Bassett Furniture Industries I BSET
December 22, 2007 - 12:42am EST by
rskfrarb210
2007 2008
Price: 8.70 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 103 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

I have found a great value investment opportunity. Bassett Furniture Industries, Inc. (BSET). The upside here is likely 123% and could be as great as 210% (I know those numbers are obscene). Your downside is protected and still likely yields 29%.
This idea is based on a sum of the parts (“SOTP”) analysis. The value of one of these parts involves what I like to call “accounting arbitrage.”
Bassett Furniture Industries, Inc. (“Bassett”) is a home furniture manufacturer and retailer. This idea doesn’t involve any analysis into Bassett’s operations, but spending time determining the value Bassett’s manufacturing and retailing business operations (“Bassett’s Operations”) will help you determine your downside. The beauty of this idea is that even if Bassett’s Operations are worthless, Bassett’s recent market price is 29% below its total underlying value.
Bassett’s recent price, as of 12/21/07, is $8.70 per share, and it has 11.81 million fully diluted shares outstanding (FDSO) for a market cap of $102.72 million. Bassett has non-core assets (or non-operating) conservatively worth anywhere from $11.10 to $14.39 per share. This leaves a negative “stub value” for Bassett’s Operations of ($2.40) to ($5.69) per share. Any worth that you determine Bassett’s Operations is in addition to the underlying value of its non-core assets. In fact, it is substantially likely that Bassett’s Operations have significant value. After subtracting the non-core assets from Bassett’s balance sheet, the implied reported book value of Bassett’s Operations is $12.44 per share. I have simply considered Bassett’s Operations as worthless (conservative), worth half of implied book value (reasonable), or worth implied reported book value (aggressive). These scenarios mean Bassett is currently priced anywhere from 22% to 68% below its underlying business value.
Bassett’s non-core assets include (a) cash on hand; (b) current deferred income taxes; (c) a fund of hedge funds, Bassett Industries Alternative Asset Fund, L.P. (“BIAAF”); (d) a marketable securities portfolio; (e) non-current deferred income taxes; (f) a 49% interest in Zenith Freight Lines, LLC (“Zenith”); and (g) a 46.9% interest in International Home Furnishings Center, Inc. (“IHFC”). I’ll discuss the three material non-core assets: BIAAF, Zenith, and IHFC.
BIAAF, LP
Bassett’s interest in BIAAF was $51.40 million at last quarter. BIAAF is invested in a few names you might recognize: Styx Partners, LP (an affiliate of Cerberus Capital Management, LP), HBK Fund, LP, Contrarian Capital Trade Claims, LP (an affiliate of Contrarian Capital Management LLC), Drawbridge Special Opportunities Fund, LP (an affiliate of Fortress Investment Group LLC), and DB Zwirn Special Opportunities Fund, LP. No adjustment to the figure represented on the balance sheet is needed. BIAAF is worth $4.35 per share.
Zenith
Bassett’s 49% interest in Zenith is on the balance sheet at $5.26 million. Zenith has recently produced de minimis income/losses. Zenith’s book value, as of November 25, 2006, is $2.95 million. I’ve discounted the Zenith account by 44% and reasonably valued it at this book value on Bassett’s balance sheet. My aggressive valuation simply uses Bassett’s current figure of $5.26 million. My conservative value assumes Zenith is worthless.
IHFC
Bassett’s 46.9% interest in IHFC is completely misrepresented on the balance sheet. IHFC presents an opportunity to engage in a little “accounting arbitrage.” The best way to think of IHFC is as a taxable REIT.
IHFC exists to solely own and lease out floor space in a showroom facility in High Point, North Carolina. IHFC’s effect to Bassett’s balance sheet is wild. IHFC’s refinancing of its real estate based on the market value of the property (and in excess of its depreciated cost) has caused Bassett to reflect a liability on its balance sheet. Why is that? Well, IHFC used the proceeds of its refinancing to pay a special dividend to its owners. Because this special dividend was “in excess of [IHFC’s] earnings,” Bassett has to reflect a liability to account for IHFC’s ‘undercapitalization.’
IHFC is a beautiful operation. See for yourself. IHFC’s complete financial statements are included in Bassett’s 10-K. Given that IHFC’s net income for the first nine months of 2007 ($9.37 million) is similar to the first nine months of 2006 ($9.92 million), I have simply used IHFC’s 2006 net income to value IHFC. Valuing IHFC at a reasonable 8X earnings places Bassett's interest at $4.54 per share ($14.29 * 46.9% * 8 / 11.81). I would feel comfortable valuing IHFC at 10X earnings, and this is included in my aggressive valuation of $5.67 million. My conservative estimate uses 5X earnings for $2.84 per share. Because IHFC does not have a negative valuation, I’ve removed Bassett’s liability that represents IHFC’s GAAP-based negative net worth.





































Conservative


Book figure

Adjs.

Adjusted Book

Oper. related?

Non-core

Operating Book



Figures in '000,000s


25-Aug



30-Dec



30-Dec

30-Dec



(Except for Per Share)


2007



2008



2008

2008




















ON BALANCE SHEET
















Cash and equivs


$4.36

100%

$4.36

No

$4.36

$0.00



A/R, net


$40.70

100%

$40.70

Yes

$0.00

$40.70



Inventories


$44.05

100%

$44.05

Yes

$0.00

$44.05



Deferred income taxes


$4.92

100%

$4.92

No

$4.92

$0.00



Assets held for sale


$0.00

100%

$0.00

No

$0.00

$0.00



Other current assets


$10.30

100%

$10.30

Yes

$0.00

$10.30



Total current assets


$104.33



$104.33



$9.28

$95.05




















P&E:
















P&E, gross


$155.23

100%

$155.23

Yes

$0.00

$155.23



Less depr.


$103.20

100%

$103.20

Yes

$0.00

$103.20



P&E, net


$52.03



$52.03



$0.00

$52.03



Investments:
















BIAAF, LP(6)
















Styx Partners, LP


$22.70













HBK Fund, LP


$13.09













Contrarian Capital Trade Claims, LP


$5.46













Drawbridge Special Opportunities Fund, LP
$6.10













DB Zwirn Special Opportunities Fund, LP
$5.03













Cash and other


$0.19













2007 adjustment


($1.18)
















$51.40

100%

$51.40

No

$51.40

$0.00




















Marketable securities(7)
















Fixed income securities


$3.67













Equity securities


$16.74













Total cost


$20.40













Unrealized holding gains


$5.46













2007 adjustment


$0.69













Fair value


$25.86

100%

$25.86

No

$25.86

$0.00




















Investments, total


$77.26



$77.26



$77.26

$0.00




















Retail real estate(1)


$31.20

100%

$31.20

Yes

$0.00

$31.20



Notes receiveable, net


$14.30

100%

$14.30

Yes

$0.00

$14.30



Deferred income taxes


$11.08

100%

$11.08

No

$11.08

$0.00



Goodwill(4)


$3.46

100%

$3.46

Yes

$0.00





Zenith Freight Lines, LLC(2)


$5.26

0%

$0.00

No

$0.00





IHFC, Inc.(5)


$0.00

100%

$33.51

No

$33.51





Other


$8.73

100%

$8.73

Yes

$0.00

$8.73



Total assets


$307.64



$335.89



$131.13

$201.30




















A/P


$18.59

100%

$18.59

Yes

$0.00

$18.59



Customer deposits


$7.59

100%

$7.59

Yes

$0.00

$7.59



Short-term revolving debt


$6.00

100%

$6.00

Yes

$0.00

$6.00



Other accrued liabilities(1)


$20.92

100%

$20.92

Yes

$0.00

$20.92



Total current liabilities


$53.10



$53.10



$0.00

$53.10




















Post employment benefit obligations


$15.05

100%

$15.05

Yes

$0.00

$15.05



Long-term revolving debt


$0.00

100%

$0.00

Yes

$0.00

$0.00



Real estate notes payable(1)


$19.02

100%

$19.02

Yes

$0.00

$19.02



Distrs. in excess of aff earnings(3)


$13.43

0%

$0.00

No

$0.00

$0.00



Other long-term liabilities


$1.52

100%

$1.52

Yes

$0.00

$1.52



Total liabilities


$102.12



$88.69



$0.00

$88.69





































Book Value


$205.52



$247.20



$131.13

$112.61




















Market Cap


$106.85
































































(1) Retail real estate properties financed through commercial mortgages payable over periods of four to twenty years and have interest rates ranging from 6.73% to 9.18%
The mortgages are collateralized by the properties with net book values totaling approximately $25,819 at August 25, 2007.
The current portion of these mortgages, $658 as of August 25, 2007has been included as a current liability in "other accrued liabilities."
The long-term portion, $19,022 as of August 25, 2007is presented as "real estate notes payable."



(2) Bassett's 49% investment in Zenith Freight Lines, LLC. ("Zenith") is consolidated and valued $5,264 at November 25, 2006, and $5,512 at November 26, 2005. Bassett's share of income (loss) from Zenith was $(248), $500 and $523 for 2006, 2005 and 2004, respectively.
At November 25, 2006, Zenith's net book value was $2.95 million.



(3) Bassett's 46.9% investment in International Home Furnishings Center, Inc. (“IHFC”) is accounted for under the equity method and reflects a credit balance and is shown in the liabilities section as "distributions in excess of affiliate earnings." The complete financial statements of IHFC are included in Bassett's 10-K.



(4) No goodwill is attributed to IHFC or Zenith.



(5) See note 3. The complete financial statements of IHFC are included in Bassett's 10-K.
"Based on current and expected future earnings of IHFC, the market value of IHFC is likely positive and substantially greater than its current negative book value."
IHFC's revenue, EBIT, and net income for the first 9 months of 2007 is $33.08, $19.35 and $9.371 million, respectively.
IHFC's revenue, EBIT, and net income for 2006 was $46.76, $28.715, and $14.29 million, respectively.
Valuing IHFC at a conservative 5X earnings places Bassett's interest at $33.51 million ($14.29 * 46.9% * 5). Given IHFC's ROIC around 25% and extremely high ROE due to real estate financing, I would feel comfortable at 10X earnings.



(6) The Bassett Industries Alternative Asset Fund, LP ("BIAFF, LP") was organized under the Delaware Revised Uniform Limited Partnership Act and commenced operations on July 1, 1998. Private Advisors, L.L.C. is the GP of the BIAFF. Bassett and the GP are currently the only two partners. Bassett accounts for investments in BIAFF, LP by marking to market each month based on the NAVs provided by the GP. The HFs and PMs provide the GP with estimated NAVs on a monthly basis that represents the amount BIAAF, LP would receive if it were to liquidate its investments in the investee funds.
The fair value of BIAFF, LP was $53.75 million at November 25, 2006. The values for each investee fund are my estimates with an adjustment to reconcile the most recent quarterly number.



(7) Bassett's marketable securities portfolio totaled $26,551 at August 25, 2007. The portfolio is comprised of nine different money managers and over fifteen different medium to large capitalization interests. Maturity dates on other investments in the portfolio range from one to six years.

Conservative
Total Value
Per share
Figures in '000,000s
(Except for Per Share)
FDSO
11.81
Price per share
$8.70
Market Cap (12/8/07)
$102.75
$8.70
Cash and equivs
$4.36
$0.37
Deferred income taxes
$4.92
$0.42
BIAAF, LP
$51.40
$4.35
Marketable securities
$25.86
$2.19
Deferred income taxes
$11.08
$0.94
Zenith Freight Lines, LLC
$0.00
$0.00
IHFC, Inc.
$33.51
$2.84
Non-core assets
$131.13
$11.10
Market price
$102.75
$8.70
Less: Non-core assets
$131.13
$11.10
Implied stub value of Bassett
($28.38)
($2.40)

Reasonable
Book figure
Adjs.
Adjusted Book
Oper. related?
Non-core
Operating Book
Figures in '000,000s
25-Aug
30-Dec
30-Dec
30-Dec
(Except for Per Share)
2007
2008
2008
2008
ON BALANCE SHEET
Cash and equivs
$4.36
100%
$4.36
No
$4.36
$0.00
A/R, net
$40.70
100%
$40.70
Yes
$0.00
$40.70
Inventories
$44.05
100%
$44.05
Yes
$0.00
$44.05
Deferred income taxes
$4.92
100%
$4.92
No
$4.92
$0.00
Assets held for sale
$0.00
100%
$0.00
No
$0.00
$0.00
Other current assets
$10.30
100%
$10.30
Yes
$0.00
$10.30
Total current assets
$104.33
$104.33
$9.28
$95.05
P&E:
P&E, gross
$155.23
100%
$155.23
Yes
$0.00
$155.23
Less depr.
$103.20
100%
$103.20
Yes
$0.00
$103.20
P&E, net
$52.03
$52.03
$0.00
$52.03
Investments:
BIAAF, LP
Styx Partners, LP
$22.70
HBK Fund, LP
$13.09
Contrarian Capital Trade Claims, LP
$5.46
Drawbridge Special Opportunities Fund, LP
$6.10
DB Zwirn Special Opportunities Fund, LP
$5.03
Cash and other
$0.19
2007 adjustment
($1.18)
$51.40
100%
$51.40
No
$51.40
$0.00
Marketable securities
Fixed income securities
$3.67
Equity securities
$16.74
Total cost
$20.40
Unrealized holding gains
$5.46
2007 adjustment
$0.69
Fair value
$25.86
100%
$25.86
No
$25.86
$0.00
Investments, total
$77.26
$77.26
$77.26
$0.00
Retail real estate
$31.20
100%
$31.20
Yes
$0.00
$31.20
Notes receiveable, net
$14.30
100%
$14.30
Yes
$0.00
$14.30
Deferred income taxes
$11.08
100%
$11.08
No
$11.08
$0.00
Goodwill
$3.46
100%
$3.46
Yes
$0.00
Zenith Freight Lines, LLC
$5.26
56%
$2.95
No
$2.95
IHFC, Inc.
$0.00
100%
$53.62
No
$53.62
Other
$8.73
100%
$8.73
Yes
$0.00
$8.73
Total assets
$307.64
$358.94
$154.18
$201.30
A/P
$18.59
100%
$18.59
Yes
$0.00
$18.59
Customer deposits
$7.59
100%
$7.59
Yes
$0.00
$7.59
Short-term revolving debt
$6.00
100%
$6.00
Yes
$0.00
$6.00
Other accrued liabilities
$20.92
100%
$20.92
Yes
$0.00
$20.92
Total current liabilities
$53.10
$53.10
$0.00
$53.10
Post employment benefit obligations
$15.05
100%
$15.05
Yes
$0.00
$15.05
Long-term revolving debt
$0.00
100%
$0.00
Yes
$0.00
$0.00
Real estate notes payable
$19.02
100%
$19.02
Yes
$0.00
$19.02
Distrs. in excess of aff earnings
$13.43
0%
$0.00
No
$0.00
$0.00
Other long-term liabilities
$1.52
100%
$1.52
Yes
$0.00
$1.52
Total liabilities
$102.12
$88.69
$0.00
$88.69
Book Value
$205.52
$270.25
$154.18
$112.61
Market Cap
$106.85

Exhibit D: SOTP Analysis
Reasonable
Total Value
Per share
Figures in '000,000s
(Except for Per Share)
FDSO
11.81
Price per share
$8.70
Market Cap (12/8/07)
$102.75
$8.70
Cash and equivs
$4.36
$0.37
Deferred income taxes
$4.92
$0.42
BIAAF, LP
$51.40
$4.35
Marketable securities
$25.86
$2.19
Deferred income taxes
$11.08
$0.94
Zenith Freight Lines, LLC
$2.95
$0.25
IHFC, Inc.
$53.62
$4.54
Non-core assets
$154.18
$13.06
Market price
$102.75
$8.70
Less: Non-core assets
$154.18
$13.06
Implied stub value of Bassett
($51.43)
($4.36)

Exhibit E: Non-Core Assets
Aggressive
Book figure
Adjs.
Adjusted Book
Oper. related?
Non-core
Operating Book
Figures in '000,000s
25-Aug
30-Dec
30-Dec
30-Dec
(Except for Per Share)
2007
2008
2008
2008
ON BALANCE SHEET
Cash and equivs
$4.36
100%
$4.36
No
$4.36
$0.00
A/R, net
$40.70
100%
$40.70
Yes
$0.00
$40.70
Inventories
$44.05
100%
$44.05
Yes
$0.00
$44.05
Deferred income taxes
$4.92
100%
$4.92
No
$4.92
$0.00
Assets held for sale
$0.00
100%
$0.00
No
$0.00
$0.00
Other current assets
$10.30
100%
$10.30
Yes
$0.00
$10.30
Total current assets
$104.33
$104.33
$9.28
$95.05
P&E:
P&E, gross
$155.23
100%
$155.23
Yes
$0.00
$155.23
Less depr.
$103.20
100%
$103.20
Yes
$0.00
$103.20
P&E, net
$52.03
$52.03
$0.00
$52.03
Investments:
BIAAF, LP
Styx Partners, LP
$22.70
HBK Fund, LP
$13.09
Contrarian Capital Trade Claims, LP
$5.46
Drawbridge Special Opportunities Fund, LP
$6.10
DB Zwirn Special Opportunities Fund, LP
$5.03
Cash and other
$0.19
2007 adjustment
($1.18)
$51.40
100%
$51.40
No
$51.40
$0.00
Marketable securities
Fixed income securities
$3.67
Equity securities
$16.74
Total cost
$20.40
Unrealized holding gains
$5.46
2007 adjustment
$0.69
Fair value
$25.86
100%
$25.86
No
$25.86
$0.00
Investments, total
$77.26
$77.26
$77.26
$0.00
Retail real estate
$31.20
100%
$31.20
Yes
$0.00
$31.20
Notes receiveable, net
$14.30
100%
$14.30
Yes
$0.00
$14.30
Deferred income taxes
$11.08
100%
$11.08
No
$11.08
$0.00
Goodwill
$3.46
100%
$3.46
Yes
$0.00
Zenith Freight Lines, LLC
$5.26
100%
$5.26
No
$5.26
IHFC, Inc.
$0.00
100%
$67.02
No
$67.02
Other
$8.73
100%
$8.73
Yes
$0.00
$8.73
Total assets
$307.64
$374.66
$169.90
$201.30
A/P
$18.59
100%
$18.59
Yes
$0.00
$18.59
Customer deposits
$7.59
100%
$7.59
Yes
$0.00
$7.59
Short-term revolving debt
$6.00
100%
$6.00
Yes
$0.00
$6.00
Other accrued liabilities
$20.92
100%
$20.92
Yes
$0.00
$20.92
Total current liabilities
$53.10
$53.10
$0.00
$53.10
Post employment benefit obligations
$15.05
100%
$15.05
Yes
$0.00
$15.05
Long-term revolving debt
$0.00
100%
$0.00
Yes
$0.00
$0.00
Real estate notes payable
$19.02
100%
$19.02