Description
Vulcan International is a holding company that is comprised of marketable securities, real estate, an over-funded pension plan and two small operating businesses. The bulk of the value is concentrated in marketable securities and real estate assets. Based on a sum of the parts valuation, as described below, it is worth approximately $94 per share on gross asset value or $60 per share on an after tax basis to shareholders. These are premiums of about 50% – 130% over the current share price. Book value stands at $54.85 per share. Management controls approximately 42% of the outstanding shares and the chairman receives $300,000 per year.
1. Securities – At September 30, 2001, Vulcan owned equities with a market capitalization of $79.3MM consisting of shares in AT&T and all of its spin-offs and two unnamed financial institutions in the Ohio area. The cost basis of these holdings is $6.3MM. They write covered calls against the positions and receive annual dividends to the tune of $2.2MM per year.
2. Real Estate – Vulcan owns 8 floors of the Cincinnati Club Building in downtown Cincinnati with 88,000 gross rentable sq. ft. and 56,000 of usable sq. ft. The company occupies the top floor and rents out the other 7. Market rents in this building are currently $10 –14 per sq. ft. depending on floor and requested tenant improvements. Minimum rental for 2002 is $318,827 excluding the top floor. A ballpark valuation assuming the top floor is rented out at market would be $4MM assuming the top floor rents out at $14/ft, a cash flow of $320,000 and a cap rate of 8%. If they could bring the remaining floors to market rents the building could be worth up to $8MM. The building was renovated in 1987 and is in good condition.
3. Timberland – The Company owns 14,000 acres of timberland in the upper peninsula of Michigan. It is difficult to place a distinct value per acre. We have used a range of $200 to $1,000 per acre and for valuation purposes used an arbitrary number of $500 per acre to come up with a $7MM value for the land.
4. Bowling Pins – a 50% joint venture with Brunswick Bowling that generates about $1.2MM in EBITDA in an environment where the largest bowling alley operator is just about to emerge from bankruptcy. A 5x EBITDA multiple at 50% ownership gives a $3MM value to Vulcan.
5. Foam Rubber Products – Manufacturers rubber and foam for inserts into shoes (US only) and other undisclosed uses. A lousy business that produces negative cash flow. However, the Company owns its 272,000 sq. ft. manufacturing facility outright and has assets of about $4MM. We give this a nominal value of about $3MM assuming a liquidation of the assets and real estate for 75 cents on the dollar.
6. Over-funded pension plan – The Company has an over funded plan to the tune of $5.2MM as of September 2001.
7. Cash and debt – At quarter end the Company had cash of $1.4MM and debt of $.565MM.
The sum is as follows: Securities $79.3MM, Real Estate $4MM, Timberland $7MM, Foam rubber $3MM, Bowling Pins $3MM, Pension Plan $5.2MM and net cash .9MM for a total of $102MM.
There are 1,085,219 shares outstanding. Taking the total asset and dividing by the number of shares gets us to the $94 total liquidation value. Using a tax rate of 40% and subtracting cost basis (gains of $73MM for securities, $10MM for real estate/timberland and other of $11MM), yields after tax corporate proceeds of approximately $65MM or $60 per share.
Catalyst
An investor group led by Barington Companies filed a 13D in October of 2001 with a stake slightly above 5%. Part of this group is Musicmaker.com, which has cash of $9MM and a large NOL. Barington gained control of Musicmaker by attacking the company legally and forcing it to realize shareholder value. Theoretically, Musicmaker could buy Vulcan and utilize its NOL to shield most of the deferred gains in Vulcan’s assets. It should be able to pay a premium to the after-tax value of $65MM, which should be an incentive for the insiders to sell out. THE BIG RISK TO THIS IS WHETHER OR NOT MANAGEMENT WOULD ACCEPT SUCH AN OFFER.