Thesis: WWAY (EV $408m, ADV $300k) is in the final stages of selling itself and has had its stock price dislocated by 20% in the last 3 weeks by a redemption at its largest shareholder (Knott Partners) which was satisfied by the distribution of 535,698 shares (30 days volume) on Oct 1, 2012

I recommend buying the stock today at $5.22 and believe one can make a 50% return in 1-2 mths.

 

WWAY has two businesses, 1) Liquid Storage Terminals (70% of EBITDA) and 2) Liquid Feed Supplements (30% of EBITDA). The strategic process, which began in Dec 2011, was prompted by an unsolicited approach from its largest shareholder, ED&F Man for the Liquid Feed Supplements business. Subsequently WWAY also received an unsolicited approach for its Liquid Storage Terminals business. The subsequent disclosures, referenced in WWAY’s most recent 10Q on page 16 (link below), make me confident there are buyers for both businesses. The disclosure also indicates a very mature strategic process.

http://www.sec.gov/Archives/edgar/data/1361872/000119312512347972/d378310d10q.htm

My conviction is FURTHER increased by three facts-:

A) The CEO, exercised 250,000 options struck at $5.55 (6% higher than the current stock price) on Oct 4 (2 days before they expired), thus paying $1.4m in cash out of his own pocket. This speaks to his opinion on the probability  of the resolution of the strategic process. 

• If he felt the strategic process might fall apart, he would have allowed these options to expire because they were NOT in the money. The stock closed below his exercise price on the day before he exercised the options, i.e. closed at $5.38 on 10/3. He essentially chose to pay a price 3% above the last close and would not have done so if the process might fall apart, in which case he would have just held on to the $1.4m and used it to buy stock at lower prices after the termination of the process
• This was a significant personal investment for the CEO. He paid $1.4m to exercise them vs his total annual pre-tax cash compensation of ~$900,000. This is a BIG bet relative to his personal resources.

B) WWAY rejected an unsolicited $6 per share (+14%) offer in Dec 2011 because in the opinion of the special committee, it “substantially undervalues the Westway terminals business and its future growth prospects”. Unsolicited bidders typically keep some room in their initial bids.

C) Infrastructure assets like WWAY’s Liquid Storage Terminals attract a dedicated pool of capital like MLP’s (BPL, KMI, NS) and infrastructure funds like MIC, who are willing to pay 12-15x EBITDA for these assets. VPK NA is a publicly listed comp which trades at 12.5x EBITDA and recently in Feb, BPL paid 15x EBITDA to purchase a terminal from Chevron. Other precedent transactions include, Buckeye / Borco (Dec 2010) - 18x EBITDA. Petronas / Vitol Tank Terminals (May 2010) - 18x EBITDA. Alinda / Houston Fuel Oil Terminal (Oct 2011) - 14x EBITDA

Valuation:

Liquid Storage Business -: owns a network of facilities located in North America, Western Europe, and Asia, providing storage and related services to manufacturers and purchasers of bulk liquid products. In 2011, this business generated $89m of revenue, $45m of EBITDA and required $10m of maintenance capex. Because of the strategic nature of the storage locations, the long term contracts, price escalators, as well as the comparables discussed above, I believe Liquid Storage is worth 11x-13x EBITDA.

 

Further support for 11-13x EBITDA -: The CFO of Vopak (VPK NA), a WWAY comp, said on a Aug 2011 call "But it reflects something different, which we covered in February. And that is that the undiminished interest for infrastructure related to the storage and handling of products that fuels a very interesting M&A market. The multiples paid for these transactions are healthy and I think that's also a reflection on the quality of our business model which we are currently operating". My recent conversations with VPK NA and MIC (who gets 50% of its EBITDA from a storage terminal operator called IMTT) have confirmed that the M&A environment remains robust. The relevance of the precedent transactions depends on the local market in question. To this extent, the Alinda transaction at 14x EBITDA which was in Houston, a market in which WWAY has 29% of its capacity and where WWAY is enjoying 100% utilization is the most relevant. 

 

Returns Relative to Replacement Cost (Liquid Storage Business) - WWAY's added 10.5m barrels of capacity in Houston in 2011 at a total cost of $13.4m, implying a $ per m barrel cost of $1.25m. Applying that to WWAY's total 363m barrels of capacity, would mean the replacement cost of their current storage capacity is $453m and WWAY is earning a 10%+ un-levered return on replacement cost. (10% based on 2011 EBITDA, actual returns are higher because all the new capacity hasn't fully ramped). MIC has said their returns on new capacity are 15%. I believe these returns are sustainable because new entrants are limited by the availability of suitable parcels of land in strategic locations and the scale efficiencies the incumbent has in being the one to add the capacity. WWAY only embarks on capacity expansions after pre-leasing much of the new capacity to existing clients.

 

Liquid Feed Supplements - Through 35 facilities, WWAY provides liquid feed supplements, which involve blending molasses and other essential nutrients to form feed rations that help to maximize the genetic potential of livestock. In 2011, this business generated $318m of revenue, $18m of EBITDA and required $4.5m of maintenance capex. I conservatively value this business at 5x EBITDA even though EBITDA is growing at 9%.

Summary – My range of target prices summarized below is $7.5 - $8.9 (+43% to +70%). Included in the valuation is a $32m hit for the costs of cutting out their $15m in corporate SG&A

 

Shares Outstanding              
Class A                                                                14.3     
Class B                                                                13.6     
Founder's Warrants (Treasury Method)              1.3     
CEO Options                                                        0.3     
Series A Convertible Preferred                            33.1        
Total Shares Outstanding                                   62.6        
Stock Price                                                          5.22     
Mkt Cap ($m)                                                      327  
Cash                                                                   9.2      
Debt                                                                   90.5     
Enterprise Value ($m)                                         408  

SoTP                                                           Base              Upside

Liquid Storage          
EBITDA                                                        44.8               44.8
x Multiple                                                    11.0x             13.0x
Value ($m)                                                  492.8              582

Liquid Feed Supplement          
EBITDA                                                         18.0              18.0
x Multiple                                                      5.0x              5.0x
Value ($m)                                                     90                90

Total Enterprise Value ($m)                         582.8            672
- Less Net Debt                                             (81)             (81)
- Less Corp SG&A at 2x                                 (32)             (32)
Total Market Value ($m)                                470              559
Diluted Shares Outstanding                          62.6             62.6

Per Share Price ($)                                         7.5              8.9
% Return                                                       43%             70%

 

In conclusion, WWAY is a compelling long because it has the combination of 1) Attractive Entry Point due to Knott Partners Distribution and forced selling subsequently. One can observe a similar dislocation in RLOG, another stock in which Knott distributed shares subject to a redemption on the same day as they distributed their WWAY shares. 2) Probability of Success as signaled by recent CEO option activity 3) Valuation as discussed above

Risks – The risk is that the strategic process has dragged on for so long and will fall apart. This could be because the economics of the US cattle industry, which is the primary customer of the liquid feed supplements, have been hampered by the drought. This is mitigated by the strong and recent signal provided by the CEO’s exercise of options. If the strategic process fails, WWAY could fall to $4 (its pre-announcement price), which would cost VIC members 20%. However given the improvement in fundamentals and some sort of capital return as a backstop, I view this as an absolute worst case.

Knott Partners Form 4 - "Pursuant to a redemption request by the sole limited partner (the "Redeeming Limited Partner") of Knott Partners Offshore Master Fund, L.P. (the "Master Fund"), on October 1,2012, the Master Fund made a pro rata distribution to the Redeeming Limited Partner for no consideration of the securities of the Issuer set forth in Column 4 of Table". http://www.sec.gov/Archives/edgar/data/808722/000110465912067343/xslF345X03/a4.xml

Most Recent WWAY Investor Presentation from Sept 2011 - http://www.westway.com/documents/Westway%20Presentation%2009-26-11%20New%20York%20Oppenheimer%20FINAL2.pdf

Imminent completion of strategic review process, most recent WWAY disclosure quoted below describes a very mature process -

On June 13, 2012, we announced that the Company entered into final negotiations to sell Westway Feed Products and certain bulk liquid storage terminals located in Dublin, Ireland; Esbjerg, Denmark; and Liverpool, Hull and Grangemouth, United Kingdom (the “European Terminals”) to an affiliate of ED&F Man. The proposed transaction remains subject to, among other things, execution of a binding purchase agreement, a shared services agreement, regulatory clearances and the sale to a third party of Westway Terminals.

On August 2, 2012, we announced that the Company entered into final negotiations with a selected group of bidders to possibly acquire our Westway Terminals business. On August 2, 2012, we also announced the postponement of our annual meeting of stockholders, originally scheduled for August 6, 2012, to allow the Special Committee and our Board of Directors additional time to complete the evaluation of strategic alternatives available to the Company. The Board has not yet set a new date for the annual meeting. The Board has further decided that, until the conclusion of the Special Committee’s strategic evaluation process, consideration of matters affecting the capitalization of the Company, including the declaration of any dividends, will be deferred.

In addition, we are currently negotiating with a selected group of bidders to possibly acquire our Westway Terminals business, which would occur through the acquisition of Westway Group, Inc.’s public equity securities following, or concurrent with, the sale of Westway Feed Products and the European Terminals.