A year and a half ago many bloggers. Hedge funds. Private investors. And I banded together to campaign against a horrible proposed buyout offer by Brazil Fast Food Companies (BOBS) controlling shareholders.
At the time I thought BOBS was worth a conservative $20 – $25 per share. So the offer by company insiders of $15.50 was ridiculous.
We made enough noise. And got enough shares together that we were able to vote down the ridiculous low ball offer of $15.50 per share.
Well now there is another offer on the table. And several people have asked my thoughts on this new offer.
I explained in that post that I expected the buyout offer to get approved. And to lose ownership of BOBS. But I didn’t explain why I thought this.
The Queijo Holdings offer of $18.30 per share for BOBS shares not owned by the controlling shareholders is still a low ball offer. In my opinion it is a certainty to get approved.
One reason is because BOBS insiders learned their lesson from the previous failed buyout offer.
A year and a half ago BOBS insiders didn’t presecure any non controlling shareholders votes on the proposed deal. This time they have.
The way I understand it… This vote requires a simple majority of non controlling shareholders to vote yes to approve the deal. And this time BOBS controlling shareholders have already gotten 40% of the non control voters to approve this deal.
In addition, two independent stockholder groups of the Company that approached the Controlling Stockholders, which collectively represent 40.55% of the shares of common stock held by minority stockholders, have agreed with the Controlling Stockholders to support a transaction only if the Board of Directors recommends one at the price set forth in the proposal.
This means that only 9.46% more non controlling shareholders need to vote yes to approve this deal. While I don’t know the results of the last vote. I will bet BOBS got more than 9.5% of non controlling shareholders to vote yes for the transaction to approve it.
The above article also explains the other reasons why I am positive this transaction will get approved.
The article explains that a “special committee” must approve this deal before it can go through. But BOBS and Queijo Holdings are picking the “special committee.” So the special committees incentives are to approve the price. And approve the deal since BOBS and Queijo are paying their fees in this case.
And whoever pays the fees for something usually gets what they want.
The above reasons are why I am positive this deal will go through.
I hope I’m wrong because I don’t want to lose ownership of this company…
But these are the reasons I expect this deal to go ahead.
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“Investing is where you find a few great companies and then sit on your ass.” Charlie Munger
Last year I did an entire write-up on my 2012 portfolio review going over how well or poorly all the companies I wrote articles on did after I wrote those articles. I wrote 15 total articles last year and the companies I bought led the portfolios I manage to a gain of 26.20% last year. I thought it was a pretty good first year after truly dedicating myself to value investing but I knew I could do better after eliminating some of the many mistakes I made in that year and purging the few remaining companies I still owned in those portfolios from when I bought into them when I didn’t know what I was doing.
With the help of the rising market, eliminating some of my mistakes, doing a lot of other stuff instead of investing, and getting some tips from other value investors on companies to buy, the portfolios that I manage have gained 71.93% this year as of today.
% Gain YTD
Core Molding Technologies (CMT)
Paradise Inc (PARF)
Calloway Nursery (CLWY)
Brazil Fast Food Company (BOBS)
Strattec Security (STRT)
Core Molding Technologies – I bought into this company too early last year when I gave into my impatience after months of not being able to find a company to buy into. At the end of last year I as sitting on an 8% point loss on my investment. With the rising market and good continued developments at the company this year it gained 88.67% I still own CMT.
Vivendi – At year’s end last year I was sitting on a 27% gain. This year with all the spin offs/sales at the company YTD it has gained another 12.39%. I still plan to hold onto this company while it continues its transition to a purely media driven company.
Paradise Inc – I bought this company in March (one of only two companies I bought this year) and in that time it has had almost no news either positive or negative so I guess this companies gains of 42.86% are chalked up to the overall rise in the market. I still own Paradise Inc.
Calloway Nursery – The other company I bought in the calendar year of 2013. Originally I saw other value investors like OTC Adventures writing about the company and paid no mind to it. Luckily after talking with Jeff from the Ragnar is a Pirate blog, DTEJD1997, them sharing some information about how much the companies properties were worth, and doing my own research into the company, I decided to buy into them and I am glad that I finally paid attention to these other investors. I have sold out of most of my position in this company at an exact double of 100%. So far it has taken me four months to sell out of that position and it will likely take another two to sell out of the rest of it. I still like this company and if the price goes back down substantially, all else remaining the same, I may buy back into it again.
Brazil Fast Food Company – I bought into this company last December after Red from the Red Corner Blog recommend that I take a look into them. Again, I am thankful that Red mentioned them to me. After a year where the company was gaining a lot after continued good results, the companies owners wanted to take it private at a ridiculous offer, which was then voted down, and the company has continued to rise after that. The company YTD has gained 112.63%, I still own them, and plan to hold them for the long-term.
Strattec Security Corp – Another company I bought into last December. This company had very good continued results, had some new positive developments, the stock went up very quickly and I sold out of the entire position up 75% in May. Since then the company’s stock price has hovered around where I sold it. Like Calloway, if STRT drops substantially, all else remaining the same, I will buy back into them because I think they are an excellent company.
Last years 26.20% gain + this years 71.93% gain means that the portfolios that I manage have cumulatively gained 98.13% (49.06% on an annual basis) in two years since I started to take this seriously. The portfolios I manage were in 40%-55% cash the entire year and are at the higher end of that range now. Frankly I was shocked when I saw this years gain and the two-year cumulative gain since I only do an entire portfolio review once a year.
What Does The Above Mean To Me?
Not much honestly. A two-year track record doesn’t mean much to me since I am a long-term investor. I was also helped a lot by two recommended companies from other value investors and the overall rise in the market. Am I glad and excited about this great start yes, but I still have a lot of work to do and at this point I think that I am only an average to above average stock picker as I have a lot of room to improve and was helped a lot by short term luck of the stock market rising a lot.
Some of the Lessons Learned This Year
My extreme patience and discipline gained from dealing with my health issues helps greatly as a long-term, very strict value investor. I did a lot of stuff not directly related to investing this year because I could only find two companies that I could buy into all year.
You need to keep a record of what you do. This was such a long year filled with great and not so great things for me that I have recently been telling everyone I only bought one company this year. I completely forgot about the PARF and BABB articles I wrote at the beginning of this year and that I actually bought into PARF back in March along with CLWY. Memories are not always what they seem to be.
Sometimes it pays to “steal” investing ideas from others, but you still must do your own research into the company.
Turn over as many rocks as possible. While I only invested in two companies this year I have researched hundreds if not thousands of other companies and have built up a watch list of around 20 companies. When those companies stock prices go down I will be ready to potentially buy some of them with the cash I have built up and the knowledge I have gained of those companies.
Starting a business is very hard. This is my biggest failure of the year by far and one that I hope to rectify at some point in the future. The business my brother and I started was a complete failure from the point of gaining customers and revenue. At this point we are not doing anything at all with the company as we overestimated the demand in our area for our product. We learned a lot of lessons from this and we hope to start a successful business in the future.
Writing a book is very hard. Most of my year (the better part of 10 months) was spent writing, editing, researching, etc for the book. It was well worth it as it has provided some for my family, for two needy families Christmas presents, I learned an enormous amount, and it has hopefully helped newer investors learn this craft faster.
It obviously pays to buy into a few great companies and then sit on your ass and be patient.
Goals For This Year
Continue to learn something every day.
Improve in some way every day.
Turn over more rocks.
I hope you all had a great year, thank you all so much for all the conversations, reading this blog, buying my book, and I look forward to talking with you all more and getting back to writing more articles for the blog in this coming new year.
RIO DE JANEIRO, Nov 20, 2013 (BUSINESS WIRE) — Brazil Fast Food Corp. (otc markets:BOBS) (the “Company”), the second largest fast-food restaurant chain in Brazil with 1,085 points of sale, today announced that the investor group (the “Investor Group”) has withdrawn its offer to acquire all outstanding shares of the Company not owned by the Investor Group. The offer was for US$15.50 per share in cash under a merger agreement with the Company. That merger agreement was terminated by the Investor Group this morning following a Company stockholder meeting at which an insufficient number of stockholders voted in favor of the proposal.
In its termination letter to the Company, the Investor Group stated, “We continue to believe that the $15.50 price recommended by the special committee of the board of directors was a fair price, as the independent directors and their financial advisor had determined. In our view, that price became even more attractive since the merger agreement was signed on September 27 because, among other reasons, the Brazilian Real has further depreciated since that time. The unaffiliated stockholders, however, have determined to remain invested in the Company which we take as a vote of confidence in the Company’s prospects even in light of the increasingly challenging Brazilian market conditions.”
No breakup fee is to be paid in connection with the termination of the proposal.
About Brazil Fast Food Corp.
Brazil Fast Food Corp., through its holding company in Brazil, BFFC do Brasil Participacoes Ltda. (“BFFC do Brasil”, formerly 22N Participacoes Ltda.), and its subsidiaries, manage one of the largest food service groups in Brazil and franchise units in Angola and Chile. Operating under (i) the Bob’s brand, (ii) the Yoggi brand, (iii) KFC and Pizza Hut Sao Paulo, as franchisee of Yum! Brands Brazil, and (iv) Doggis, as master franchisee of Gastronomia & Negocios S.A. (former Grupo de Empresas Doggis S.A.), our subsidiaries are Venbo Comercio de Alimentos Ltda. (“Venbo”), LM Comercio de Alimentos Ltda. (“LM”), PCN Comercio de Alimentos Ltda. (“PCN”), CFK Comercio de Alimentos Ltda. (“CFK”, former Clematis Industria e Comercio de Alimentos e Participacoes Ltda.), CFK Sao Paulo Comercio de Alimentos Ltda. (“CFK SP”), MPSC Comercio de Alimentos Ltda. (“MPSC”), FCK Comercio de Alimentos Ltda. (“FCK”, former Suprilog Logistica Ltda.), DGS Comercio de Alimentos Ltda. (“DGS”), Yoggi do Brasil Ltda. (“Yoggi”), Schott Comercio de Alimentos Ltda. (“Schott”), Little Boss Comercio de Alimentos Ltda. (“Little Boss”), CLFL Comercio de Alimentos Ltda. (“CLFL”) and Internacional Restaurantes do Brasil S.A. (“IRB”). IRB has 40% of its capital held by Mascali Participacoes Ltda., another Brazilian limited liability company, whose main partner is the CEO of IRB.
Safe Harbor Statement
This press release contains forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known or unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those expressed or implied by such forward looking statements. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see the disclosures in the Company’s financial reports, including the risk factors contained in the Company’s most recent annual report and quarterly reports available on its website www.bffc.com.br.
SOURCE: Brazil Fast Food Corp.
Great news of course for all BOBS shareholders as that offer of $15.50 a share was ridiculously low as was outlined many places and talked about on this blog here and here.
Thank you to everyone who voted no to the offer and everyone who I have been in contact with over the last several weeks as this offer was considered. Thanks to all of you concerned shareholders we were able to vote down the offer and keep a hold of this massively undervalued and growing company for at least a little while longer.
I was asked this morning if I think the BOBS insiders would seek any kind of “revenge” against minority shareholders in the near future. I do think that with this no vote does come some downside for us remaining shareholders. Being a bit of a cynic, especially after something like this has happened, I do think that the next several quarters earnings and growth will be lower than they have been in recent quarters. Possibly artificially lower due to management wanting to get the companies price lower so they can attempt another buy out at a lower price, or because of the real problems that are going on in Brazil, even if management in my estimation overstated some of the concerns going on there. I also expect that if the insiders do attempt to take the company private again that they are not likely to give minority shareholders the same benefit of “Outside” shareholders having the only votes on the matter like they did this time.
In any case I plan to hold onto my BOBS shares for the time being and if I am right and the share price drops for any issues, real or manufactured, everything remaining the same I will just buy more shares of the company.
Congratulations and thank you to everyone, but I am preparing for a bit of a bumpy ride at least in the short-term as a BOBS shareholder.
Brazil Fast Food Company Insiders Ridiculous Offer To Take The Company Private
I woke up to this news this morning, emphasis is mine:
Brazil Fast Food Corp. Proposes to be Acquired
RIO DE JANEIRO–(BUSINESS WIRE)– Brazil Fast Food Corp. (OTC Markets:BOBS) (the “Company”), the second largest fast-food restaurant chain in Brazil with 1,057 points of sale, today announced its entry into a definitive merger agreement pursuant to which Ricardo Figueiredo Bomeny, its CEO, and certain other shareholders (collectively, the “Investor Group”) representing approximately 74% of the Company’s outstanding shares, propose to acquire all outstanding shares of the Company at a price of US$15.50 in cash per share, or a total equity value of approximately US$32,556,045.
Under the terms of the merger agreement, Company stockholders would receive US$15.50 in cash for each outstanding share of Company common stock they own.
The merger, which is expected to close during the fourth quarter of 2013, requires the approval of the majority of the non-controlling stockholders who vote on the merger agreement. The transaction is not contingent on any financing.
The transaction is subject to other customary conditions, in addition to the stockholder approval described above. If the Company terminates the merger agreement because the Company’s Board of Directors authorizes entering into an Alternative Acquisition Agreement (as defined in the merger agreement), or if the Investor Group terminates the merger agreement because the Company’s Board of Directors changes its recommendation of the Investor Group’s offer, the Company must pay the Investor Group a US$1 million termination fee.
The Company’s Board of Directors acting on the recommendation of a Special Committee of independent directors unanimously approved a merger agreement under which the Investor Group would acquire the Company and take it private subject to a number of conditions, including a vote of the unaffiliated stockholders.
The Special Committee retained independent financial advisor Duff & Phelps and legal advisor Baker & McKenzie to advise it. The Investor Group retained financial advisor A:10 Investimentos and legal advisor Linklaters LLP to advise it.
Gustavo Alberto Villela Filho, who was a member of the Special Committee, said, “The Special Committee and its advisors conducted a disciplined and independent process intended to ensure the best outcome for shareholders.”
Ricardo Bomeny, CEO of the Company and part of the Investor Group, said, “I believe this transaction offers an exciting opportunity for Brazil Fast Food Corp. and its shareholders by delivering immediate value to those shareholders while allowing us to focus on long-term strategy and goals as a private company.”
In connection with the transaction, the Company will send to its stockholders a proxy statement and other documents, including a form of proxy card. The proxy statement and a form of proxy will be mailed to the Company’s stockholders. Stockholders are urged to read the proxy statement and any other documents sent to them carefully because they will contain important information about the transaction. Stockholders will be able to obtain a free copy of the proxy statement at the Company’s website of www.bffc.com.br, and upon request to the Company.
As Red from The Red Corner Blog said on Twitter:
@17thStCap Pricing the offer lower the last close and presenting it as “delivering immediate value” to minority shareholders. Funny.
If you are an owner of BOBS or follow the company at all you will know that this is a below market offer. The company opened trading at $16.50 per share this morning so their offer is a 7% discount to what the market thought the company was worth and well below what I and others think the company is worth.
It does seem that a majority of the non-controlling shareholders have to approve this deal which is good if that really means what it seems like. However, I have not been able to find clarification on what exactly that means but hopefully it means all outside investors.
I have not been able to find any significant fund or institutional ownership of BOBS on sites like Morningstar, but I am talking with several other “outside” investors, (Including a couple that own substantial portions of the outsider shares) on potentially collaborating to push for a higher offer. If you are a BOBS shareholder and would like to collaborate please contact me through my contact page.
In my first article on BOBS which can be viewed here, I explained why I thought it was worth between $16 and $22 a share in December WITHOUT discounting its massive NOL’s at all. In my second BOBS article, which can be viewed in total here by SA Pro members, I showed why I think the company is CONSERVATIVELY worth $20-$25 a share, this time discounting its NOL’s by 50%. If you are not an SA Pro member I will repost just the valuation here.
Numbers are in millions of Brazilian Real, except per share information, unless otherwise noted. The numbers I have bolded are what I am going to talk about here.
EBIT and net cash valuation
Cash, cash equivalents and short-term investments are 38.61.
Total current liabilities are 51.50.
Number of shares are 8.13.
Cash and cash equivalents + short-term investments – total current liabilities = 38.61-51.50 = -12.89/8.13 = R$-1.59 per share = -$0.71 in net cash per share.
BOBS has a trailing twelve-month EBIT of 33.58.
5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments: Using CURRENT exchange rate of $1 USD to R$0.45 and not the exchange rate from an original article.
5X33.58 = 167.9+38.61 = 206.51/8.13 = R$25.40 per share which equals $11.42 per share.
8X33.58 = 268.64+38.61 = 307.25/8.13 = R$37.79 per share which equals $16.99 per share.
11X33.58 = 369.38+38.61 = 407.99/8.13 = R$50.18 per share which equals $22.56 per share.
14X33.58 = 470.12+38.61 = 508.73/8.13 = R$62.57 per share which equals $28.31 per share.
Plus NOL’s: R$37.3 from income tax and R$68.7 from social contribution tax which is a total of R$106, or $47.65, which equals a total of $5.86 per share. I’m discounting this amount by 50% due to my conservatism and because of how long some of these will take to realize which brings the per share total down to $2.93.
5X EBIT + cash and cash equivalents estimate of $11.42 per share + $2.93 per share = $14.35 per share.
8X EBIT + cash and cash equivalents estimate of $16.99 per share + $2.93 per share = $19.92 per share.
11X EBIT + cash and cash equivalents estimate of $22.56 per share + $2.93 per share = $25.49 per share.
14X EBIT + cash and cash equivalents estimate of $28.31 per share + $2.93 per share = $31.24 per share.
TEV = Market cap + all debt equivalents (Including the capitalized value of operating leases, unfunded pension liability, etc) – cash – long-term investments – net deferred tax assets.
TEV = 117.1+147.67-38.61-18.51 = R$207.65 = $93.44
TEV/EBIT = 6.18
EV/EBIT = 3.23
EBIT/TEV (Earnings Yield) = 16.17%
If you compare the first article to the second one you will notice that its profitability has continued to improve in the ensuing months. This has helped increase the overall value of the company and has kept them massively undervalued as their TEV/EBIT and EV/EBIT are about what they were in December when they were selling at $8 a share. Their earnings yield has actually improved in that time.
In the second article I discounted the NOL’s by 50% due to my conservatism, and the company is still worth at 8X and 11X EBIT $20-$25 a share which is what I think is its intrinsic value range at MINIMUM today. That valuation completely discounts 50% of its substantial NOL’s and does not count any future growth potential at all which is substantial. If the company were to stay on its current trajectory and with the upcoming 2014 World Cup and 2016 Olympics both in Brazil, I think the company could AT LEAST be worth $30-$50 a share in a few years time.
Suffice it to say I think that the current offer is absolutely ludicrous by the insiders of BOBS who appear to be trying to steal the company from its outside shareholders and think that we should hold out and push for a much higher offer and I urge all BOBS shareholders to vote no to this ridiculously low ball offer.
For the time being the portfolio below is based on the portfolios that I manage. Earlier this year I liquidated my personal account to fund the start-up of me and my brothers business, pay off some bills, go on a trip for the first time in 10 years, and save money for me and my wife’s baby that is due in late October. I am going to start building the funds in my personal portfolio back up again as soon as possible
Cash – Approximately 40% of portfolio.
Calloway Nursery, CLWY – Approximately 19% of portfolio. I have a sell order pending for this company now due to it rising close to my estimate of its intrinsic value so the above chart could change if my sell orders are filled. Up 90% as of today since I bought them in March.
Brazil Fast Food Company, BOBS – Approximately 14% of portfolio. First article I wrote about them can be viewed here, second article can be viewed here. As of today up 109% since buying them in December.
Paradise Inc, PARF – Approximately 10% of portfolio. First article I wrote about them can be viewed here, second article can be viewed here. As of today the position is about even since buying in March.
Core Molding Technologies, CMT – Approximately 5% of portfolio. First article I wrote about them can be viewed here. As of today up 27% since buying into them in August of 2012. The company has won multiple awards in recent months for being an excellent supplier and has also added significant additional business with Volvo.
As you can see from the portfolio above I have made some changes in the portfolio since my last update adding Calloway Nursery and selling Strattec and Main Street Capital. I sold Strattec up nearly 75% since buying into them in December because they rose very fast to the high-end of my estimated value for them. Will possibly buy back into them again if their price falls because I still think they are an excellent company. I sold Main Street Capital up 65% due to the liquidation of my personal portfolio, which is the only place I held it, due to the reasons listed above.