Description

Alico, Inc. is a small-cap land play in Florida that recently received an unsolicited cash takeover bid. ALCO is also effectively controlled by a reorganized family trust that is seeking to merge its separate privately-owned agricultural holdings with ALCO, while supporting a special cash dividend for all shareholders.

An investment vehicle called National Land Partners (NLP) led by Florida developer Harry Patten – who founded what became resort company Bluegreen (NYSE: BXG) - has proposed a cash takeover at up to $55.75 per share, subject to due diligence. While any sale depends on support by the Atlantic Blue Trust (ABT) which controls roughly 48% of ALCO’s shares and has expressed no interest in a sale at current prices, it does appear that NLP has discovered value here significantly above $55 and has effectively put the company in play.

In fact, ALCO is in the process of selling off a major tract of land that equates to about one-third of its market cap, and NLP has apparently had talks with other parties who might purchase the remaining acreage. All key parties have hired bankers and lawyers to sort through the different agendas here. The annual shareholder meeting has been set for February 11th, with a record date of January 11th.

Business description
Alico, Inc. is an agribusiness company operating in Central and Southwest Florida formed in 1960 as a spin-off of the Atlantic Coast Line Railroad Company. The Company owns over 140,000 acres of land located in Collier, Hendry, Lee and Polk Counties. The Company is involved in various operations and activities including citrus fruit production, cattle ranching, sugarcane and sod production, and forestry. The Company also leases land for farming, cattle grazing, recreation, and oil exploration.

Financials
ALCO’s operating business includes ranching and farming and has generated steady profits – improved by cutbacks in G&A expense in recent years. Management expects profits in fiscal 2005 to approximate fiscal 2004.

Fiscal year (8/31) 2002 2003 2004
Operating revenue $49.2 $48.3 $52.1
Gross profit $9.7 $11.0 $13.1
G&A $10.8 $6.3 $6.5
Operating profit ($1.1) $4.7 $6.7
Depreciation $7.0 $6.7 $6.5
EBITDA $5.9 $11.4 $13.2

Gross margin 19.7% 22.8% 25.2%
Operating margin -2.3% 9.7% 12.8%

Land summary
COUNTIES
Acreage (8/31/04) TOTAL Hendry Polk Collier Lee
Citrus
Producing acres 11,147 3,765 3,253 4,129 -
Support & nonproductive 5,737 1,890 650 3,197 -
Total citrus 16,884 5,655 3,903 7,326 -

Sugarcane
Producing acres 13,083 13,083 - - -
Support & nonproductive 10,796 10,796 - - -
Total sugarcane 23,879 23,879 - - -

Ranch
Improved pasture 22,922 22,627 295 - -
Semi-improved pasture 21,752 20,038 602 1,112 -
Native pastures 19,513 11,846 5,949 1,718 -
Support & nonproductive 25,522 23,302 1,540 680 -
Total ranch 89,709 77,813 8,386 3,510 -

Farming
Leased acres 2,932 2,802 - - 130
Support & nonproductive 1,029 1,008 - - 21
Total farming 3,961 3,810 - - 151

Sod
Producing acres 500 500 - - -
Support & nonproductive 335 335 - - -
Total sod 835 835 - - -

Other
Rock & sand mining 5,573 - - - 5,573
Commercial & residential 226 4 214 - 8

TOTAL 141,067 111,996 12,503 10,836 5,732


Valuation summary
With the takeover bid, the market capitalization has increased from about $300 million to over $400 million.

Stock price $58.11
Shares 7.319
Mkt. cap $425.3

Obviously the vast majority of the value here relates to the land holdings, but the profitable agribusiness operations are worth something -- probably about $10-$12 per share as a going concern.

Value per share Multiple
EBITDA 5.0 6.0 7.0
$10.0 $6.83 $8.20 $9.56
$12.5 $8.54 $10.25 $11.95
$15.0 $10.25 $12.30 $14.35

With a net cash position on the balance sheet at fiscal year-end, there looks to be another $4 per share in cash.

Balance sheet 31-Aug
Cash $24.3
Marketable securities $55.6
Total $79.9

Notes payable, current portion $3.3
Notes payable, long-term $48.3
Total $51.6

Net debt ($28.3)
per share ($3.86)

Ultimately, the total value depends on the value of the land holdings. For reference, here are ALCO’s own recent land sale transactions:

Recent land transactions
Location Acres Price ($mm) Price/acre Date of sale
Lee County 5,732 $138.4 $24,145 Next 2 yrs to close
Lee County 244 $30.9 $126,639 2Q/FY04
Lee County 313 $9.7 $30,990 4Q/FY03
Hendry County 358 $0.669 $1,869 4Q/FY03
Polk County 266 $0.617 $2,320 4Q/FY03

Clearly the high sales prices for Lee County land should not be held as representative of the potential for the remaining land holdings, with most acreage represented by ranch land in Hendry County. But if we use the pending Lee County sale price and apply averages to the remaining land acreage in the other Florida counties, ALCO would only need to sell the remaining land at $1,500 per acre to achieve over $60 per share in total company value (by including $14-$16 per share for the agribusiness and net cash). If the other land is worth on average what the recent Hendry county sale netted at just below $2,000 per acre, then investors are effectively getting the profitable agribusiness operations for free. The most recent Polk County sale was completed at well over $2,000 per acre and both the Hendry and Polk County sales were completed about one and a half years ago in a real estate market that has continued to see strong pricing. Shrewd development and sales of the remaining land holdings creates the opportunity for much greater upside in the fast-growing Florida market.

Land valuation
Price/acre $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000
Total value $274 $341 $409 $477 $544 $612 $680 $747 $815
Value/share $37.40 $46.64 $55.89 $65.13 $74.38 $83.62 $92.87 $102.11 $111.36
Acres 135,335 Excl. Lee County
Of course, it could be argued that the value of the agribusiness operations should be excluded in determining overall value in a land sale since the land would likely be put to better use and thus the agribusiness does not really have a true terminal value. So much as this is true, all of the land will not be sold immediately such that some period of positive cash flows will accrue from the business while the assets on the land (e.g. cattle and farming equipment) can be salvaged for additional value. Also, small incremental per acre sale assumptions generate significant additional value for shareholders.

Catalyst

*Potential takeover by third party: the company is reviewing an unsolicited takeover proposal
*Potential going private: family trust could buy out the public float to ensure control
*Potential merger with other family trust holdings
*Additional land sales
*Special dividend: excess cash balance and dividend policy under review by board