Alco Stores Inc. ("ALCS") is a relatively unknown public company in the USA that operates in a niche market. ALCS operates more than 200 general stores in 23 States. Its stores sell a wide array of items from electronics to apparel.
ALCS operates in a niche market. The company only operates stores in low populated areas which have populations that would not attract Targets, Wal-Marts, etc. Therefore, ALCS operates in markets where the large competitors do not exist.
This doesn't mean ALCS has no competition. There is always companies such as Big Lots and Family Dollar to provide some level of healthy competition.
ALCS has a very low float of approximately 3.26 million shares which means that any trades in its stock could cause large fluctuations. With that being said, the company has very low daily volume, about 3-5 thousand per day.
Now I will explain what makes me very interested in this company and why I believe it is a potential arbitrage play worth between $6-8/share in the short term.
The company has a book value of about $25/share and tangible book value of about $16/share. The company currently trades at $10.16/share.
In the summer (July/August) 2013, the company received a takeover offer from Argonne Capital at $14/share in cash. Argonne is a private equity firm that owns several restaurants and real estate properties across the USA.
ALCS's Board accepted the offer which was subject to shareholder approval. Argonne allowed ALCS's Board a limited time to seek higher offers.
An offer of $14.30/share came from Everbright Development Overseas which is a Chinese company whose business is unclear.
Both offers were rejected by shareholders in October 2013.
It is important to note who the primary holders of ALCS are:
1. Aegis Financial - about 10.85%
2. Heartland Advisors - about 11.7%
3. Everbright Overseas Development - about 17.4%
4. Activist Michael Price - about 8.1%
*Not to mention several other institutional investors
The company adopted a poison pill in the spring of 2013 primarily due to the accumulation of its shares by Michael Price and/or other of the above companies.
There is a very good chance that ALCS will be acquired over the next several months as it is quite common for companies whose shareholders reject takeover offers based on valuation to receive higher offers soon thereafter.
I believe that this is an opportune time to invest in this company for the short term (6-9 months). In addition, it appears that any future takeover offer would be approximately $16-18/share, the former of which is the tangible book value of ALCS. Therefore, in the short term there is potential to earn approximately $6-8 per share.
What if I am wrong? I do not see much, if any, downside risk here as the company is trading at such a low valuation ($10/share compared to $16/share in tangible book and $25 in tangible/intangible book). I suspect that it could be argued that if the company is not sold in the near term then some of the above institutional investors will want to sell which could lead to a further price reduction ($6-8/share in the short-term), however, again I point to valuation.
Please note that I am not yet a shareholder but intend to initiate several purchases over the next few weeks on any dips.
Disclosure: I am long ALCS, ACTS, GNW, RF, FNFG.