SonomaWest Holdings SWHI
December 19, 2006 - 2:25pm EST by
2006 2007
Price: 15.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 17 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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This is a mini-micro cap stock. If you need any sort of size atall, read no further.

SonomaWest was founded as the Vacu-dry Company in 1946. It was in the business of processing fruit into product for human consumption. In order to be close to its suppliers, it located its operations in Sebastopol, California. Its fruit processing activities ceased some time ago. Vacu-dry was renamed SonomaWest and all that remains is some cash, the original land and buildings and an investment. Sebastopol is a rural area 56 miles north of San Francisco. Happily, it is part of the "Russian River Valley", a well-known and important wine-growing region. SomonaWest's properties consist of the two sites. A 2001 self-tender document disclosed a 1998 appraisal of the two properties which valued them at $13 million. A 2005 appraisal done in conjunction with a bank loan valued the properties at $18 million. I believe that they are worth that and more.

SonomaWest Industrial Park South
consists of 15.2 acres in three lots located at 1365 Gravenstein Highway South. There are 5 buildings of 85,882 leasable sq. ft. on one 5-acre lot. The buildings are old and bring in rent of about $465,000 annually. Until recently, they had a vacancy rate of 30-40%. They are now 100% occupied. These 5-acres are zoned "limited industrial" which  restricts their usage to agricultural/food processing, light industry, office space related to the industrial usage, warehousing and storage. The other two lots are 2 and 8 acres zoned "limited industrial" and "low density residential", respectively. They are unbuilt upon. The 2001 self-tender document stated that they could be sold for $4.2 million. The 2005 appraisal gave them a value of $4 million.

SonomaWest Industrial Park North consists of 66.4 acres in three lots located at 2064 Gravenstein Highway North. On one 27-acre lot, there are 12 buildings of 289,336 leasable sq. ft. The buildings are old and bring in rent of about $1,550,000 annually. After many years, the zoning on the property has been changed to "MP-Industrial Park" from"Diverse Agricultural". In addition, a master use plan was approved for the property. As a result, the existing buildings maybe replaced with new buildings without further zoning applications or approvals. These new structures can then be leased to a wider variety of tenants. This is very positive for the 27-acre site. In the past these 12 buildings ran vacancy rates of 30-45%. They are now 96% leased. In addition, there are two other sites. One has a large pond on it which serves as fire protection. The other site was previousy used for wastewater treatment. The permit for wastewater has lapsed. If the permit were ever regained, it would be a matter of some positive consequence. The 2005 bank appraisal valued this property at $14 million before the zoning changes.

MertoPCS 6% Convertible Preferred Stock was purchased in 2002. MetroPCS is an "all-you-can-eat" cellular provider similar to Leap wireless. A total of $3 million was paid. In 2005 a tender offer was made for 20% of MetroPCS's convertible preferred by an outside investor. SonomaWest sold 20% of its position for $1.8 million, leaving it with an 80% position with an implied valuation of $7.2 million. Since the time of the tender, Leap and others have done very well. I judge MetroPCS to be a stronger company than Leap as it has more subscribers, higher EBITDA and better service areas. If MetroPCS appreciated at the same rate as Leap, the $7.2 million would be worth around $12 million.  MetroPCS was founded in 1994, went bankrupt, and has since prospered. It has been a long, hard road for the VC's who backed the company. In 2004, the company almost went public but was forced to withdraw its registration statement because of accounting issues which were of little substance. I believe that the company will go public or merge with another carrier in 2007.

Craig Stapleton, the former president of Marsh & McLennon Real Estate Advisors, and his family own 48% of the company's stock. They tried to take the company private earlier this year. The independent directors blocked it. They may try again.


The announcement of development plans for the north industrial park. The sale or going public of MetroPCS.
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