Raise Your Glass To Leucadia’s Crimson Wine Group Spinoff

Leucadia (LUK) is one of those low key companies which has done a superb job for shareholders. The company has grown Book Value per share at an 18.5% CAGR and shareholder equity at over 19% since 1979. Not bad. No fancy homepage for this company, instead the spartan website offers up some links to the company’s SEC filings and chairman letters. The company recently made some big news in the M&A space when it announced that it would acquire the remaining shares of investment bank Jefferies Group (JEF).

Buried within the fine print of the transaction is that in order to gain approval, Leucadia must spin off the Crimson Wine Group, its maker of fine wines. Apparently (at least according to the amended Form 10), Jefferies’ management deemed Crimson to be ‘less strategically relevant’ and believed that it was not worth more than its carrying book value. As a result, the two sides agreed that the unit should be unloaded prior to executing the merger. Leucadia also included the usual spinoff rationale boilerplate about giving shareholders and lenders the ability to value each business on its own.

Based on its name, it should be pretty clear how Crimson makes most of its its money. The company operates four wineries in the United States where it produces and sells…wine. The finished product is either sold via distributor (the majority of sales) or direct to customer (much higher margin). Unfortunately, industry regulations often limit the company’s ability to sell direct though and it is worth noting that the industry can be very competitive. Results have been weak the past few years and the company has been negatively impacted by the poor economy. Despite all of this, it is important to note that LUK was committed to investing in the company and growing the business, having made several recent acquisitions. Here are the four main wineries owned by Crimson:

  1. Pine Ridge Vineyards – acquired in 1991
  2. Archery Summit – started in 1993 by Crimson
  3. Chamisal Vineyards – acquired in 2008 and in 2013 is expected to complete a massive expansion project
  4. Seghesio Family Vineyards – acquired in 2011 and expects to complete expansion project in 2013

The company also owns Double Canyon Vineyards which does not produce wine on site and sells off the vast majority of its grapes.

In order to finance all of those acquisitions and expansions, the company tapped Leucadia’s credit and ran up a nice ‘Due To Leucadia’ balance. This was effectively the company’s debt onto which it paid interest. Like a good parent, Leucadia is giving its child a fresh start as it heads out on its own and is committing the ‘Amount Due’ account into the company’s capital balance, effectively cleaning up its balance sheet. It is also committing $13m in cash to Crimson. While this will improve net income by reducing interest charges for now, the company will have to set up its own revolving credit facility which will be much smaller than it is used to having. It is unlikely to pursue anymore $86m acquisitions (the price it paid for Seghesio) anytime soon. It is important to go through the Form 10 in depth in order to get a better feel for the company’s financial position which is impacted by seasonality and numerous one-time items.

Leucadia shareholders are expected to receive 1 share of Crimson Wine for every 10 shares of LUK owned. The board of directors has established February 25, 2013 as the distribution date for shareholders as of February 11, 2013 (the date of record). As a result, there are expected to be ~24.5 million shares outstanding after the distribution. A group of three insiders will control a hefty amount, ~25%, of those outstanding shares:

  1. Ian Cumming, LUK Chairman and CEO, owns 8.7%
  2. Joseph Steinberg, LUK President & COO, 9.7%
  3. Bruce Berkowitz, manager of Fairholme Funds, 7.4%

This should only exacerbate the liquidity issue bound to arise from the fact that the new company is not planning on listing its shares on any exchange, but will just trade OTC. I am not sure what that will mean for most ordinary shareholders. We know what Jefferies supposedly thinks about the company’s value, but another recent wine focused spin, Treasury Wine Estates (TSRYY), trades at 1.5x Tangible Book (and ~34x P/E and 12.5x TEV/EBITDA).

Disclosure: Author holds no position in any stock mentioned.

13 thoughts on “Raise Your Glass To Leucadia’s Crimson Wine Group Spinoff

  1. anon

    interesting post. are you doing any further research into this? Seems like strong potential for orphan stock that gets dumped by institutions to clean up their books. Maybe an opportunity if the financials look decent and the selling pressure is strong.

  2. anon2

    I’ve done the work — I wouldn’t bother with it. Terrible industry and de minimis profitability (@ tangible book value, you’re looking at a 75x P/E). Good luck

  3. TheSpinDoctor

    Anon2 – what numbers did you end up using for tangible bv and eps?

    Anon1 – I hope to do a bit more work on this, time permitting. Not in a huge rush though. Given its size and OTC trading, I think there is high potential for this to get dumped. Doesn’t mean it will happen or be worth buying though. As anon2 points out, the industry is tough, economy still weak and the company hasnt done much. On the other hand, the balance sheet will be clean and Leucadia’s management are no fools – they have been investing in the space throughout the downturn…

  4. anon2

    I’ve got…

    TBV = $183m [$197m book value less deferred tax assets/liabilities]
    Net Income = $3m (or $0.105 EPS)
    Normalized FCF = $5m ($11m less $6m Maintenance CapEx)

    Jefferies wanted Leucadia to punt this because it’s a cash sinkhole and it’s not much more than Steinberg and Cumming’s pet project.

    P.S. Book value is mostly meaningless here anyways because ~50% comes from the overpriced Seghesio acquisition done last year.

  5. anon2

    Book value = ~$8/sh (in Crimson shares, not Leucadia shares… they’re doing a 10:1 reverse split)

    If you own Leucadia and receive Crimson shares as a distribution, think hard about the price you can sell it and what value you attribute to it…

  6. valuelion

    I think this is an incredible trading opportunity. The company will initially trade in the OTC, but I believe they will list at some point in the not too distant future.

  7. TheSpinDoctor

    Funny you should call it a pet project. Did you see the line in the form
    10 where Steinberg purchased over $120K of wine using corporate
    discount in 2009? Wine can be pricey, but I am betting thats a lot of bottles…

  8. Anon2

    What is your point? Steinberg is rich. So what? He wants to support his pet projects and likes their wine. And?

    If Larry Ellison bought $120k of pineapples from his Lanai pineapple plantation, does that make it any less of a pet project vis a vis Oracle?

  9. golfnut27

    in a 10:1 reverse split, does that mean that if LUK shares trade at $26 then Crimson will begin trading at $26 or $2.60 (1/10 x $26)? Trying to figure out price to tangible book

  10. valuelion

    Moving the company from OTC to any of the major markets would be a simple driver of value creation.

  11. Anon2

    Sure, that’s true. But why do you assume they will move from OTC to a major exchange? Why wouldn’t they just list it on a major exchange now? Most spins do exactly that.

    Unless you are implying that Steinberg and Cumming are listing on OTC to accumulate more shares on the cheap, then listing on a major exchange to realize fair (higher) value. I guess that could be the modus operandi, we’ll see…

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