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:

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@17thStCap Pricing the offer lower the last close and presenting it as “delivering immediate value” to minority shareholders. Funny.
— red. (@theredcorner66) September 27, 2013

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.

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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.

Relative Valuations

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.