Duff Brothers Seeks To Increase Stake In Frozen Food Express To 100%: Under Board Review

| About: Frozen Food (FFEX)

Frozen Food Express Industries, Inc. (NASDAQ:FFEX) is the largest full-service, publicly owned, temperature-controlled trucking company in North America. We owned the stock in 2012 and even wrote a brief article, "Frozen Food Express, Third Time's a Charm," indicating that we felt that the stock had some upside due to some hidden clues, but sold at a loss after the company reported extremely disappointing third-quarter 2012 results after challenging market conditions delayed the anticipated positive effects of restructuring initiatives.

In our initial article, we did list caveats to the story, which included:

  • Fuel Prices: Although the company is able to pass on part of higher fuel costs as surcharges to some of its customers, a sudden rise in fuel prices (from economic shocks like Middle Eastern conflicts) could lead to a delay in price adjustments.
  • Weak Revenue growth: FFEX operates in a mature industry that has led to the company reporting little to no revenue growth over the past five years. One factor that can possibly jump start revenue growth is FFEX's penetration into new rapidly growing markets, such as the bulk tank water.

As stated in its 2012 third quarter release, in part to blame for the weak quarterly results and reduced outlook was that the company:

…experienced an unexpected steep decline in activity in our water transport business and a sharp increase in fuel prices…

So, the first caveat materialized, and our hope that an increased water transport business could jump-start growth, as stated in our second caveat, was temporarily dashed.

Well, FFEX is back on our radar. Recent 13D activity explicitly indicates that the FFEX board of directors has received specific details from a third party (Duff Brothers Capital Corporation) expressing a desire to acquire the company. The company has yet to discuss this development in a press release, possibly creating an opportunity for investors to profit from this "information arbitrage". The Duffs have purchased 1.05 million FFEX shares at prices between $0.82 and $1.69, from Jan. 3, 2013 to May 5, 2013. Although the exact details of the transaction have not been disclosed, we believe the Duff Brothers' (Thomas and James) proposal holds merit.

Thomas Duff is the CEO of Southern Tire Mart and James Duff is its Vice President. Southern Tire Mart is the largest independently owned commercial tire dealer and retread manufacturer in the United States. From the website:

…we currently operate 16 Bandag manufacturing facilities, 54 commercial service locations and have over 1300 employees located in eight states. With our strategically located retread plants and service facilities, we can effectively service most if not all of your needs throughout the South Central United States.

Given that Southern Tire Mart is not a publicly traded company, financial data is not readily available. However, our due diligence indicates that Southern Tire Mart's annual revenues are between $50 and $100 million. Although the company does not provide transportation services as FFEX does, synergies for an acquisition with FFEX may exist through the integration of Southern Tire's maintenance services that include fleet Inspections. From a cursory observation, we can assume that the merged company could begin to take a scalpel to the $168 million that includes salaries, wages and related expenses, and supplies and maintenance costs as outlined in FFEX's 2012 10K.

Salaries, wages and related expenses $115,333,000
Supplies and maintenance $53,028,000

FFEX's balance sheet shows that the company values its tires on equipment-in-use at $8.7 million.

Duff Brothers' Offer Is No Joke

Evidence exists that the FFEX Board of Directors are no doubt considering the Duff Brothers' proposal. Here is a quote from one of the 13D's that demonstrates how the Board is cooperating with the Duff Brothers:

The Issuer entered into a Confidentiality Agreement (the 'Confidentiality Agreement') pursuant to which the Issuer agreed to provide the Affiliates certain confidential information concerning the business of the Issuer.

The progression of 13D activity indicates that the Duff Brothers' interest has strengthened with each successive filing. The first 13D filing disclosed on March 4, 2013, stated that the Duff Brothers had not yet made any proposal to acquire FFEX and stipulated that a potential proposal would be contingent upon financing. However, the company's most recent 13D/A filing, on May 10, 2013, disclosed that the Duff Brothers had provided the FFEX Board with a specific proposal that would not be subject to a financing contingency. Finally, a 13D/A filed on June 3, 2013 disclosed that certain members of FFEX's board of directors have responded to the Duff offer and that negotiations are continuing.

The Duff Brothers' first step in the acquisition proposal will be to commence a tender offer for a yet-to-be publicly disclosed price or amount of shares, followed by a merger for control of the remaining shares.

The risk of playing this story is that:

  • FFEX may reject the proposal. This scenario could send shares back to below $1.00 in the near term.
  • FFEX may accept a less than shareholder-friendly proposal.

The good news is that:

  • Part of the Duff's proposal includes a tender offer that may have to be decent enough to entice shareholders to consider.
  • FFEX management believes that it is in the midst of a turnaround, which lessens the chance that they will allow a third party to "steal" the company.
  • John McManama, CFO and senior VP of FFEX, recently resigned, which may be an indication that he knows a change in management is on the horizon.
  • Shares of many trucking companies have begun to perform well.


We still have to perform more due diligence on what a proper takeover valuation for FFEX should be. But using a multiple of 1.5 times book value per share seems like a good start. The company's book value is currently around $1.40 per share, which would give us a possible low ball take-out price of $2.10, or roughly 40% higher than current prices. Even though FFEX has been losing money for the past three years and its restructuring efforts which were intended to result in profitability in 2012 ran into short-term obstacles, it is worth noting that the management anticipates reaching profitability in 2013, and we assume that this point will play a part in the current acquisition discussions.

In a September 2012 investor presentation (and before disappointing the market with quarterly results that fell short of guidance) management mentioned that they expected EBITDA for the second half of 2012 to average between $5 million and $7 million per quarter. So, assuming that the FFEX business plan is back on track, we can use an annual EBITDA run rate of $20 million to further assist us with valuing FFEX shares. (FFEX does exhibit some seasonality with the first quarter being the weakest, which is why we used the low end EBITDA data point.)

FFEX's most comparable publicly traded company is Marten Transport, Ltd. (NASDAQ:MRTN). Martin only offers full truckload services, whereas FFEX offers both full truckload and less-than-truckload services. FFEX Trucks will also service longer distances than MRTN.

Company EV/ trailing 12-month Sales EV/EBITDA Price to Book Price to Hard Assets (Cash, property and equipment).
FFEX 0.18 2.951 Guided 1.08 0.45
MRTN 0.75 4.992 Trailing 1.5 1.25

1Based on previous EBITDA guidance.

2Source: Yahoo.

It's easy to see that FFEX is selling well below the valuation multiples of MRTN. Similar discrepancies also exist when looking at other indirect comparable publicly traded trucking companies. To be fair, part of the valuation gap stems from the fact that FFEX is underperforming its peers, but the gap is too wide given that FFEX expects operations to improve and that cost synergies may be possible from a merger with Southern Tire Mart.

The Filings

Here is a summary of the relevant 13Ds underlying our findings. In a 13D filed on March 4, 2013, The Duff Brothers expressed intent of a possible acquisition of FFEX.

Quote from 13D:

The Reporting Persons have expressed an intent to discuss with the Issuer a possible negotiated acquisition or other transaction between the Reporting Persons or an affiliate and the Issuer. The Reporting Persons intend to have further discussions and communications with the Issuer regarding a possible acquisition of the Issuer or other extraordinary corporate transaction, such as a merger; however, no commitment, binding or non-binding, has been made in accordance with such intention and no specific proposal has been made. Any proposed transaction would be contingent on, among other things: A) the results of the due diligence review; B) receipt of necessary financing; and C) negotiation of a satisfactory acquisition agreement with the Issuer.

On March 15, 2013, a 13D/A filed stated that:

On March 13, 2013, Duff Brothers Capital Corporation and Investment Transportation Services, LLC, affiliates of the Reporting Persons (the "Affiliates"), and the Issuer entered into a Confidentiality Agreement (the "Confidentiality Agreement") pursuant to which the Issuer agreed to provide the Affiliates certain confidential information concerning the business of the Issuer and the Affiliates generally agreed not to disclose such confidential information and agreed to standstill restrictions with respect to the Issuer's securities.

The filing from May 8, 2013 stated:

On May 8, 2013, Thomas Milton Duff and James Ernest Duff (the 'Duffs') made a non-binding proposal to the Special Committee of the Board of Directors of the Issuer (the 'Special Committee') to acquire all of the remaining issued and outstanding shares of the Issuer's Common Stock not owned by the Reporting Persons. This non-binding proposal is subject to various conditions, including further due diligence. The Special Committee has not yet provided a response to this non-binding proposal.

The Duffs anticipate that the proposed transaction would be structured as a two-step merger consisting of a cash tender offer followed by a merger. Upon acquisition of all of the equity of the Issuer, the Duffs plan to cause the registration of the securities of the Issuer to terminate and the Issuer's Common Stock would no longer be traded on the NASDAQ stock market. The Duffs anticipate that the acquiring entity would have sufficient cash at the time the tender offer commenced such that the proposed transaction would not be subject to a financing contingency. No binding obligation on the part of the Reporting Persons, their affiliates, or the Issuer will arise with respect to the proposed transaction unless and until a definitive agreement satisfactory to all parties is executed and delivered.

The most recent filing from June 3, 2013 stated:

Thomas Milton Duff and James Ernest Duff (the 'Duffs') recently discussed their prior non-binding proposal to acquire all of the remaining issued and outstanding shares of the Issuer's Common Stock not owned by the Reporting Persons with certain members of the Board of Directors of the Issuer. The Duffs continue to negotiate with the Issuer. As of the filing date of this Schedule, the plans or proposals of the Reporting Persons are otherwise consistent with previous disclosures.


While there is no guarantee that a Duff Brothers/FFEX deal will be consummated, placing a bet on a scenario in which the parties will try to get a deal done seems reasonable, especially since the Duffs have already committed funds to purchase shares of FFEX at prices as high as $1.69.

Disclosure: I am long FFEX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.