The stakes are high: Imperial Sugar (IPSU), the largest U.S. sugar refinery, is in crisis mode. Input costs are rising, selling prices are falling and the company is out of cash. Its credit line is quickly dwindling, as it has used $80 million of its $120 million credit line and still has to make employee pension fund contributions and capital investments to its refinery. If it does not begin to improve operationally, or sell its Wholesome Joint Venture stake at a decent price, it will become out of compliance on its loan covenants and consequently be forced to file chapter 11.
The good news is that it has initiated steps to resolve the production issues plaguing the company at its Port Wentworth refinery (the largest U.S. sugar refinery) by repairing a faulty boiler and obtaining a new cooling tower (these two projects were scheduled to be completed in January). The spread between raw sugar and refined has modestly improved.
The company will be hosting its Annual Shareholders' meeting on March 22, and it will be interesting to see if some sort of "Gordon Gekko" moment transpires, especially considering many shareholders have seen 80% of their investment vaporize. This is the first year the company has failed to include a shareholder's letter in its annual report. This void couldn't come at a worst time, as shareholders sorely need clarity and communication at this critical juncture. Hopefully, Dimensional Fund Advisors (IPSU's largest shareowner with a 6.9% stake) will press management for more transparency.
The stock: Shares have finally begun to climb in the past few weeks, rallying over 35% from their lows. The recent strength in the stock price could cause shorts some jitteriness, and prompt them to begin covering the over 1.8 million short shares present. It makes sense that they would want to book some profits and reduce their exposure to the potential development of a wicked short squeeze.
This Thursday, the company is set to release its first quarter earnings before the market open. IPSU's lone analyst is forecasting a 77 cent loss on revenues of $232 million. This is probably too optimistic, considering IPSU's dismal recent track record. In any event, investors will not be focusing on the past, but what tidbits management releases concerning the future.
Wholesome Sweeteners: what will this company ultimately fetch in a sale? Estimates for IPSU's 50% stake vary greatly, from $30 million to $100 million, so a midpoint of $65 million seems reasonable, and more than enough to move its liquidity issues to the rear view mirror. The question is not if the company will sell it, but when and for how much? My best guess is a deal will be consummated by the end of April, netting IPSU a cool $70 million-- roughly twenty times Imperial's original investment.
Bottom line: this one is a crap shoot. Any type of good news could triple the price, but another bout of bad news and the speculator could see a total loss. The risk reward ratio is a compelling 3:1, meaning for every dollar of risk, there is a potential three dollar gain. I wish I had more risk tolerance, because this one could make those that bet big rich!
Disclosure: I am long IPSU.
