Description

Blue Apron (“APRN”) is about to complete one of the most unusual transactions I have come across in my investing career.  I don’t love (or even like) the meal-kit business but I assure you that the rest of this is worth reading – keeping in mind market cap/trading liquidity limitations.  Pro-forma for the extremely large rights offering funded and back-stopped by INSIDERS, the stock is impossibly cheap.  Bizarrely, shareholders today are “accreted” by the rights offering as it will complete at $10/share versus Friday’s close of $6.84/share.  If the company has the success that the insiders seem to think is possible, the stock could be 10-20x.  Once the rights offering is complete, the TEV declines markedly as the cash balance shoots higher.  The going-concern discount that the company earned should be shed.  If the stock were to trade at 1.0x sales, the stock would move to $15/share (+233%).  If the stock were to trade at an industry multiple on what I believe insiders think is possible, 3.0x $1.0bn of sales = $100/share (+1462%).  I would be shocked if I am there for ~$100/share.  However, the optionality is real and should be restored to the valuation once insolvency is removed.  This optionality includes the large customer list, $500mm of annual sales, $100mm+ under-utilized distribution center in NJ, $500mm of branding and $500mm of Federal and State NOLs.  I suspect APRN is worth more than $118mm to a buyer in this consolidating industry which is the PF TEV at $6.84/share.  The management team and insiders are rushing this transaction through with zero out-reach to investors and zero disclosure on the details behind this transaction.  These steps seem specifically designed to allow Joseph Sanberg to buy even more of the company via the back-stop feature.   

Rights Offering:  APRN announced a $45mm rights offering on 09/21/21.  The ex-date for the rights was 10/7/21.  The rights offering allows you to buy 1) 1 Class A share 2) 1 7 year warrant to purchase 0.8 of 1 Class A share 3) 1 7 year warrant to purchase 0.4 of 1 Class A share 4) 1 7 year warrant to purchase 0.2 of 1 Class A share.  The warrants are non-transferable which makes them highly undesirable to institutional investors – which discourages participation.  At the same time, Joseph Sanberg (friend of CEO) will invest $30mm at the rights offering terms and will back-stop the $45mm rights offering.  Matthew Salzberg (founder and former CEO, former Chair) will invest $3mm at the rights offering terms and step down from the Board.  In addition, Linda Kozlowski (CEO) and Elizabeth Huebner (Board) have both indicated that they will fully participate in the rights offering.  I estimate this is translates into at least $1.0mm and $320k investments for these two.  It is worth mentioning that this rights offering is back-stopped.  The financing is happening and as a minority you will be accreted.  I suspect that the investing public isn't too famiiar with this concept and is skeptical that it will go through.

Board/Share Class Collapse:  In conjunction with this transaction, Matthew Salzberg will step down from the board.  It is reported that Linda Kozlowski (CEO) had been unable to execute on her vision as Salzberg had constantly tinkered or limited her plans.  Salzberg and his father controlled the voting class and may have been an obstacle to a sale.  It is worth noting that Salzberg’s father is the former CEO of Deloitte & Touche.  Further, the collapse of the share class would likely facilitate the application of the NOL’s should APRN start to generate EBT, be acquired or buy something that generated EBT.  These steps align all shareholders, remove a potential impediment to execution by the management and free the company up for a potential sale.

Why did insiders decide on $10/share?  I suspect this relates to the following.  a)  it was a material premium for the Salzbergs and coaxed him to resign.  This converted a looming disaster into a face saving transition.  b) It allows Sanberg to put a material amount of capital to work at a valuation with massive upside potential but yet doesn't trigger a change of control which would invalidate the NOLs

Smart Insiders:  Joseph Sanberg is a self-made investor who attended Harvard and worked at Tiger Global.  He seems to have had a material liquidity event with the Aspiration SPAC.  https://news.yahoo.com/leonardo-dicaprio-backed-fintech-public-160852813.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAKxuuVDukFOhadh5j2JGbUQJ6N5JFqsbajwsmTbWIDDuQzpTQ4qgN_bKgR72cLaQpoZZBZ4ZPyAAVwRrCtIFfcLoWmcs3zle7GbdAGneBlKdc6MntJIstP7CDo8WbAf4b3H5lJP2LAHu_C-KyNG2ZlfepgrIJAzAGRsgFi0bZsUk

As I mentioned, the Salzberg’s financial savvy is led by a former Deloitte & Touche CEO.  Kozlowski is no slouch either.  She was COO of ETSY and Evernote before getting the nod to lead APRN.  All told, there are some smart investors putting up to $78mm to work at $10/share (plus warrants).  They don’t want to let anyone know what their plans are to allow for investment in the backstop.  This seems like a clue!

Lawsuit:  Matthew Sciabacucci launched a lawsuit on Friday.  He seems to suit a lot of people.  He is arguing for greater visibility into the process behind the decision to pursue the investment.  Sciabacucci seems pretty savvy.  I suspect he is trying to obtain more disclosure from the process as opposed to blocking the transaction.  However, his lawsuit rattled investors Friday (creating an opportunity.)  https://news.bloomberglaw.com/class-action/blue-apron-board-facing-investor-suit-over-stock-sale-to-founder  My real hope here is that Sciabacucci is able to convince them to disclose financial projections.  The rights offering goes live next week.  so - we should see something soon.

ESG:  APRN is going all in on ESG.  They are pursuing carbon neutral, diversity and worker pay.  This is clearly an attempt to pander to ESG capital as I suspect the name of the game here will be lower the cost of capital as far as possible to potentially make acquisitions which should have material synergies.

Business:  I am not a fan of the meal-kit business.  The preparation times are lengthy.  I found the portion sizes to be small as well.  If you are an experienced cook, it takes far longer to assemble something new than repeat an old favorite.  However, if you include the shop-time and mental effort to remember all of the ingredients needed, the all-included preparation time compresses a bit.  The solution is also excellent for less experienced cooks.  Further, Linda is rolling out a microwaveable solution.  The goal is to drive incremental sales per shipment as the margins on that are near 100%.  Linda has been able to drive retention and increase sales per customer.  This has pushed the company close to EBITDA break-even next year.  I haven’t done much to diligence their ability to drive sales/customer acquisition with their newly injected cash.  Clearly, there is some risk that Covid-19 drove up sales too which might fade.  As I mentioned, I am not a big fan of the business.  However, I think nearly every meal-kit company and their sponsors in the world would want to buy APRN for $118mm for operating synergies, customer list, NOLs, distribution center.  Feel free to pan this idea on the merits of the business but its worth more than $6.84 and could move fast.

Catalyst

Rights offering completion next week.