Paradise, Inc. Is Liquidating! ($PARF)

Well, it looks like another "one-day" stock has had its day:

Dear Fellow Shareholders:

We are pleased to inform you that on April 15, 2019, Paradise, Inc. (“Paradise” or the “Company”) entered into an Asset Purchase Agreement (the “Purchase Agreement”), with Gray & Company (the “Buyer”) and Seneca Foods Corporation (the “Parent”). Subject to the closing conditions included in the Purchase Agreement, including most importantly approval by you as our shareholders, the Company will sell to the Buyer the assets of its glacé fruit product business (the “Fruit Business”). If approved and closed in accordance with its terms, the sale of the Fruit Business (the “Asset Sale”) would be for an aggregate purchase price of approximately $10.9 million, consisting of cash consideration of approximately $9.4 million and assumed liabilities of approximately $1.5 million. Approximately $0.9 million of the purchase price would be held in escrow for six months after the sale to satisfy indemnification obligations of the Company. We ask for your approval of the Asset Sale as described in further detail in the accompanying proxy statement.

In addition, our Board of Directors has determined that the best course of action following the Asset Sale is the orderly sale of our remaining assets, including our molded and thermoformed plastics business (the “Plastics Business”) and the real property on which we operate our businesses (the “Real Estate”), as part of a Plan of Complete Liquidation and Dissolution (the “Liquidation Plan”). As a result, we are also asking in the proxy statement for the approval by our shareholders of the Liquidation Plan.

That is from a proxy statement that was filed with the SEC. It goes on to give an estimate of the liquidation value:

Assuming shareholder approval and closing of the Asset Sale, the Board estimates that the aggregate amount of distributions to shareholders as a result of the Asset Sale and Liquidation Plan will be between approximately $18.0 million and $25.0 million, or approximately $35 to $48 per share based on 519,600 shares outstanding...

Paradise was a net-net idea that Nate posted way back in July 2012 - so seven years ago. At that point, shares were trading at about $18. Commenters actually gave the idea a bit of a hard time, for example:

Your investment in a business like PARF has costs -- the returns that you could have earned in treasuries, bonds, ETFs, or some other stock.

If one invests $100 in PARF's assets, one can expect 6% back per year; if one invests the same amount in the S&P or some other index, one can expect ~9% back a year. Every year one holds PARF, one loses 3% of the value of one's investment via opportunity cost.

That's why the business has negative economic value for the investor. Everyone else, -- employees, suppliers, customers, tax authorities -- are quite happy with PARF.As for the private investor,given that PARF's under-performance is built into the business (tremendous amount of working capital required to generate very little in terms of profit), why would a rational person -- private buyer or Mr. Market -- want to pay full price?

I don't think they would: the'd pay 2/3 of the price of the assets, just in order to break even.

And that missing 1/3, the proxy for value destruction, has a value of ~$5-$6 million, which, not coincidentally, is the value of the excess cash.

Over the years the company paid a paltry $0.92 of dividends, but with the liquidation announcement there is now a $38.52 bid for the shares. That represents an IRR of a little over 12%. If the liquidation were to result in $45 in proceeds a year from now, the IRR might end up being 13% compounded for eight years. (It should be noted that this is about the same as the total return of the S&P 500 over the same seven year time period.)

Regarding the acquisition, one Tweeter commented, "Seneca Foods is buying Paradise inc. candied fruits business for $9.4 mln, ~0.6x last year's sales and somewhat over 3x operating earnings. That's a nice buy for Seneca and a shitty sale for Paradise investors, a perennial OTC asset play."

In fairness, the proxy statement describes a very long lasting marketing process by Paradise's bankers, and apparently this was the highest offer. It would be interesting to know the real reason that nobody stepped up willing to pay more for this segment.

Another Tweeter observed that Paradise "announced in Feb18 it was exploring strategic alternatives. Didn't disclose until 12/7/18 that it had entered into a retention agreement effective 10/31/17 with CFO with $75K bonus paid when company sold."

The proxy statement is well worth reading. The negotiations with the eventual buyer lasted from March 2018 until April 2019. One thing that is a little ominous is that the buyer wanted the fruit business but not the plastics and especially not the real estate. See this little tidbit:

On January 3, 2019, the Parent terminated negotiations with the Company regarding a merger but communicated its willingness to purchase only the Fruit Business of the Company under an asset purchase. The Parent did not give any reason for this termination at this time, but later told the Company that it did not want to acquire the stock of the Company based on the preliminary results of the Phase 2 study. 

Apparently the buyer was emphatic that they did not want "to be in the 'chain of ownership' for the Company’s real estate property"! The way that this was resolved is that Paradise is doing an asset sale of just the fruit business; not a merger or sale of the whole company.

Here is the detail from the proxy statement on the estimated proceeds after the asset sale of the fruit business:

After execution of the Purchase Agreement, the Company will have an estimated remaining asset value net of liabilities of approximately $14.0 million (with the Plastics Business and Real Estate being valued at net book value). Given that, estimated future proceeds to shareholders are calculated as (1) the cash consideration from the Asset Sale; plus (2) the net tangible value of remaining assets less liabilities; less (3) transaction-related fees/expenses and severance ($4.2 million); plus/minus (4) operating profits/losses between the date of closing of the Asset Sale and the date of full liquidation of the Company (assumed to be break-even) — totaling $19.2 million of estimated proceeds.

Payments of severance and a special bonus are going to be an eye-popping $3.2 million -that is over $6 per share.

One wonders what the real estate is going to bring... It seems like management should have elaborated a bit on the problems revealed by the Phase 2 environmental study. Is it a Superfund site or what?