Friday, May 7, 2010

Yep, the insiders are going to run off with Rock of Ages.....(ROAC)




After the close, Rock of Ages(ROAC) - no not the Def Leppard song! - announced they have received a "going private proposal" from the Swenson brothers, who between them own most of the company's voting shares.

Back in August, I thought the shares had upside, but I worried that the Swenson brothers might take the company off our hands before earnings improvements kicked in. At ROAC's size, the public company compliance and reporting fees alone are reason enough to go private...

From August 27th:

I just got off the phone with CFO Laura Plude, who graciously answered a few of my questions. Quarry segment results were greatly improved (see below), thanks to strong Chinese demand. I asked if the improvement in results at their Bethel White Quarry (which they cited as the big boost to earnings) could continue, and was told that not only would it continue but we might see even better improvement due to equipment repairs/upgrades and other efforts.
As they're a small company, I inquired as to the "public company costs"(auditors, SEC compliance, etc) they incur, because at this size they can be a very hefty percentage of costs. Ms. Plude said they were previously about $1million per year but have probably shrunk to $700k -->> that's still 10cents per share on a sub-$3 stock, yuck.
I like the CFO's upbeat view, and the operational improvements that we've seen, but the nagging worry I have here is the ownership of the stock. Two brothers (the former CEO and now Chairman of the board is one of them) own most of the class B shares, which have ten times the voting rights of class A shares -->> the company is totally in their control. If things look poised to take off, there's not much (aside from a heavy debtload) to stop them from taking the company private and enjoying the upside themselves.

Suspicions confirmed. Before we get too upset however, it should be noted that the cash offer for the company is at $4.38, a 30% premium to today's closing price and 63% higher than where we flagged them as undervalued.

I love Kurt Swenson's discussion of bank financing - it sounds like he walked past the banker's office and threw a paper-airplane-note through his window:
We have had a preliminary meeting with Swenson Granite's long time lender and they have informally indicated an interest in participating in this transaction, but we have no comfort letter or financing commitment at this juncture. I also have personal relationships with the Company's current lenders.

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