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Survey Report: Ranges of Valuation
Estimates
In an informal March 26, 2003 survey request, copied below,
participants in the Forum being conducted for shareholders of Farmer Bros.
Co. were asked to estimate the lowest and highest prices per share that they
might consider “fair” for a management offer to buy out public investors,
based only on the information currently available from the company. The
responses received by April 6, 2003 are summarized as follows:
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|
Lowest Price |
Highest Price |
Percent Spread |
|
Average |
$384 |
$473 |
23.4% |
|
Median |
$400 |
$484 |
23.8% |
|
Standard deviation |
29.68 |
63.38 |
7.75 |
The range of responses, as well as participant comments,
suggested significant uncertainty about unknown conditions. For example,
some respondents mentioned particular uncertainty about estimating possible
high values because of the potential “hidden” values of real estate on the
books at purchase prices from over fifty years ago. In fact, some of the
Forum participants who have been most actively interested in valuation
issues actually declined to make what might be considered arbitrary guesses
for this survey.
It should be noted, however, that averages of participant
responses are not significantly different from the ranges that might be
established by prospective strategic bidders who would consider comparable
market price ratios of peer group companies. Based on applicable multiples
of 6.2 for book value and 9.3 for tangible book value (using the April 4,
2003 MultexFundamentals industry index of 50 food processing companies,
including Farmer Bros. as well as the frequently mentioned Sysco, for
example, which currently trades at 8.0 times book value and 15.4 times
tangible book), the industry comparable market range for only the food
business of Farmer Bros. with approximately $81 million net book value as of
December 31, 2002 would be calculated as from $503 million to $755 million.
Adding the company’s $287 million investment funds (but without adding any
assumed amounts for surplus real estate or other non-operating values) would
give Farmer Bros. a total value of from $790 million to $1.042 billion, or
from $410 per share to $540 per share.
Thanks to each of the participants who responded to this survey, and also
to those who commented without providing value estimates. Your views should
be very useful to both the shareholders and management of Farmer Bros. in
their efforts to address investor interests.
GL – 4/7/03
March 26, 2003 Survey Request:
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----- Original
Message -----
From:
Gary Lutin
To:
Distribution: Farmer Bros. Forum
Sent:
Wednesday, March 26, 2003 12:42 PM
Subject:
Quick survey: estimate of "fair" value ranges for theoretical offer
Your views of value
ranges will be appreciated to help determine the direction of Forum
information requests. According to standard Forum practice, of
course, all responses will be considered private and only the
statistical results will be reported, without identifying participants.
What we would like
to know is the range of your high and low estimates of a value that you
might consider "fair," based only on the information currently
available to you, for the type of theoretical offer described a few
weeks ago in the Forum distribution copied below. In summary, you
should assume that the company or its ESOP would be offering a
non-taxable exchange of either cash or preferred stock (with
dividend, redemption, and other provisions establishing effective
marketability at the offering price, of course). If there were such an
offer, what would be the lowest amount you might consider fair and
reasonable to accept for a share of Farmer Bros. common stock? And what
would be the highest amount?
It's assumed that
you'd want more information before actually making a decision on such an
offer, which is one of the reasons for this survey. We want to know the
spread between low and high guessing ranges based on the information
that's currently available, so that we can define the value of obtaining
additional information to narrow the spread. And, naturally, it would
also be helpful for everyone -- shareholders as well as management -- to
have a general idea of how the market views the potential value of
Farmer Bros. Co.
Please simply write
in the amount of your high and low estimates in the spaces below, and
then return this note to me:
Lowest
possible estimate of "fair" value per share:
Highest
possible estimate of "fair" value per share:
Your response will
be appreciated, and I will also welcome your questions or comments.
GL - 3/26/03
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
(Tel: 212/605-0335)
(Fax: 212/605-0325)
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[Copy of
March 3, 2003 Forum distribution]
----- Original
Message -----
From:
Gary Lutin
To:
Distribution: Farmer Bros. Forum
Sent:
Monday, March 03, 2003 8:55 AM
Subject:
Evaluation of restructuring alternatives, with example
Those of you who've
expressed an interest in evaluating the business operations of Farmer
Bros. should let me know during the next week or so what information
you'd like to see from the company.
The first
information request letter to Farmer Bros. concerning management of the
investment portfolio should be sent shortly. We've organized a very
simple and practical process for letters to be sent by a "Delegate" and
are now simply waiting for the authorizing shareholder's execution of a
power of attorney form. Once that's done, we'll start work on the
preparation of second letter requesting other information, turning from
investment funds to business operations.
Since I know that
several of you have wanted to analyze possible restructuring or
recapitalization alternatives, I suggest that we concentrate now on
information needed to evaluate the business operations for purposes of
determining fair price ranges for relevant transaction alternatives.
For example, you'll
see below a simple spreadsheet for a theoretical example of a
restructuring in which public shareholders would receive $425 per share
in either cash or preferred stock. In this illustration, the ESOP would
offer to pay cash, funded by the company, for a sufficient number of
shares to bring its total holdings to something over 30%, and the
company itself would offer to exchange preferred stock for about the
same number of shares to take all the public shareholders out of the
common stock.
Based on what we
know, this theoretical example would seem to make sense to all parties.
It leaves the company with over $90 million in "reserve" funds and no
debt for the secure continuation of business. The public shareholders
would get either cash or a more liquid preferred stock, and people
familiar with ESOP rules tell me that a transaction giving an ESOP over
30% of the shares could be non-taxable to sellers. But we'd need to
determine what the restructured company is worth -- its value as a
coffee processing and food distribution business -- to determine what
price would be fair for the share offerings. Should a
shareholder accept $425? Or $500? Or Friday's closing price of
$306.50?
There are of course
several strategic alternatives that shareholders as well as management
may want to consider. For any of these, the company's shareholders will
need to be able to make informed evaluations. So, please tell me what
information you need.
GL -
3/3/03
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
(Tel: 212/605-0335)
(Fax: 212/605-0325)
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Analysis
of Restructuring Alternatives - Farmer Bros. Co. |
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Reported
12/31/02 |
ESOP
Proposal |
Preferred Proposal |
Adjusted
for Proposals |
|
|
|
|
|
|
|
Price per share |
|
$425.00
|
$425.00
|
|
|
|
|
|
|
|
|
Common stock
outstanding (000 shares) |
|
|
|
|
|
Owned by ESOP |
143 |
454 |
|
597 |
|
Controlled by
management (non-ESOP) |
875 |
|
|
875 |
|
Independently
owned |
909 |
(454) |
(455) |
0 |
|
Total
shares |
1,926
|
0 |
(455) |
1,472
|
|
Preferred stock
outstanding (000 shares) |
|
|
|
|
|
Owned by ESOP |
0 |
|
|
0 |
|
Controlled by
management (non-ESOP) |
0 |
|
|
0 |
|
Independently
owned |
0 |
|
455 |
455 |
|
Total
shares |
0 |
0 |
455 |
455 |
|
|
|
|
|
|
|
|
|
|
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ASSETS |
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|
|
|
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Current assets: |
|
|
|
|
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Cash and cash equivalents |
$14,001
|
|
|
$14,001
|
|
Short term investments |
272,672
|
(193,124) |
|
79,548
|
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Accounts and notes receivable, net |
18,534
|
|
|
18,534
|
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Inventories |
36,288
|
|
|
36,288
|
|
Income tax receivable |
0 |
|
|
0 |
|
Deferred income taxes |
1,188
|
|
|
1,188
|
|
Prepaid expenses |
2,482
|
|
|
2,482
|
|
Total current assets |
345,165
|
(193,124) |
0 |
152,041
|
|
|
|
|
|
|
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Property, plant and equipment, net |
38,596
|
|
|
38,596
|
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Notes
receivable |
224 |
|
|
224 |
|
Other
assets |
27,988
|
|
|
27,988
|
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Deferred income taxes |
2,672
|
|
|
2,672
|
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Total assets |
$414,645
|
($193,124) |
$0 |
$221,521
|
|
|
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LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
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Current liabilities: |
|
|
|
|
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Accounts payable |
$5,708
|
|
|
5,708
|
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Accrued payroll expenses |
6,425
|
|
|
6,425
|
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Other |
5,478
|
|
|
5,478
|
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Total current liabilities |
17,611
|
0 |
0 |
17,611
|
|
|
|
|
|
|
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Long
term debt |
0 |
|
|
0 |
|
Accrued postretirement benefits |
23,705
|
|
|
23,705
|
|
Other
long term liabilities |
5,486
|
|
|
5,486
|
|
|
29,191
|
0 |
0 |
29,191
|
|
|
|
|
|
|
|
Commitments and contingencies |
0 |
|
|
0 |
|
|
|
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Shareholders' equity: |
|
|
|
|
|
Preferred stock, ?? terms, ?? Shares |
0 |
|
193,195
|
193,195
|
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Common stock, $1.00 par value, authorized |
|
|
|
|
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3,000,000 shares; 1,926,414 shares issued |
1,926
|
|
|
1,926
|
|
Additional paid-in capital |
18,215
|
|
|
18,215
|
|
Retained earnings |
373,943
|
|
|
373,943
|
|
Unearned ESOP shares |
(26,241) |
(193,124) |
|
(219,365) |
|
Treasury shares |
0 |
|
(193,195) |
(193,195) |
|
Total shareholders' equity |
367,843
|
(193,124) |
0 |
174,719
|
|
Total liabilities and shareholders' equity |
$414,645
|
($193,124) |
$0 |
$221,521
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