Last year, Luby's commenced an effort to explore strategic alternatives, but on September 8th the company kicked up the effort by formally announcing they were pursuing a liquidation (requiring shareholder approval) by selling their operations and assets in several transactions, then returning the proceeds to shareholders along the way. Disclosed in the announcement, possibly to convince shareholders to vote for the liquidation, management announced an estimated distribution amount:
While no assurances can be given, the Company currently estimates, assuming the sale of its assets pursuant to its monetization strategy, that it could make aggregate liquidating distributions to stockholders of between approximately $92 million and $123 million (approximately $3.00 and $4.00 per share of common stock, respectively, based on 30,752,470 shares of common stock outstanding as of September 2, 2020)The stock trades for $2.35 today.
Luby's is a throwback to the old world, they own much of the real estate for their restaurant locations versus leasing them, that's where most of the value is in the liquidation. They've even previously considered selling the restaurant operations and converting to a REIT at one point. In the proxy statement they've disclosed the current post-covid value of the real estate (they've hired two separate real estate appraisers):
As of August 26, 2020, we owned 69 properties, consisting of the underlying land and buildings thereon, most of which operate, or have operated in the past, Luby’s Cafeterias and/or Fuddruckers operations. The estimated value of those properties as of August 26, 2020, was $191.5 million.Hidden Value Blog did a nice write-up on the situation a few months ago and did more diligence than me on the underlying real estate portfolio in order to validate the company's appraisal, worth a read. Most of the real estate is in Texas, which should hold up fairly well, major cities like Houston, San Antonio and Dallas all annually rank near the top of job growth and new home construction.
The company has ~$63.7MM of gross debt, $10MM of which is a PPP loan that will likely be forgiven by the government. Without giving value to the restaurant operating entities or on the downside expenses regarding the liquidation, the value of the real estate is potentially worth just over the top end range of $4/share. There's reason to believe that management might be understating the distribution range, in the background section of the proxy statement, Luby's financial advisor presented the following range on 7/20:
Duff & Phelps noted a reference range of aggregate potential liquidation proceeds available to holders of Luby’s common stock from $127.0 million to $172.1 million or $4.15 to $5.62 per share of Luby’s common stock, based on an estimated 30,625,470 shares of common stock outstanding and the Company’s estimates of value for its owned real estate.Later in the proxy, its mentioned that the Duff & Phelps estimate didn't reflect the current real estate portfolio, but that seems odd since any real estate sales in the interim would be netted off against net debt. Or it could just be a financial advisor telling a management team what it wants to hear.
Timing and the duration of a liquidation are always a big risk, these take twice as long to wrap up as you'd think, especially the last puff which can be frustrating if you're late to the situation. However in this instance, much of the distributions will likely take place in the next 6-12 months as the company has been in active discussions on each of the assets for months. It is mentioned a few times in the proxy that the distribution estimation is based on actual indications of interest for each asset, reading the tea leaves, it seems likely we'll see significant asset sales in the near term. I wouldn't be surprised to wake up and see news that Franchise Group (FRG, still long) was buying Fuddruckers after their failed attempt to buy another struggling chain in Red Robin (RRGB) last year.
I've participated in a few liquidations over the years, the only time it worked out poorly for me is NYRT, in that instance an activist came in with overly lofty projections in order to win over shareholders so they could earn management and incentive fees. Here the liquidation is more of a white flag, management has been in place for two decades and should have a sense of the value of their assets, they also own 30% of the shares and thus aligned to get maximum value within a reasonable time frame.
Disclosure: I own shares of LUB