Description

M&F Worldwide (NYSE:MFW) is the world’s leading manufacturer of licorice flavors. At $5.60 per share, MFW has a market capitalization of $102 million. The company has a cash balance of $106 million and a debt balance of $64 million (Net cash per share of $2.31). The company's enterprise value is $60 million. At the present stock price, the company trades at an EV/LTM EBIT multiple of 1.5x, 3.6x P/FCF and 2.1x P/FCF net of cash.

Business Description:

MFW is primarily in the business of producing licorice flavors and other flavoring agents from whole and processed plant products. Based upon its knowledge of the licorice industry, MFW believes that it is the world's largest producer of licorice flavors. MFW also believes that it manufactures more than 70% of the worldwide licorice flavors sold to end-users. Approximately 70% of MFW's licorice sales are to the worldwide tobacco industry for use as flavoring and moistening agents in the manufacture of American blend cigarettes, moist snuff, chewing tobacco and pipe tobacco. While licorice flavors represent a small percentage of the total cost of manufacturing American blend cigarettes and the other tobacco products, the particular formulation and quantity used by each brand is an important element of the brand's flavor.

MFW also sells licorice flavors to worldwide confectioners, food processors and pharmaceutical manufacturers for use as flavoring or masking agents. In addition, MFW sells licorice root residue as a garden mulch under the name Right Dress. MFW's other products include natural flavors and plant products from roots, berries, spices and botanicals that are used in food, tobacco, pharmaceutical and health food products.

The Company believes that MFW has achieved its position as the world's leading manufacturer of licorice flavors through its experience in obtaining licorice root, its technical expertise at maintaining the consistency and quality of its product and its ability to develop and manufacture proprietary formulations for individual customers and applications.

MFW is a steady, slow-growth business. The company trades at a steep discount due to 1) the market’s current misunderstanding of the company’s balance sheet/earnings and 2) Perelman’s recent shenanigans. In April of 2001, Perelman sold his 80% interest in Panavision to MFW for $121 million (consisting of $80 million in cash, 1.5 million of MFW common stock, 6.2 million of Series B Preferred - $44 million liquidation preference). As a result of the transaction, MFW’s balance sheet was destroyed and, for reporting purposes (not credit purposes), it was forced to consolidate Panavision’s rapidly deteriorating operating results. On October 1, 2002, after numerous lawsuits, Perelman agreed to completely unwind the transaction. The company’s most recent financials do not accurately reflect the current status of MFW’s restructured balance sheet and operations.

The Company (led by Ronald Perelman, who owns 32% of the Company) purchased Panavision, a heavily-debt burdened, unprofitable company also controlled by Ronald Perelman. The transaction has subsequently been reversed (on 12/03/02, the company announced the complete unwinding of the transaction) and the next filing with the SEC (10-K ended 12/31/02) will reveal the "real" balance sheet. However, the financials to date have been presented PF for the Panavision stake, so it doesn't show up on typical value screens and whatnot.

Financials:
Stock Price: $5.60
Shares: 18.2 million
Equity Value: $102 million

Cash: $106 million
Debt: $64 million
Enterprise Value: $60 million

LTM EBIT: $39 million
LTM FCF: $28.3 million

Net Cash per Share: $2.31

Multiples:
EV/LTM EBIT = 1.5x
P/FCF = 3.6x
P/FCF (Net of cash): 2.1x

At a P/FCF multiple of 10x (rather arbitrary, but seems appropriate for a low-growth but highly cash generative business), the stock should be worth about $15.00, or a 168% return at the current stock price.

Catalysts:
- Filing of financial statements after unwinding of Panavision acquisition
- Focus on corporate governance (Enron, Tyco, etc.) keeps stakeholders in check
- Change in dividend legislation (given large cash balance)
- Simply undervalued

Catalyst

Catalysts:
- Filing of financial statements after unwinding of Panavision acquisition
- Focus on corporate governance (Enron, Tyco, etc.) keeps stakeholders in check
- Change in dividend legislation (given large cash balance)
- Simply undervalued