-redevelopment-opportunity/USA-1002-1310-w-dr-martin-luther-king-jr-blvd-plant-city-fl-33563/usa1065122

    Looking at the table indicating liquidation estimates by management (see write-up) and taking into account $14/share distribution so far, PARF shares are currently trading below the lower end of the estimates. So the downside of holding this at $19/share (management’s low-end estimate would suggest $21.5/share liquidation proceeds) seems to be minimal. But again, not sure if those estimates are still relevant.

    1. dt

      Hopefully, more information will be provided in the ‘Articles of Dissolution’ which the company expects to file shortly.

      $10/share dividend will be paid out at the end of September.

      1. dt

        Thanks.

        However, are you sure the $3.55m figure is the one to use for the price of all land parcels?

        55% discount to the initial listing price ($7.7m) and to tax appraisal value ($8.2) seems a bit too high. But if that is the case then we are probably around ‘low end’ range of management’s estimates, suggesting that the remaining distributions will be around $21/share, which is in line where PARF is trading currently.

  6. jwestern

    It just occurred to me that I might have to pay withholding tax on these distributions because I’m Canadian. Does anyone know whether these distributions are treated differently than ordinary dividends?

    1. dt

      These are liquidating distributions that are treated as a return of capital and not as dividends and my understanding is that there should not be any withholdings tax. On the previous distribution, IB reversed withholding tax after I contacted them.

      1. fishwithwings

        Did they withhold taxes because you were not a US resident? Asking because I am too last to check my statement to see if they withheld anything.

      2. jwestern

        Negative for me. But who knows what happens at tax time

  7. Pedro

    Is this still alive or not? Can’t seem to find any recent info on the company.

  8. dt

    We are closing Paradise liquidation case. The stock is untradeable after the new SEC rule for dark companies came live. Moreover, the timeline has been prolonged way too much – management is sitting silently already for 1 year after the last asset sale and IR department is not responding to requests to share the latest annual report.

    Definitely expected a better outome, but that’s the risk with nano-cap liquidations. 10% loss in 2 years on this one (counting in received dividends).

  9. apqnm

    PLANT CITY, Fla., Dec. 16, 2021 /PRNewswire/ — Paradise, Inc. (the “Company”) today announced that its Board of Directors approved the final and liquidating distribution to shareholders in the aggregate amount of $2,338,200, or $4.50 per share. This final distribution will be paid on or after December 28, 2021 to shareholders of record as of the close of business on December 27, 2021. The Company expects to follow the same payment procedures as for the prior three distributions. A shareholder holding shares of the Company’s common stock in “street name” should contact his or her brokerage firm, bank, trust or other nominee for details on how payment will be made.

    https://www.prnewswire.com/news-releases/paradise-inc-announces-final-distribution-to-shareholders-301445128.html

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