Anticipated Sale Makes Imperial Sugar Whole Again
At first glance, the news that Imperial Sugar (IPSU) was selling its 50% Wholesome Sweeteners stake for $60 million to the Arlon private equity group, was just what the Dr. ordered. It seemed like a decent price, a solid buyer and a rapid closing period. The market was initially euphoric over the development, bidding up the shares as much as 30% within the first hour of trading, but then pulled a "Nervous Nelly" when it gave it all back, and then some. The first hour's upward explosion had to be attributable to some serious short covering as well as speculative buying, while the selling pressure that later dominated the session was largely due to speculators who bought the rumor and who were intent on selling the news.
I was shocked and dismayed that the initial gains were wiped out, especially considering that Wholesome's sales proceeds alone nearly matched IPSU's tiny $65 million market cap. I even doubled my position, as the shares sunk. My average $6.25 purchase price that day obviously did not end up working out too well. I guess I should have known better than to try and "catch a falling knife," but I really believed the stock had become even a more compelling value, after the sale development had been announced. I suppose when cooler heads prevail, and the full effect of the sale consequences are ultimately understood and analyzed, the stock should once again rally to the $7 vicinity, providing the opportunity for a very quick and juicy 40% return.
After selling off three Joint Venture segments in the last year alone (Santos, LSR and Wholesome), here is what Imperial Sugar will be left with:
(1) Port Wentworth, one of the largest refineries in the United States. Over $200 million of insurance proceeds were poured into rebuilding it, after a terrible explosion occurred in February 2008 (most of the construction occurred on the packaging side). The processing side is still in need of some upgrades and repairs, before the refinery can reach full production (capital requirements for completion could range anywhere from $25 to $50 million) and the company is still in the process of developing a plan to implement the needed upgrades.
(2) Its Sugarland, Texas corporate headquarters complex
(3) Its Gramercy small bag packaging facility adjacent to LSR
(4) Natural Sweet Ventures, a partnership with Pure Circle Ltd. which focuses on the development of SteviaCane (can this become another Wholesome Sweeteners?)
(5) A finished goods inventory of $28 million and Raw and In-process materials of $17 million
(6) Pension fund liabilities of $127 million, necessitating the company to contribute about $12 million per year to maintain its solvency
(7) About $60 million in cash and $70 million in debt (after the close of Wholesome in early April)
Liquidity issues in the rear view mirror: the anticipated cash infusion should put its liquidity issues behind them for good, as the company currently has virtually no cash and owes $71 million on its credit line (although it paid down $10 million sequentially). It only has $18.4 million of remaining availability on its revolver, so a cash infusion of $60 million would do wonders at this juncture, as it's almost enough to eliminate its entire debt, with a stroke of a pen - although the Wholesome transaction will generate a $35 million to $40 million gain (it will not be subject to income taxes due to tax loss carryovers) and in the process, increase the company's shareholder's equity (book value) 26% from $152 million to $192 million, equating to $12.71 a share to $16.04 per share.
Vulnerable to a takeover: with its market cap so low and its balance sheet finally shored up, IPSU is vulnerable to a hostile takeover attempt from private equity groups or other food processors such as Archer Daniels Midland (ADM), Corn Products International (CPO), or privately held Cargill (it recently entered into the sugar refining business through its ownership in the LSR refinery). The sugar producer is ripe for the picking because its pieces are worth more than its whole. The best method to ward off an unwanted suitor is with success, and if the company is able to achieve some quick operational improvement, the sky is the limit.
Final thoughts: there is no doubt that IPSU is a risky stock, but it is far less risky today, than it was before it had a buyer for its Wholesome stake. The good news is that with risk, comes reward and when reviewing its 52 week price range of $2.55 to $26.00, it is obvious that this equity offers significantly more reward than risk at this juncture.
By Mark Krieger
Disclosure: I am long IPSU.
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