TradeLink Securities LLC ("TradeLink") is currently a long term shareholder of Books-A-Million Inc. ("BAMM" or "the company"), holding approximately 1% of the company as of May 7th, 2012, and believes the Anderson family take-private offer at $3.05 is insufficient.
The company navigated a difficult environment for booksellers over the last year, and by managing capital conservatively, avoided the fate of over-leveraged competitors. The cherry picking of Borders' stores during bankruptcy, in which Books-A-Million took on more profitable stores while shedding non-performing ones, has left us eager as shareholders to see the effects of these transactions in the upcoming years.
The recent fourth quarter report was the first reflecting the performance of the new stores. What we saw there was encouraging: an increase in revenues over the prior comparable quarter, and profits of 48c per share . Q4 typically is BAMM's best, and we believe with these new stores operating, BAMM will in short order return to its normal mode of profitability, showing profits in Q1, Q2 and Q4. With these in place, it is reasonable to assume BAMM will earn 50-60c per share this year. Even at a conservative multiple of 8 times earnings, at the low end BAMM is worth $4/sh, and at a 10x multiple of the high end should be worth $6/sh, based on expected earnings this year.
Earnings multiples are only part of the value of BAMM. The take private offer price of $3.05 is approximately half of its book value per share. Most of this book value is current in the form of inventories. Inventories turned over more than twice last year, and although some discounting of this inventory may be appropriate, we believe a 50% discount to the company's audited book value is far too high, especially since the operating company is profitable, conservatively capitalized, and cash flow positive, so distressed sale prices are unlikely.
On the cash flow side, we note that BAMM generated $29MM in cash flow from operations last year, in a challenging year for booksellers, with the new stores in place for only one quarter. With capital expenditures of $24MM, BAMM generated free cash flow of almost $5MM last year. Capital expenditures were higher than usual last year because of the new store roll-out, and with these stores in place, this year we expect higher cash flow from operations and lower capital expenditures. We expect BAMM to generate $10-15MM in free cash flow in calendar 2012 - they generated over $10MM free cash flow every year since 2007 except the most recent - and the offering price of $48MM for the equity is an unacceptably small multiple to expected free cash flow.
Finally, we need to look at the environment in which the offer was placed. The company notes that the offer of $3.05 represents a 20% premium over the April 27th closing price, and a 13% premium over the 90 trading days prior. In the last two months, the company has issued press releases announcing the dismissal of the CEO, CFO and auditor. This has created an unfavorable environment for the stock, and in our view does not establish a proper price from which to compute the offer premium. As shareholders, we were concerned by the dismissal of the CFO and auditor. Though we did not sell, it is apparent that many did, judging by the price drop from $3.50 to under $2.50 in less than two months, with no other material news released about the company. Thus we reject the idea that the offer represents a premium to a fair market price - it is not unreasonable to conclude that the company's actions and press releases during this period drove the price well below fair value, below a reasonable level. We do not accept that this is a reasonable period over which to construct a baseline price for determining the premium.
The poor performance of the stock, as opposed to the recent performance of the business, has been trying for shareholders, and I assume it is frustrating to the Andersons as well. I thank them for bringing attention to the unreasonably low market valuation of the company with their take-private offer, and especially for respecting the majority vote of non-family shares in considering this offer. That said, the offer of $3.05 is unacceptably low, and TradeLink will vote against it. I believe this time next year, if the offer is rejected, we'll be glad we did.
- Financial data obtained from the most recent 10-K, most recent fourth quarter press release, and take-private offer.
Disclosure: I am long BAMM. Positions subject to change without further notice