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Tuesday, May 18, 2010

Regency Affiliates, Inc.

Regency Affiliates, Inc. (RAFI) is a publicly traded, they are the parent company of several subsidiary business operations. This play on this name is a take private that has already been approved by shareholders and the board and is currently awaiting comments (if any) from the SEC. The deal is as follows:

They will be doing a 1-for-100 reverse stock split immediately followed by a 100-for-1 forward stock split. The purpose of the split / re-split is to reduce the shareholder count below 300. Under SEC rules, a company with a class of securities registered under the Securities Exchange Act of 1934 may choose to terminate its registration if certain conditions are met - one such condition is if the securities have fewer than 300 record holders. By de-registering they will be able to avoid costly SEC listing requirements. Stockholders owning fewer than 100 shares of common stock immediately before the reverse stock split will no longer own such shares after the effective time and, in lieu thereof, will receive from RAFI $6.00 in cash, without interest, for each of such shares of common stock.

Based on this and today's closing price, investors can make a quick 43% return (non-annualized and excluding trading fees). Based on my discussions with the GC and with a couple of corporate lawyers the only risk is if the SEC comments on the transaction, thus stalling the process. The transaction was submitted to the SEC when they filed their proxy on March 1, 2010. The SEC than has (again according to the GC and confirmed by others) 60 days to review the transaction and if no comment is made the stock will split and repurchase will commence.

It almost doesn't matter what RAFI does but for those who care:
RAFI is more than 50 years old. It was reorganized in 1987 to be the successor to Transcontinental Oil Corporation, which existed since 1947. RAFI owns a partnership interest in the Security Land and Development Company Limited Partnership. The Partnership owns a two story office building and a connected six story office tower occupied by the United States Social Security Administration Office of Disability and International Operations under a fifteen year lease, expiring in 2018. On April 30, 2004, RAFI, through a newly-formed, wholly-owned subsidiary called Regency Power Corporation, acquired a 50% membership interest in MESC Capital, LLC, from DTE Mobile, LLC. MESC Capital was formed to acquire all of the membership interests in Mobile Energy Services Company, LLC. Mobile Energy owns an on-site energy facility that supplies steam and electricity to a Kimberly-Clark tissue mill in Mobile, Alabama. RAFI owns, through it 75% owned subsidiary, 80% of National Resource Development Corporation which has as its principal asset approximately 70 million + short tons of previously quarried and stockpiled rock located at the site of the Groveland Mine in Dickinson County, Michigan.

As of the most recent 10-Q (9/30/09) RAFI has approximately $7m in cash and marketable securities vs. $0 in debt.

So to reiterate the simplicity of this thesis - buy 99 shares (use limit orders so you don't get bad pricing due to the illiquidity) then sit and wait and receive $6 per share or approx 43% return in less than a month or so (annualize if you want but the number is satisfactory enough in its un-annualized state). Assuming you can get closing pricing your profit potential is ~ $180 before commissions so around $170 ex commissions. It is true you won't profit greatly from this trade, but at least its enough of a profit to go out to eat....maybe there is such a thing as a free lunch...

Target: $6.00 Current Price: $4.19

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