Imperial Sugar: Are Its Parts Worth More than the Whole?

Thanks to a 50% selloff since the start of the new year, Imperial Sugar (IPSU) has gotten so cheap that its pieces could be well worth more than its whole. I admit, I was blindsided by the intensity of the share’s recent implosion, as I was just touting them near the $12 mark. To proclaim I have egg on my face on this one, is no doubt an understatement and in hindsight qualifies as a major screw up.

But all is not lost, because at its current “beaten down” market cap of a mere $87.2 million, the market value alone of its $40 million equity ownership position in Wholesome Sweetener’s, coupled with its Mexican Joint venture investment of $50 million, exceed its current market cap, meaning you get the rest of the company’s assets for “free”.

What you get for free: (1) $100 million worth of inventories (2) the company’s Sugar Land, Texas real estate holdings (its executive offices) (3) $35 million of cash (remember they are debt free) (4) The company’s Kentucky Distribution center (5) its Port Wentworth, Georgia refinery (in the process of a $200-220 million rebuild with insurance proceeds) (6) Its Gramercy, Louisiana refinery (in talks with Cargill and Louisiana Sugar to enter a joint venture) (7) $40-$60 million worth of expected insurance proceeds resulting from projected payments through its business interruption insurance policy.

Greed is good: If the purveyor of Holly and Dixie brand sugar were to liquidate (sell off all its assets and use the proceeds to settle all its liabilities), the balance remaining to distribute among shareholders would be far greater than what the market is currently pricing the company today as a going concern. Wall Street is plainly not being efficient in its valuation, as it is too caught up in the ramifications of the Port Wentworth explosion, to see through the smoke.

A private equity firm needs to come to the rescue, to liberate this company, by unlocking its hidden value and enriching its owners. The new law of evolution in corporate America seems to be survival of the “ineffective”, it all comes down to either doing it right or getting eliminated. The acquirer is not a destroyer of companies, but a liberator of them! The point is that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, will not only save Imperial Sugar, but that other malfunctioning corporation called the USA.

Bottom line: The stock, no doubt, is in a state of freefall. Eventually, the selling pressure will abate as clearer heads prevail. The shares are getting hit with relentless hedge fund selling. Shorts are also exacerbating the slide by piling on IPSU’s downside momentum by selling shares “at will” to open positions. I would be prone to wait to go long until the trend reverses, and the shares at least climb back over the $9 vicinity - fighting the tape never proves effective. This recipe of climactic selling is a setup for a major reversal, as the shares will recover just as fast as they crumbled, when shorts are forced to reverse their positions. Another $2 drop in the share price is not out of the question, but the stock’s upside is closer to $15, representing a compelling risk reward ratio. Who knows, shareholders could even be rescued by a “white knight” by the name of Gordon Gecko. Stranger things have happened.

Disclosure: Long IPSU

Comments

[whatswrong:]

Mark,

Great article, I was just curious as to your worst case scenerio liability wise for the explosion, and if even that case is being priced in with the stock below 7.

Feb 26 10:14 AM