Description

Coolbrands International Inc. (COB.to)

Coolbrands is essentially a cash rich shell company run by the family of Canadian billionaire Seymour Schulich that is in the process of finding a suitable acquisition.  It had a colourful history as a manufacturer of frozen desserts, but those operations have since been sold.  The company today consists of $1.10 in cash per share versus a stock price of $0.40.  In other words, it has roughly $63 million in cash versus a market capitalization of $21 million.  There is minimal cash burn as the interest expense should offset operating costs.

According to the company, “CoolBrands' management continue to receive and evaluate proposals to invest the Company's cash assets in merger and acquisition opportunities. Until a decision is made to pursue one or more investment alternatives, the Company believes that the investment returns on its cash investments will exceed the level of general and administrative costs expected to be incurred during the year.”

There is one issue with this idea and it relates to a lawsuit, the details of which are given below:

"On October 31, 2006, Capricorn Investors III, L.P. (“Capricorn”), the parent of Americana Foods Corporation, filed a complaint in the Supreme Court of the State of New York against CoolBrands, Integrated Brands, Inc., CBA Foods LLC, CB Americana LLC and certainofficers and directors of CoolBrands asserting allegations against the defendants for breaches of contract, breach of fiduciary duty, fraud and conspiracy and seeks injunctive relief and damages of over $60 million. On June 8, 2007, the Company and its co-defendants moved to dismiss the Complaint. The Court directed the parties to begin engaging in document discovery and indicated it would rule on the Defendants motion to dismiss. On June 13, 2008, the Court granted the Company’s motion to dismiss as to seven of the ten claims made by Capricorn in its complaint. The Court provisionally dismissed all of Capricorn’s claims against CoolBrands and its subsidiary company Integrated Brands, Inc. but permitted the plaintiff an opportunity to re-plead its case to include these parties. Capricorn’s claims alleging civil conspiracy, breaches of fiduciary duty, fraud, negligent misrepresentation and promissory estoppel were dismissed and all claims that Capricorn brought against individual officers and directors of CoolBrands were dismissed. The judge converted to a breach of contract claim Capricorn’s declaratory judgment claim involving a change of control provision in the Partnership Agreement and also sustained its breach of contract claim for alleged failure to submit operational and financial information pursuant to the Americana Limited Partnership Agreement. Litigation continues on these points. On September 22, 2008, Capricorn filed its submission with the Court to oppose the Court’s earlier decision on the defendant’s motion to dismiss. On October 6, 2008, the Company filed its reply brief refuting the matters contained in Capricorn’s submission and reiterating its position that the case should not continue against CoolBrands and Integrated Brands. In-person oral arguments were held on November 6, 2008 and it is anticipated that a Court decision on Capricorn’s submission will be rendered in early 2009."

If Capricorn were to win the lawsuit, the stock would trade down to roughly $0.05 per share as the loss of $60 million would essentially wipe out the current cash balance of $63 million.  The company would then have to do the right thing and wind-up the company and dividend the remaining cash back to shareholders.

However, at a price of $0.40, the stock price is essentially discounting a payout of $40 million on the lawsuit.  On the other hand, “CoolBrands does not believe thatany of the existing legal matters will have a material adverse affect on its financial condition or results of operations.”

Obviously, this is a source of significant risk and the company has been able to settle numerous prior lawsuits at minimal cost to the company.

Risks

Small cap, illiquid, potential for poor acquisition, potential for acquisition in natural resources where pricing could decline, adverse legal outcome

Catalyst