Description

I believe that Crimson Wine Group is a prime candidate to be taken private or sold to a strategic buyer at a substantial premium.  With a very cheap valuation supported by high-quality assets, a cash-rich balance sheet, substantial recent programmatic insider buying taking each primary owner up to 10% (20% total stake) and 3+ years post-spin, the stars appear to be aligning for CWGL.  I consider downside protection to be solid, and believe upside potential is likely 50-100% in a sale, depending on the type of buyer, should a transaction occur.

Based in Napa, CA, Crimson Wine Group, Ltd. (“CWGL”) is an owner and operator of boutique, estate-based wineries that produce in the finest wine growing regions of California, Oregon and Washington.  The company’s wineries include Pine Ridge Vineyards, Seghesio Family Vineyards, Archery Summit Winery, Chamisal Vineyards, Double Canyon Vineyards and Seven Hills Winery.  Founded in 1991, CWGL was for years a division of well-known conglomerate Leucadia National Corporation (NYSE: LUK).  In 2013, in conjunction with Leucadia’s acquisition of investment banking firm Jefferies LLC, LUK leadership Joseph Steinberg and Ian Cumming believed value would be better realized for LUK shareholders through a tax-free spin-off of CWGL to LUK shareholders, which was completed in February of that year when LUK common shareholders received one share of CWGL for every ten shares of LUK owned.

Keys to the Thesis

• Underfollowed spin-off, with no sell-side analyst coverage (at least that I can find).
• Extraordinarily valuable land assets in premier locations.  CWGL owns 860 plantable acres of land, 740 of which are currently planted.  Of these, 158 acres are in five Napa Valley, CA appellations:  Stags Leap District, Rutherford, Oakville, Carneros and Howell Mountain.  In addition, the company owns 101 acres in Willamette Valley, OR, 99 acres in Edna Valley, CA, 318 acres in Sonoma County, CA, and 184 acres in Horse Heaven Hills, WA.
• Ultra-clean balance sheet, with $33 million of cash and investments (Treasuries and CDs) and only $15 million of debt.
• Cheap valuation, as the company’s book value is $206 million ($8.58/share), while its market capitalization is only $224 million at a $9.35 share price.  Current enterprise value, net of debt and cash, is only $206 million.  It is worth noting that property and equipment is $118 million of this value, and land is not marked to market over time.
• To indicate directionally how undervalued the land may be, in January 2013, CWGL sold a non-strategic vineyard for $1.8 million, after selling expenses, and booked a pre-tax gain of $0.7mm.  In May 2014, the company sold a non-strategic unplanted parcel of land in Washington for $3.9 million, after selling expenses, and booked a pre-tax gain of $1.8 million.  Sixteen years ago, in 2000, there was an article in Wine Spectator indicating that Pine Ridge alone had been receiving offers upwards of $150 million.  While that may have been a product of the internet bubble, that was a long time ago and prime property has reached new heights in California, in many cases surpassing those 2000 heights.
• In the last two years, there has been a very large ongoing program of insider stock purchases by officers and directors, but most notably by former LUK leaders Joseph Steinberg and Ian Cumming, who have taken turns executing their insider purchases on nearly a daily basis via Rule 10b5-1 plans.  Such plans allow insiders to transact in their stock on a pre-determined price and time basis regardless of whether they come into possession of material non-public information.  It is far more normal to see such programs used by insiders to sell stock than to buy stock, and this is a significant reason why I own the shares.
• Steinberg and Cumming each now owns approximately 2.4 million shares, collectively representing approximately 20% of CWGL’s shares outstanding. 
• Following a tax-free spin-off, tax laws generally prohibit change of control transactions within two years of the effective date.  This date would have passed last year, and the company would now be eligible to be sold to a third party or taken private.  Notably, Ian Cumming’s son John Cumming is CWGL’s chairman, so the top shareholders also effectively control management.
• On a standalone basis, the company generates approximately $61 million of revenue, $33 million of gross profit, and $15 million of EBITDA.  As part of a larger company, general and administrative expenses could likely be reduced by $3-4 million and selling and marketing expenses perhaps by $5-7 million.  As such, I believe EBITDA as viewed by a strategic buyer with an existing salesforce would likely approximate $25 million.

In summary, I believe that the downside risk in owning CWGL shares is low, as the business is very conservatively capitalized and with highly valuable tangible assets.  The aggressive recent insider share purchases caught my attention, and particularly so since the principals are known for being extraordinarily savvy investors.  It would not surprise me if these purchases were an attempt to buy in as much inexpensive stock as possible in advance of a take-private bid or outright sale to a strategic buyer, but that is pure speculation.  In that case, I would not be surprised to see a valuation 50-100% above the current price, in the $14-18 range.

Key Risks

• Effectively controlled situation by Joe Steinberg, Ian Cumming, and son John Cumming.  Could make poor decisions, but I believe this is unlikely given their large and increasing ownership stake.
• Vagaries of Napa Valley property market and wine industry.

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.  Please do your own research.

Catalyst

• Value investor awareness and understanding.
• Potential use of excess cash to repurchase stock, perhaps through a tender offer.
• Take-private transaction or sale of the company to a strategic buyer.