More Viceroy Homes News

There was another article in the National Post recently about the Viceroy Homes privatization. It clearly outlines the hypocrisies of the deal, and mentions this blog site. Click here to get the complete article

On another note, one very astute shareholder recently forwarded me his analysis of the latest quarterly earnings for Viceroy Homes. It follows:

Results issued last night are not as bad as expected. Without currency translation loss on USA assets, would have actually made a small profit. Not bad, given the housing crunch. Still no debt and now over $16 million in cash.

Of interest is Note 3: Capital Stock, item b) Issued capital stock of the company is as follows:

If my math is correct, the average issue price of the Class A shares is about $4.92, while the effective average issue price of the Class B shares is under $0.15!! Not bad for the Class B shareholders since they were collecting annual dividends of $0.30 per share until recently, on top of being paid generous salaries.

So the Class A shares have put up the vast majority of the equity. Yet the Class B shareholders want the Class A shareholders to sell at $4.25, while the 3 Class B shareholders continue to keep their shares, at least for now, to profit from the Russian venture. Not a great deal as far as the Class A shareholders are concerned.

The true worth of Viceroy Homes

To be absolutely clear, although we are against the current privatization deal, we would be open to exploring a buyout, should the purchase price be fair and reasonable.

The current offer to take the company private for $4.25 per share is absolutely ridiculous, and should not be considered what so ever.

Evaluating the true value of a company is quite difficult and somewhat subjective. But throught he following paragraphs I will show you exactly why we feel the current offer is way too low.

Following info from 2007 annual information form


Earnings

Viceroy Homes went public in 1986.

On September 1, 1993, the Company issued 2,100,000 Subordinate Voting Shares pursuant to a private placement of special warrants. The net proceeds of the equity issue were approximately $9,654,000. So each share was purchased for $4.6

In 1997, through a sale of special warrants, the company issued 2,200,001 shares for proceeds of $20,529,000. So each share was purchased for $9.33

In 1997 the company had Revenue of 46.879 Million and Net income of $2,053,000

Now in 2007, the management would like to take the company private through a share buyout at $4.25 per share. Has the Value of the company, it's assets and its potential really dropped from $9.33 per share to $4.25 per share in ten years?

Well, in 2007, As per the 2007 Annual report, Viceroy had Revenues of 82 Million and declared a loss of 1.3 Million. So, we can see that the business has actually grown over the years by over 40 million in revenue. Although the company lost a small amount of money in 2007, in 2006 the company actually made 4.1 million dollars on revenue of 102 Million dollars. So clearly, although 2007 may have been a rough year, the company as a whole has grown considerably and in 2006 it was highly profitable.

Except for 2007 and 2005, Viceroy homes has been profitable for every year since 1997, in many cases reporting profits in excess of $5 million per year. Why should we then not assume that our latest troubles, since 2007 are not only temporary blips in an otherwise fine earnings track record.

Assets

There are currently 11,047,217 common shares outstanding (both Class A and B) and at $4.25 per share, the company is being valued at about 47 Million dollars.

If we look at the latest balance sheet of the company, we see Assets of 57.4 Million vs Liabilities of 15.5 Million and tax liability of 3.1 Million for a Shareholder equity of 38.6 Million.

In the assets, there are 25.4 Million worth of property plant and equipment. What the numbers don't tell is that most of the land was purchased decades ago, and since the land is carried at book value (purchase value) its true current worth is not reflected.

The other property and machines have been updated over the years and are still technologically current.

It would be conservative to say that the actual value of the land and property has almost doubled over the last 50 years, so even though the company is carrying the assets at only $25.4 Million, they would be appraised at least to $50 Million.

When we use this number to value the assets, we get a shareholder equity value of approximately $63 Million. Considering the 11 Million shares outstanding, we can arrive at a book value for Viceroy Homes of $5.75 per share. This is absolute bare minimum and represents no premium to book value.

Given the leading position of the company in the manufactured home industry and its well developed network of dealers, a fair offer for the company would range from $6 to $7 per share.

Our intent with voting against the privatization deal is to either:

Stop the buyout, with the intent of returning the company to profitability, and return the dividend, under the leadership of a more competent management team,

or

Force the Class B shareholders and the Russian buyout firm to raise their bid for the class A shares into the $6 to $7 price range.

Given the level of positive response from individual shareholders as well as larger institutional shareholders who own over 25% of the Class A shares, we remain completely confident in our ability to meet our objectives.

New article in National Post raises questions about Privatization

I would encourage everybody to take a look at a new article written in the National Post concerning the privatization deal. You can get the full article here.
The article is by Barry Critchley

Here are some excerpts:

"none of the retail shareholders he has contacted is pleased with the deal. In his view, Viceroy's breakup value, even without the Russian deal and clientele, exceeds $7 a share.

"They have no debt, have good technology which requires better management, and own significant assets, including land purchased more than 50 years ago and carried on the balance sheet at cost," he said.

For the rest of the shareholders, their objections include this query:

If the deal is so good for the public shareholders -- at the time, the offer was described as a 37% premium to the recent trading price-- why aren't management shareholders selling?

It's unusual for a company to be privatized and for the insiders to continue to hold stock.

The no-selling by the insiders -- some of whom started the company more than 50 years ago -- led McVety to wonder, what is the real game plan? In his view, it is nothing more than a way for the holders of the class B shares to sell their stake to the Russians at a later date -- but for a higher price than $4.25 a share.

And those suspicions were heightened when William Simpson, Viceroy's chief financial officer, said that as a result of OPIN's investment, Viceroy hopes to gain a "bunch of business." If that does happen, no prizes for guessing which Viceroy shareholders will gain."

Recap:

Again, I encourage everyone to read the complete article. It clearly states our concerns and shows exactly why we feel that if you vote for this deal, you are being swindled. The vast majority of the people I have spoken with are completely against this deal and we will be voting against it.

The true value of Viceroy Homes is considerably more than $4.25 per share, and we hope that by voting against the deal, we will ultimately be able to get a much better price.

Viceroy has a long history, and given the huge insider ownership, management has a strong interest in keeping this company profitable and viable. The privatization is a tactic to maximize their own wealth at the expense of regular shareholders. If management really wants to take the company private, they should be prepared to raise their bid to a fair price (at least $6 per class A share in my opinion)

Mario Rizzi

514 967 9827