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Note: For purposes of clarifying points reported in the article presented below, it is assumed that the article's use of the term "group" in referring to shareholders is intended only in the broad sense of a category, and not in the sense of the SEC definition applicable to 13D filings based on agreements to act in concert. Mr. Lutin, the Forum's chairman, stated at the time of the article's publication that he was not aware of any agreements among shareholders to act in concert. He also stated, in relation to the article's reference to proxy contests, that he had confirmed only that this was one of the alternatives that could be considered by shareholders of any company if directors fail to perform their duties, and that he had not indicated that any Farmer Bros. shareholders were currently considering a proxy contest. Finally, regarding his own position, Mr. Lutin reiterated his previous statement that he was not soliciting proxies and would not accept proxies if presented to him. |
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Investors put heat on Farmer Bros.
by Ron Orol in Washington Posted 04:56 EST, 23, May 2003 Investors routinely use terms like "shadowy" and "opaque" to describe Farmer Brothers Co. Indeed, for years management at the family-controlled coffee manufacturer and distributor has discouraged analyst coverage and done its best to mute the influence of shareholders. The Torrance, Calif., company even held its latest annual meeting the day after Christmas to reduce investor attendance. "We don't really have an investor relations department," said a Farmer Brothers receptionist. The company, whose market capitalization is $600 million, also does not mail annual reports to investors. Nor does it issue earning updates or hold analyst conferences. "It's always been this way," the receptionist said. Lately, however, investors have begun stirring for change. A group of shareholders, led by Franklin Mutual Advisers LLC of Short Hills, N.J., are trying to nudge Farmer Brothers to take itself private or seek a buyer. "There's a lot of value locked up in the company that should be made available to other shareholders," said Bradley Takahashi, a vice president at Franklin, which owns 10% of the coffee maker. And after years of ignoring such requests, the company, which roasts, packages and distributes coffee to restaurants and hotels, is at least bending to the pressure. Farmer Brothers said on April 30 that it is examining strategic options, although a spokesman declined to say whether it plans to hire a financial adviser. President and chief operating officer Roy Farmer Jr., son of Farmer Brothers founder and chief executive Roy Farmer Sr., did not return requests for comment. Shareholders say that while Farmer Brothers is profitable, it is hiding information about the value of its real estate and other assets to depress the company's stock. The reason? A lower share price will translate to lower estate taxes when control of the company shifts from father to son. Farmer Sr., 86, controls 52% of the company in stock and through various family trusts. "It's like a closely held family-run concern under the guise of a public company," said Marc Heilweil, chairman of investment firm Spectrum Advisory Services Inc. in Atlanta, which has a 1% stake in Farmer Brothers. Investors also want the company to reinvest some of its nearly $300 million in cash and securities in the business to boost the stock. The Farmer Brothers spokesman said that the company's financial disclosures comply with Financial Accounting Standards Board and Securities and Exchange Commission requirements. To improve its corporate governance, Farmer Brothers in April named two independent directors and accepted the resignation from the board of corporate counsel John Anglin, a longtime board member. Farmer Brothers defenders point out that the stock price has soared to roughly $317 per share from $18 in 1980. The company, which had net revenue of $206 million in 2002, down from $215 million in 2001, has increased its shareholder dividend in each of the past seven years. John Schrier, a tax lawyer and managing director of boutique investment bank Akiva Capital Group Inc. of New York, concurs that Farmer Jr. will save on estate taxes if the value of the stock is lower. Estate taxes are typically based on the value of a company's stock market cap on or around the day when the majority shareholder passes away and control of the stake changes hands. Gary Lutin, a spokesman for the shareholder group and president of New York investment firm Lutin & Co., said Farmer Brothers is moving in the right direction. But if it fails to follow through and hire a banker, Lutin warned that the group will consider a proxy fight to oust the board and steer the company toward a sale or a going-private transaction. Investors also are urging Farmer Brothers to register with the SEC as an investment company because they say roughly half of its assets come from cash and securities unrelated to its coffee enterprise. As an investment company, Farmer Brothers would face more stringent disclosure requirements, Lutin said. Jack Norberg, chairman of Standard Investment Chartered Inc., a Costa Mesa, Calif.-based investment firm that owns roughly 1% of Farmers Brothers, opposes a proxy contest but favors a move to go private. Norberg estimated that management would buy out minority shareholders in a going-private deal for $820 million to $870 million, or $425 to $450 a share. Shares of Farmer Brothers hovered at roughly $317 in afternoon trading on May 23. Norberg also said that rival food and coffee distribution companies, such as Houston-based Sysco Corp. or Columbia, Md.-based U.S. Foodservice, could have interest in buying Farmer Brothers for as much as $1 billion, or $525 a share. Such a premium would reflect the operating efficiencies achieved by reducing head count and eliminating redundant operations, Norberg said. James Mitchell, general partner of Mitchell Partners, a Costa Mesa, Calif.-based investment firm, said an acquisition is unlikely because Roy Farmer Jr. wants to keep the company "all in the family." By contrast, going private would maintain the family's hold on Farmer Brothers. It also would allow shareholders to cash out at a premium, while reducing Farmer Brothers' estate tax liability, Norberg said.
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