Friday, March 1, 2024

Limoneira: Citrus Farmer, Pursuing Strategic Alternatives

Limoneira Company (LMNR) ($330MM market cap) is a California based citrus farmer (primarily lemons, secondarily avocados) packager and part-time real estate developer that announced on 12/1/23, they were pursuing strategic alternatives.  From the press release:

Scott S. Slater, Chairperson of the Board, stated, “Over Limoneira’s 130-year history it has grown into one of the leading, sustainable agribusiness companies in the world with over 11,100 acres of valuable lands, real estate properties, and senior water rights. Over the past 18 months, we have developed a strategic roadmap intended to enhance near and long-term shareholder value. Today, we consider ourselves to be in a strong financial position, having recently reduced our net debt position and rightsized the balance sheet through our ongoing strategic shift towards an asset-lighter business model. Given the Board’s belief that there is a disconnect between Limoneira’s public market value and the intrinsic value of our Company’s underlying assets, the Board believes it is the right time to explore all strategic options to prioritize the Company’s growth and stockholder value.”

Last summer, the company hosted an investor day where they laid out their estimated fair market value of LMNR's real estate and other assets:


Today, the stock trades for roughly $18/share, or a 40% discount (60% upside) to the low end of the above NAV (which they cite is based on recent agriculture transactions).  I waited a little while to buy this one (the price has also come in from the post-announcement excitement) as it strikes me as a potentially difficult business to sell leading to an extended timeline:
  1. Agriculture/farming operations aren't know as fantastic businesses, they're price takers not price makers and as a result, can be very cyclical.  They're also capital intensive, although Limoneira is trying to be more of a farm management and packaging company, as seen above, the value is in the land and related assets.
  2. Part of the value is in higher or better uses of the real estate, such as difficult to monetize water rights.
  3. This is a old company, main employer in town (many of their employees live on property in housing owned by Limoneira), as a result, it's probably hard from a personal relationship perspective to be the management team that sells to outsiders.  Easier to maintain the status quo.
But there is reason to believe management does intend to sell, shortly after the strategic alternatives announcement, they let 13D holder Peter Nolan on the board:
Limoneira Chairperson of the Board, Scott S. Slater, stated, “... We are pleased to welcome Peter and believe he will be a valuable asset in guiding the Company as we continue to execute against our strategic roadmap to enhance near and long-term value and commence the exploration of potential strategic alternatives aimed at maximizing value for our stockholders.”

Peter Nolan, Chairman of Nolan Capital, Inc. commented, “I am excited to be joining the Board of Limoneira as it enters this phase of exploring ways to unlock additional value for stockholders.”

Peter Nolan, a former PE executive, owns 6% of the company and his family office has some past experience with real estate and agriculture businesses.  The two events of Nolan showing up on the shareholder registry and strategic process seem related, hopefully he can help engineer a sale here.

Unlike other situations, management doesn't appear to be an obstacle here; this article from the VC Star provides some interesting background on the company, including how it came public after they tripped the SEC shareholder count number and had to list in 2010.  They haven't gained much from being public, probably makes sense for them to be private again.  CEO Harold Edwards is quoted, "The value the market perceives we have versus what we believe is the intrinsic value - there's always been a big difference between those two things.  The idea is that maybe there's a better way for us to operate.  Maybe there's a better ownership structure that isn't public.  Maybe it's private, or maybe it's merging together with another public company."  Guessing we just have to be patient on a sale, maybe mid-to-late summer is reasonable.

Disclosure: I own shares of LMNR

18 comments:

  1. As the cost basis of their land is likely to be very low, if they sell the land wouldn't they be subject to capital gains taxes? Is this tax liability reflected in their estimate of NAV?

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    1. The note in the table above says it is " Pre-Tax " .

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    2. Yes, if they sold it piecemeal, but I'm hoping there are ways they can sell the company has a whole in a tax efficient manner. But they could sell the land, incur taxes, and move to their asset-lite operating model as one potential path.

      Thanks, something I should have noted more clearly in the post.

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  2. I feel like I inspired this post by asking about a similar company in the comments of your 2023 review post. Cool!

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    1. Thanks, possibly! I do really appreciate people who comment and share ideas, it is part of the benefit for me. Want the feedback and idea flow.

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  3. Who could be potential buyers and are there precedent deal multiples for similar assets?

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  4. Looking at the historical ROE of the business, why would anyone want to buy it when they can get more in 'risk free' interest? I suspect my question is incredibly naïve, but I guess the learning has to start somewhere!

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    1. Yes, historical ROE isn't great. They've been undergoing a bit of a turnaround that might be close to an inflection point. Moving less from a pure grower, transitioning to more of a service provider, CVGW might be a good comp to where they want to go.

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  5. easy to make more risk free instruments but harder to make more land

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  6. Have you looked at NeuroMetrix? They have a MC of less than 6mm with 18mm in net cash and an extremly bad management. Nonetheless they initiated a strategic review. Language doesnt sound good, but last week both major shareholders publicly announced that they would push management to liquidate the company asap. RS Fund owns 14,4% and Ephraim Fields owns another 9,3%. They also have a pretty low cash burn and the net cash numbers are pretty current.

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    1. I'm still kicking it around, but yes looks interesting. Odd that for such a small market cap that the CEO/Founder owns almost no shares, not sure management/board is on the same side as shareholders. But they could be forced to do the right thing, just might not be easy.

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    2. Fields letter suggests that management is a real problem in this company.

      "We believe the stock’s dramatic undervaluation is largely attributable to the perception that you are not acting in the best interests of shareholders"

      "To be clear, we have never, ever, seen such a dual mandate review process like the one you have initiated."

      "Considering how much money shareholders have lost under your leadership and how much money you have personally made while shareholders have suffered greatly, we doubt many shareholders would be supportive of NURO remaining public"

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    3. Using an ATM when you're trading at a substantial discount to cash is a tough look, hard to see how they suddenly get religion without being forced/voted out.

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    4. Its definitely interesting but a couple issues. First its market cap is a lot more than $6M, the 10k reports 1,986,000 shares at Feb 29th, a big increase from 1.5M on Dec 31. So it looks like they continue to sell ATM while well below NCAV, and RS Fund + Ephram Fields have been diluted down to 14.7% combined. Thats crazy.

      Second is they just renewed their shareholder rights plan that on my quick read would limit both RS Fund and Ephraim Fields from buying more than 15% each. And no other large shareholders to help (unless we jump in ;) This is going to take a lot of time and work, probably replacing the board.

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    5. Thats a downer. I only briefly looked at it last week and used the latest numbers shown on TIKR. However, Ephraim Fields seems to be pretty commited to his investments and replaced boards before.
      I dont know anything about RS Fund, but I found the guys twitter and so far I am not impressed, even though he actually seems to like the idea of pressuring the management into liquidation or cash distribution.

      Considering the new shareholder rights plan you mentioned, the whole thing seems to sound a lot more attractive than it actually is. I'll still put a little position in my basket. Who knows, maybe two more guys will decide to get active.

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  7. Pretty transparent and encouraging comments from CEO Harold Edwards on today's conference call (from BamSEC):

    So the process initially has begun with a robust, very deep dive into valuations into the assets of the company. So our land assets and our water assets and really understanding sort of from the highest and best use and a fair market value of the existing assets that the company has, giving ourselves and our directors a better understanding of directionally what the asset value of the company might look like. And we're nearing completion of that.

    All that while we've been very pleased to have been receiving significant levels of inbound interest from various types of groups that would be interested in some or all of the assets. You've had strategic interest. You've had financial interest, you've had interest from sovereign wealth pension funds, insurance companies, but also large multinational citrus interest and as well as avocado interest. And even real estate development and water interest.

    So there's been a whole spectrum of interest, and it's all been inbound. So now the next phase in the process will be to take inventory of these valuations and then look around the room and the Board will agree to a take action, to decide to move forward with the next part of the process, which would be the outbound exploration, where we'd be working closely with our legal advisers and our bankers to reach out to potential -- potentially interested parties some of which you have may have expressed interest on an inbound basis but many of which haven't expressed any interest, but we think there might be part of our story that they might be interested in.

    Once that whole process is complete, we'll see what sort of opportunities have presented themselves, at which point then the Board will make the decision to move forward with the process to explore the potential sale of some or all of the company or to continue down the path of the strategic plan that it has in place right now. So it's an exciting time. We're all really busy and a lot of things going on. But the possibilities look and the potential looks pretty exciting for us at this point.

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  8. I'm a bit skeptical these guys will end up selling the company. My skepticism is not based on any facts and I've been wrong before. I'm having trouble understanding why the board wants to sell the company in the first place. I'm also having trouble putting a realistic value on the companies land. Company also has some debt and preferred shares to think about as well. Even CEO isn't 100% sold on selling the company. "Once that whole process is complete, we'll see what sort of opportunities have presented themselves, at which point then the Board will make the decision to move forward with the process to explore the potential sale of some or all of the company or to continue down the path of the strategic plan that it has in place right now"

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    1. I'm a bit skeptical too, still own it, but does seem like an asset that is hard to sell. Both for tangible and intangible reasons.

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