Farmer’s Battle With Shareholders Coming Down to Price

By RiSHAWN BIDDLE
Staff Reporter

So how much is Farmer Bros. worth?

The valuation game has more or less begun for the Torrance-based coffee distributor in the wake of last week’s disclosure that a disgruntled institutional shareholder has been discussing a repurchase of its shares.

The Franklin Mutual Advisors division of Franklin Resources Inc. disclosed in a Securities and Exchange Commission filing that it would sell its 9.8 percent stake back to the company if it offered to “equally” buy out other shareholders at an acceptable price it put in the “low $400s per share.”

In its filing, Franklin says it made its intentions known after a discussion with Farmer Bros. executives on April 29. “We would commit to accept such offer,” wrote Franklin President David Winters in his letter.

After the letter was released, Farmer’s stock rose 5.1 percent, to $325 a share on May 1 from $309.25 on April 29.

Farmer Bros. spokesman James Lucas said the company would “consider all options,” including the Franklin proposal.

Shareholders who have been prodding Farmer to disclose more financial information have been exchanging notes on how much they think the company might be worth. In its filing, Franklin said it believes Farmer Bros. could easily fund a buyback at its suggested price with some of the $287 million in cash sitting on its balance sheet. “This price would be acceptable to shareholders of the company,” Winters wrote.

Cash horde

One shareholder, Jack Norberg of Costa Mesa brokerage Standard Investment Chartered, argues that the shares could be worth as much as $525 each.

Besides the company’s cash horde – amounting to $149 per share – there’s the high-margin coffee business, which provides coffee, hot cocoa and equipment to offices and restaurants.

Being the largest coffee firm in the western United States, Norberg argues that Farmer would be a great acquisition for either a strategic buyer such as distributor Sysco Corp. or a value investor such as Berkshire Hathaway Inc., the conglomerate run by Warren Buffett.

Investors long have complained that the company hasn’t been run to its fullest potential, missing out on the gourmet coffee sensation that spawned Starbucks Corp.

“It’s such a great business. If only there was a way to get rid of Roy Farmer,” said Norberg.

There are also hidden assets on the balance sheet. Farmer Bros. values its plants, equipment and real estate at $38.6 million, including its headquarters and adjoining has its warehouse and main manufacturing plant.

But Gary Lutin, who runs a shareholders’ forum sponsored by Franklin, said the company could realize double the value of its real estate assets if it did a sales-leaseback arrangement where it sold the offices, then leased them back for a 20-year period. The shareholders’ forum has been at the center of recent efforts to force changes at Farmer Bros., including a survey conducted last month, which hit upon a range of valuations for the company from $378 and $484 per share.

Company officials believe such surveys by outsiders are a waste of time.

“The only value is the stock price,” said Lucas.

He added that no one invests based on book value any more. “The last investor who worked on that basis is dead,” he said.

Practical valuations

In the end, the debate may be meaningless.

“The company may be worth $500 just if it was run the way other responsible firms would be,” said Lutin. “However, most practical investors would rather accept $400 now than wait or continue fighting with management. Whether that price is fair or not is another matter.”

The squabbling over price is the latest development in a long running spat between Farmer Bros. and its dissident shareholders.

Besides demanding more information, the dissidents oppose the company’s use of an employee stock ownership plan to maintain insiders’ control.

Last week, two new directors were named to the board, including Thomas Maloof, the chief financial officer of an Irvine-based marketing consultancy. With the resignation of Farmer Bros.’ longtime outside counsel – who became secretary – the company maintains that the “majority of the board” is independent as defined by the Sarbanes-Oxley Act.

However, one of the directors Farmer Bros. calls independent is a retired company executive. There are also grumblings that Maloof was once the chief operating officer of HMO Foundation Health during a period of financial turmoil in the early 1990s.