CRIMSON WINE GROUP LTD CWGL
December 22, 2016 - 9:34am EST by
cuyler1903
2016 2017
Price: 9.35 EPS 0 0
Shares Out. (in M): 24 P/E 0 0
Market Cap (in $M): 224 P/FCF 0 0
Net Debt (in $M): -18 EBIT 0 0
TEV ($): 206 TEV/EBIT 0 0

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  • Potential Takeover Target
  • Wow Cuyler even pumps in the tags
 

Description

I believe that Crimson Wine Group is a prime candidate to be taken private or sold to a strategic buyer at a substantial premium.  With a very cheap valuation supported by high-quality assets, a cash-rich balance sheet, substantial recent programmatic insider buying taking each primary owner up to 10% (20% total stake) and 3+ years post-spin, the stars appear to be aligning for CWGL.  I consider downside protection to be solid, and believe upside potential is likely 50-100% in a sale, depending on the type of buyer, should a transaction occur.

Based in Napa, CA, Crimson Wine Group, Ltd. (“CWGL”) is an owner and operator of boutique, estate-based wineries that produce in the finest wine growing regions of California, Oregon and Washington.  The company’s wineries include Pine Ridge Vineyards, Seghesio Family Vineyards, Archery Summit Winery, Chamisal Vineyards, Double Canyon Vineyards and Seven Hills Winery.  Founded in 1991, CWGL was for years a division of well-known conglomerate Leucadia National Corporation (NYSE: LUK).  In 2013, in conjunction with Leucadia’s acquisition of investment banking firm Jefferies LLC, LUK leadership Joseph Steinberg and Ian Cumming believed value would be better realized for LUK shareholders through a tax-free spin-off of CWGL to LUK shareholders, which was completed in February of that year when LUK common shareholders received one share of CWGL for every ten shares of LUK owned.

Keys to the Thesis

  • Underfollowed spin-off, with no sell-side analyst coverage (at least that I can find).
  • Extraordinarily valuable land assets in premier locations.  CWGL owns 860 plantable acres of land, 740 of which are currently planted.  Of these, 158 acres are in five Napa Valley, CA appellations:  Stags Leap District, Rutherford, Oakville, Carneros and Howell Mountain.  In addition, the company owns 101 acres in Willamette Valley, OR, 99 acres in Edna Valley, CA, 318 acres in Sonoma County, CA, and 184 acres in Horse Heaven Hills, WA.
  • Ultra-clean balance sheet, with $33 million of cash and investments (Treasuries and CDs) and only $15 million of debt.
  • Cheap valuation, as the company’s book value is $206 million ($8.58/share), while its market capitalization is only $224 million at a $9.35 share price.  Current enterprise value, net of debt and cash, is only $206 million.  It is worth noting that property and equipment is $118 million of this value, and land is not marked to market over time.
  • To indicate directionally how undervalued the land may be, in January 2013, CWGL sold a non-strategic vineyard for $1.8 million, after selling expenses, and booked a pre-tax gain of $0.7mm.  In May 2014, the company sold a non-strategic unplanted parcel of land in Washington for $3.9 million, after selling expenses, and booked a pre-tax gain of $1.8 million.  Sixteen years ago, in 2000, there was an article in Wine Spectator indicating that Pine Ridge alone had been receiving offers upwards of $150 million.  While that may have been a product of the internet bubble, that was a long time ago and prime property has reached new heights in California, in many cases surpassing those 2000 heights.
  • In the last two years, there has been a very large ongoing program of insider stock purchases by officers and directors, but most notably by former LUK leaders Joseph Steinberg and Ian Cumming, who have taken turns executing their insider purchases on nearly a daily basis via Rule 10b5-1 plans.  Such plans allow insiders to transact in their stock on a pre-determined price and time basis regardless of whether they come into possession of material non-public information.  It is far more normal to see such programs used by insiders to sell stock than to buy stock, and this is a significant reason why I own the shares.
  • Steinberg and Cumming each now owns approximately 2.4 million shares, collectively representing approximately 20% of CWGL’s shares outstanding. 
  • Following a tax-free spin-off, tax laws generally prohibit change of control transactions within two years of the effective date.  This date would have passed last year, and the company would now be eligible to be sold to a third party or taken private.  Notably, Ian Cumming’s son John Cumming is CWGL’s chairman, so the top shareholders also effectively control management.
  • On a standalone basis, the company generates approximately $61 million of revenue, $33 million of gross profit, and $15 million of EBITDA.  As part of a larger company, general and administrative expenses could likely be reduced by $3-4 million and selling and marketing expenses perhaps by $5-7 million.  As such, I believe EBITDA as viewed by a strategic buyer with an existing salesforce would likely approximate $25 million.

In summary, I believe that the downside risk in owning CWGL shares is low, as the business is very conservatively capitalized and with highly valuable tangible assets.  The aggressive recent insider share purchases caught my attention, and particularly so since the principals are known for being extraordinarily savvy investors.  It would not surprise me if these purchases were an attempt to buy in as much inexpensive stock as possible in advance of a take-private bid or outright sale to a strategic buyer, but that is pure speculation.  In that case, I would not be surprised to see a valuation 50-100% above the current price, in the $14-18 range.

Key Risks

  • Effectively controlled situation by Joe Steinberg, Ian Cumming, and son John Cumming.  Could make poor decisions, but I believe this is unlikely given their large and increasing ownership stake.
  • Vagaries of Napa Valley property market and wine industry.

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.  Please do your own research.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Value investor awareness and understanding.
  • Potential use of excess cash to repurchase stock, perhaps through a tender offer.
  • Take-private transaction or sale of the company to a strategic buyer.
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    Description

    I believe that Crimson Wine Group is a prime candidate to be taken private or sold to a strategic buyer at a substantial premium.  With a very cheap valuation supported by high-quality assets, a cash-rich balance sheet, substantial recent programmatic insider buying taking each primary owner up to 10% (20% total stake) and 3+ years post-spin, the stars appear to be aligning for CWGL.  I consider downside protection to be solid, and believe upside potential is likely 50-100% in a sale, depending on the type of buyer, should a transaction occur.

    Based in Napa, CA, Crimson Wine Group, Ltd. (“CWGL”) is an owner and operator of boutique, estate-based wineries that produce in the finest wine growing regions of California, Oregon and Washington.  The company’s wineries include Pine Ridge Vineyards, Seghesio Family Vineyards, Archery Summit Winery, Chamisal Vineyards, Double Canyon Vineyards and Seven Hills Winery.  Founded in 1991, CWGL was for years a division of well-known conglomerate Leucadia National Corporation (NYSE: LUK).  In 2013, in conjunction with Leucadia’s acquisition of investment banking firm Jefferies LLC, LUK leadership Joseph Steinberg and Ian Cumming believed value would be better realized for LUK shareholders through a tax-free spin-off of CWGL to LUK shareholders, which was completed in February of that year when LUK common shareholders received one share of CWGL for every ten shares of LUK owned.

    Keys to the Thesis

    In summary, I believe that the downside risk in owning CWGL shares is low, as the business is very conservatively capitalized and with highly valuable tangible assets.  The aggressive recent insider share purchases caught my attention, and particularly so since the principals are known for being extraordinarily savvy investors.  It would not surprise me if these purchases were an attempt to buy in as much inexpensive stock as possible in advance of a take-private bid or outright sale to a strategic buyer, but that is pure speculation.  In that case, I would not be surprised to see a valuation 50-100% above the current price, in the $14-18 range.

    Key Risks

    Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.  Please do your own research.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    Subjectre: Asset value vs earnings power
    Entry12/22/2016 02:17 PM
    Memberdman976

    How do they match up?  NAV (adjusted for intrinsic land value + intangible asset value less taxes) vs an adjust cash flow yield?


    SubjectQuestions
    Entry12/26/2016 04:51 PM
    Memberblaueskobalt

    Why is there 50-100% upside?  I don't quite follow how you triangulate that value...

    Why do you think this is timely now? This has been out there for some time...anything other than the insider buying?

    Why do you think this is being run to maximize value for minority shareholders?  Sure the Leucadia guys have a greal track record in that vehicle, but a vineyard is pretty different. Guys of their weath and social status have a long track record of winemaking as a family vanity project...one could argue that this is exactly what this looks like...


    SubjectRe: Questions
    Entry12/29/2016 10:02 AM
    Membercfavenger

    Re: your third aquestion - if the Leucadia guys wanted to play with a vineyard as a vanity project wouldn't they keep it tucked away inside LUK as a P&L rounding error rather than place it front and center as a standalone public company?


    SubjectRe: Re: Questions
    Entry12/29/2016 10:23 AM
    Membercuyler1903

    Yeah, they already had effective control of the company with their collective stake at the spin, plus the CEO slot.  It would be pointless for them to buy millions more in stock if it were not a strategic investment decision, particularly after the 2-yr anniversary of the spin via a 10b5 program.


    SubjectRe: Re: Re: Questions
    Entry12/29/2016 01:22 PM
    Memberblaueskobalt

    According to the proxy, Jeffries management forced the spin because they (who are professional valuers of assets) felt it was worth no more (and potentially less) than book value: 

    Shares of Crimson stock will only be distributed to Leucadia shareholders of record on the Crimson record date, because the Leucadia winery business spin out is a condition to Jefferies’ obligation to consummate the transactions. Jefferies management deemed Crimson as less strategically relevant than Leucadia’s other subsidiaries, ascribing a value to Crimson no greater than approximately its book carrying value. As such, in assessing and negotiating the terms of the transaction with Leucadia, Jefferies management viewed the pre-transaction divestiture of Crimson through the Leucadia winery business spin out an efficient and desirable method of divesting Crimson, as compared with a post-transaction sale or other divestiture. It was therefore agreed that that the spin out occur prior to consummation of the transactions, without reducing the book value of Leucadia by more than $197 million and that it be effected without Leucadia retaining any material liability with respect to Crimson.

    Reading between the lines, it would appear that (a) Jeffries thought that Crimson was worth no more than BV, or (b) Jeffries thought that Crimson was worth no more than BV under Cumming's/Steinberg's operating plans (which may be as a family vanity project).

    I recognize that the long-term plan may be to squeeze out minority shareholders and take the company private (for the families), but I don't see much evidence to suggest that this will be imminent or for a big premium (and you need both for this to work).


    SubjectRe: Re: Re: Re: Questions
    Entry12/29/2016 02:29 PM
    Membercuyler1903

    Not scientific, but I'm guessing Napa real estate (where much of the value lies) is worth a fair amount more today than when the spin decision was made in 2012.  Maybe it doesn't sell for a huge premium or at all, but I'll go ahead and take my chances at this price.  To correct one thing, there are no "minority shareholders" to squeeze out - the big shareholders are still in the minority themselves despite essentially having operating control.  By the time there is the hard "evidence" of something good happening (beyond, I guess, the timing, large 10b5-1 purchases, and historical sales at a premium to book), the stock probably won't be available for book value.  Who knows, maybe it appreciates on a standalone basis first?

    Just part of my portfolio, trying to skate where the puck might end up, hope for a good bounce.  Nothing glamorous about it.  Kind of feels like a DGT Holdings or Dole type of situation, both ideas worked out well, though I only made money on DGT.

    Happy new year.

    Cuyler


    Subjecttidbit
    Entry12/29/2016 08:45 PM
    Memberrhubarb

    A year or so ago, I was seated at a table with a former member of handler's team at the time of the LUK merger.  I asked him specifically why they spun out CWGL and he indicated that they (Jefferies) just didn't want the asset.  

     


    SubjectPretty big insider buys
    Entry04/07/2017 02:19 PM
    Membercuyler1903

    I don't know what to make of it, but the volume of these purchases was unusually large compared with their prior buys (though these guys are unusually rich).  Maybe the latest vintage is tasting particularly good.  If so, that 20% shareholder discount will come in handy.

    CUMMING JOHN D.

    Director

    2017-03-29 Buy 10,600 $9.38 $0.10M 113,880 10.26% View Filing

    CUMMING IAN M.

    Director

    2017-03-27 Buy 68,838 $9.25 $0.64M 2,431,349 2.91% View Filing

    STEINBERG JOSEPH S

    Director

    2017-03-27 Buy 18,837 $9.25 $0.17M 2,485,925 0.76% View Filing

    STEINBERG JOSEPH S

    Director

    2017-03-23 Buy 47,418 $9.16 $0.43M 2,467,088 1.96% View Filing

    STEINBERG JOSEPH S

    Director

    2017-03-22 Buy 2,582 $9.23 $0.02M 2,419,670 0.11% View Filing

    DELONG PATRICK M

    Director

    2017-03-20 Buy 500 $9.07 $0.00M 11,000 4.76% View Filing

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