Special Situation: Delisting by Jaclyn (JLN)

Jeff, who started a new blog called Circle of Competence, suggested a special situation play with Jaclyn (JLN). Jaclyn, which is a clothing manufactuer with a market cap of around $20 million, is planning to delist from the AMEX in order to save regulatory compliance costs (supposedly up to $500k per year). In order to accomplish that they supposedly have to reduce the number of stockholders below 300 and are going to do it by going through a reverse split followed by a forward split with a ratio of 1-to-250. Anyone owning less than 250 current shares will be offered $10.21 per share (an upside of around 22% right now). Note that this size limitation pretty much rules out anyone with a big portfolio or a fund manager.

I have never participated in any deal like this before but am seriously thinking about it. I have only been investing seriously for a few years now and all of my past experience is with mergers & acquisitions (currently pending BCE, along with Tribune and ABN-Ambro (mom's portfolio) last year; unsubstantiated takeovers (really dumb investing) in 24/7 Real Media and PetroKazakhstan.) Jaclyn is a special situation play that is ideal for a small investor. Institutional investors and large investors will not try to take advantage of this buyback given the small size.

Average volume of trading is about 4500 right now. Given this thin trading, if you do buy this stock make sure you place a limit order or are confident that the market price won't budge because of your purchase. This is a less risky than many of the pending M&A deals in my opinion. Note that if you are intrested you should buy less than 250 shares, which translates to $2079.15 at today's price (249@$8.35).

My quick analysis of Jaclyn buyout based on Buffett's template that I have outlined in the past follows...

(Here is a recent press release outlining the situation. Anyone seriously looking into this should read the full documents filed with the SEC. Also make sure you read Jeff's blog post for additional insight.)


JLN takeover price: $10.31
Closing Date: Unknown (key shareholder vote on May 7,2008 so that's the earliest; latest probably 3Q08)
Current price: $8.35

Gain if deal closes: 22.28%
Loss if deal fails (guess): -28.14% ($6)
Probability of success (guess): 95%
Probability of failure (guess): 5%

Expected Return = 0.95*0.2228-0.05*0.2814= 19.75%

I place a high probability of success and the overall return seems attractive. I'll think about buying some shares (make sure to buy 249 or less).

Buffett's Four Key Questions

(1) How likely is it that the promised event will indeed occur?

I place a very high probability of success given that the steps Jaclyn needs to accomplish almost seem to be written in stone. In particular, as Jeff alludes to in his post, majority of shareholders seem to support the delisting so shareholder vote is likely to be successful; bank financing is not an issue; AMEX will easily satisfy the delisting after conditions are satisfied; getting listed on Pink Sheets OTC won't be a problem.

(2) How long will your money be tied up?

A few weeks to 6 months is my guess.

(3) What chance is there that something still better will transpire - a competing takeover bid, for example?

Zero.

(4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?

What can cause a deal failure is if the company posts a huge loss or runs into some unexpected financial problems. The loss upon failure is hard to figure out in this case. Not only do I not know anything about this company or its industry, it is a thinly traded stock with huge price ranges. The 52wk low is $2.10 according to Yahoo Finance so the stock may drop as much as that (in an extreme case). I picked $6, which is roughly the average over the last 2 years, because there doesn't seem to be anything terrible with their earnings or balance sheet. JLN posted a large loss about an year ago but it seems to be on a good track for the last few quarters.


If the Deal Fails...

I have zero interest in this company. Sell if above cost (including commissions). Otherwise decide whether to hold or sell at an opportune time for a loss. The amount of capital invested isn't very large so locking up capital for a longer period is fine...

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6 Response to Special Situation: Delisting by Jaclyn (JLN)

May 2, 2008 at 5:17 PM

Glad you enjoyed the post, Sivaram. I like your 4-point analysis there, a great addition to what I already wrote. You quantified some of my vaguer statements.

Looks to me like a good situation for small investors.

-Jeff
www.circleofcompetence.blogspot.com

May 2, 2008 at 5:42 PM

I am participating in this Special Situation as well. I've been following it since February over at Fat Pitch Financial's Contributors Corner.

May 4, 2008 at 5:29 PM

The four point analysis is from Warren Buffett... so thank him :)

May 9, 2008 at 1:33 PM

Had a few observations on the situation...

-- JLN says there are around 1M shares held in street name in total. They've assumed that 30% of these shares will be odd lots less than 250 shares. This may prove to be a low estimate.
-- TD Banknorth has allowed borrow up to $3M. Based on their assumptions, they believe the total cost of this would come to $3.7M. If an extra 300k shares end up as odd lots, that would imply total incremental costs of perhaps $3.5M. This isn't permitted under the terms of the current revolver, but TD Banknorth says they'll work with JLN to work something out.


So... my questions are these:
--To delist, when exactly do they need to have less than 300 recordholders? My understanding is that it's *after* the transaction, and not before.
--What will JLN do if the % of total street name shares in small lots goes to 60%?
--Will they buy everyone out prior to the Effective Date, or the Record Date? They say the Effective Date, but this seems a little unclear.

May 10, 2008 at 8:24 PM

Good question Curt. I don't know the real answer for sure but my understanding is that the number of holders have to less after the reverse-forward split. The whole point of the double split is to satisfy that 300 holder requirement.


The point you bring up regarding the estimate of the number of shareholders is a real risk (and I should have pointed that out in my post). Although there is the possibility that there are way more odd lot holders, I am not sure how true that is. This is a company that hardly anyone has heard of so it would surprise me if, say, an extra 100,000 people own under 250 shares. Nevertheless, it is a risk that you should consider if you are considering taking a position. I personally don't think it's a big threat (my big concern is the company running into some financial problem in the future (retailers are suffering) and pulling the plug on the whole thing).


The dates are unclear to me as well. In fact, a lot of things are quite unclear with this company. For instance, they supposedly were to originally have a shareholder meeting on the 7th of May, and we haven't heard anything that was decided on that meeting. I'm not even sure if a meeting was held.

May 11, 2008 at 1:47 PM

Sivaram,

I put up a response to Curt's requests in my article as well, so take a look at that...
It's here:
http://circleofcompetence.blogspot.com/2008/04/jaclyn-arbitrage-for-little-guys.html

I would be very surprised if there was a massive understatement by JLN on the number of odd-lot shares. Number 1, part of their due diligence prior to the transaction is finding out exactly how many <250 share holders are out there. The 250 share limit is not arbitrary- JLN picked that number for a reason based on the fact that A. they could afford to buy out everyone with less than 250 shares
and B. Buying out everyone with <250 shares would put them under 300 record holders.

To me, that seems like a simple part of their DD process.

Additionally, if they are wrong, they have a huge amount of availability on their LOC, and extra cash on their balance sheet.

250 shares is not a lot of shares at 7.50/share- thats less than $2,000 of capital there. For them to find an additional $1mm in costs, there would have to be over 500 holders that they missed. For Curt's hypothetical 300,000 shares, they would have had to miss 300k/250 or 1,200 holders, a substantial amount considering they are trying to get under 300 in order to delist.

Regarding the dates: when the make an official date, they'll update the proxy and let us know, so I wouldn't worry there.

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