Let the word go forth throughout Fooldom -- we've struck pay dirt.
Or, rather, Pay Dirt. The ultra-deep-value small-cap investing cousin to Motley Fool Hidden Gems scored a win on Sunday, when private equity powerhouse Sun Capital Partners agreed to purchase one of the two companies recommended in our inaugural edition: ice cream hawker and former Hershey
Structured as a purchase by its affiliate, Freeze Operations Holding Corp., Sun will be buying Friendly for the princely sum (note the irony) of $15.50 per share -- a mere 8% premium to the stock's Friday close. While current shareholders may develop an ice cream headache over the price, however, Pay Dirt subscribers are making out quite well. $15.50 per stub is a good 36% gain from the price at which Pay Dirt analysts Bill Mann and Jim Gillies recommended the stock back in January.
Will it happen?
My guess is that, barring a higher offer from another would-be purchaser, yes, this deal will go through. According to Friendly's late-Sunday-night press release on the deal, the Board of Directors has "unanimously approved" the purchase and is recommending that shareholders do likewise. In that regard, insiders and hedge funds controlling more than 50% of shares outstanding have already agreed to vote in favor of Sun Capital's offer. Under the terms of the firm's charter, another 16% or so of shares outstanding are all that's needed to seal the deal.
Should it happen?
A price of $15.50 per share is a premium to both recent shareholders and Pay Dirt investors who bought in January. But the terms of the buyout aren't likely to put chocolate mustaches of happiness on the faces of longer-term shareholders, as they amount to a 14% discount from the price at which Friendly's shares debuted on the AMEX a decade ago. Math geeks (and those who know how to use Google's "root" equation) will recognize that as an annualized return of negative 1.5% per annum.
Still, when you consider the state of the company, which Bill and Jim characterize as "an over-leveraged and moribund ice cream restaurant/distributor with a spitting-mad founder and management that -- at best -- has failed its obligations to shareholders," it's hard to call the decline unwarranted. True, Friendly sells for just a fraction of the price-to-sales ratios accorded to rivals such as Denny's
While I can't speak for Bill or Jim, the deal looks fair to this Fool, and offers those who bought on our original recommendation about an 85% annualized gain. I'd take the money and run -- or even better, take the money and roll it over into one of our other Pay Dirt recommendations.
For more on comfort-food restaurants, check out:
Does Friendly's story have you hungry for more small-cap goodies? Check out Motley Fool Hidden Gems free for 30 days.
Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy goes wild for mint chocolate chip.
