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On September 8, the troubled Texas-based dining chain Luby’s (LUB) announced its intention to liquidate after a strategic review process launched over the summer. At the time of writing, the shares, though volatile, trade below the lower end of the company’s estimate of $3-4/share upon liquidation (bolding below is mine):
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). Aggregate payments will likely be paid in one or more distributions. The Company cannot predict the timing or amount of any such distributions, as uncertainties exist as to the value it may receive upon the sale of assets pursuant to its monetization strategy, the net value of any remaining assets after such sales are completed, the ultimate amount of expenses associated with implementing its monetization strategy, liabilities, operating costs and amounts to be set aside for claims, obligations and provisions during the liquidation and winding-up process and the related timing to complete such transactions and overall process.
Source: Luby’s investor site
CEO Christopher Pappas owns over 23% of the shares, and his brother, Harris Pappas, has a similarly large holding. There has been no material insider selling since 2018. Hence, alignment with shareholders is relatively clear. The CEO will benefit far more from an effective, price-maximizing liquidation process than a drawn-out process with high fees.
Value Of Real Estate
That Luby’s has material real estate assets is not new news. There was a Seeking Alpha piece on it two years ago, some good valuation work here, and activist investors such as Bandera Partners have stressed this issue too. Of course, what is new is that we now have a catalyst in the liquidation process.
The LUB 10-K has an appraised real estate value as of 15 November 2019 of $211M across 74 properties, note several other locations are leased. Of course, that valuation is before any COVID-19 haircut, should that occur.
Luby’s has also seen gains on property sales in 2018 and 2019, suggesting that that property is indeed undervalued on the balance sheet. This makes sense given that the company first listed in 1973, so its real estate assets are unlikely to be fairly valued on the balance sheet.
In a recent piece in Statesman, a real estate executive had this to say about the Austin locations:
They’ve always had great real estate,” he said. “A lot of their locations are along major thoroughfares, and there is generally always a tenant for a property on a major thoroughfare.
Luby’s properties are skewed towards Texas, with 25% of its locations in the state where the company was founded, but otherwise, the distribution broadly follows the population centers of the U.S., with some locations elsewhere in the Americas. The properties are generally large, freestanding properties given that the burgers and buns are prepared on-site. The locations tend to be clustered in urban areas, as is the case with Luby’s Texas locations below.
(Source: Google Maps)
Balance Sheet Valuation
If we increase the value property and equipment and property held for sale on the balance sheet by $90 million (consistent with appraisal value), and, more conservatively assume that $36 million of value attributed to goodwill, inventory and lease rights-of-use is worthless, then we have $119 million of residual value to equity holders, which, with 30.5 million shares out, is $3.90/share. Now we can add some sensitivities below.
Potential Positives – Value Of Franchise And Foodservice Assets
- There is potential value in the Fuddruckers brand and potentially Luby’s too. The organization also operates some restaurants under a franchise model, and there may be buyout potential there. Of course, many restaurant chains have value without owning the underlying property. That said, sales trends have been weak for both brands historically.
- In addition, there may be other assets within Luby’s business beyond property. The company has a foodservice business (Luby’s Culinary Services) with approximately 30 contracts, which delivered $31.8 million of revenue in 2019 and $3 million of operating profit. Of course, many of the locations served by this business, such as stadiums and hospitals, will be seeing a dramatic impact from COVID-19 this year, but there is value in the assets for a foodservice buyer.
The key point is there is potential upside to simply the real estate portfolio depending on the outcome of the liquidation process. Even though the sales process failed, it’s not impossible that liquidation process draws out a buyer for the overall business. The CEO himself may be mulling an offer.
If operating businesses attract bids, then the value for shareholders could exceed $4/share, though it should be noted that no firm bids were forthcoming during the recent strategic review process.
Potential Negatives – Cash Burn And Taxation
A primary negative is cash burn =- the company used $16 million of cash in its most recent quarter. Presumably, operating performance is improving off the COVID-19 lows, but assuming 18 months to complete asset sales, the cash burn could dent, or even eliminate, the return to shareholders.
Tax is a consideration too, though the company had $5 million of NOLs in 2019, and that number may have increased in 2020 given the dire operating performance.
Monte Carlo Analysis
Below is a Monte Carlo analysis of potential liquidation outcomes using a range of outcomes for property sales and other positive and negative variables during the liquidation process as discussed above.
The downside case is that property assets are worth their balance sheet value and other assets have little value, so material liabilities could mean no recovery for shareholders in an extreme case.
The expected value here is $2.80/share. This is likely too conservative, but is a good reminder that the setup is not without risk on both sides. Just as the equity could be wiped out if everything went terribly, so shareholders could see closer to $6 if sales execution was flawless at high valuations. Both outcomes are improbable. Note, I’m using underlying uniform distributions here. Had I used normal distributions, valuations would be more tightly clustered in the $2-4/share range.
Source: Author’s analysis
Luby’s appears fairly valued today, but with a broad spread of potential outcomes. The liquidation process is likely to be managed effectively given the CEO’s large equity stake in the business. Indeed, the CEO may make an offer. There is a broad range of outcomes, but investors can be reasonably confident, though hardly certain, of an outcome of around $2.80/share, close to current trading levels. Hopefully, weakness in the shares offers opportunity in the coming weeks.
Disclosure: I am/we are long LUB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not intended as investment advice. Author’s stock positions may be updated without notice. No warranty is given on the accuracy of the information in this write-up or that it will be updated. Investing involves risk of permanent capital loss.