Eden Bioscience Corporation (NASDAQ: EDEN)

May 8, 2009 · 4 Comments

Bookmark and Share

We are adding Eden Bioscience Corporation (EDEN) to our ValueHuntr Portfolio. On December 5, 2008 the company announced its intention to dissolve, following the board’s consideration of strategic options to maximize shareholder value. The Company intends to hold a special meeting of shareholders to seek approval of the liquidation plan on May 20, 2009. At its current market price of $1.40/share, the company is trading at a discount to our conservative estimate of $1.64/share value at liquidation.

On an April 1, 2009 DEF14A SEC filing, the company’s management estimated a total liquidating distribution of between $1.27 and $1.42 per share. In particular, they expect to make an initial distribution of up to $1.00 per share within 45 days after the effective date of dissolution, and the rest of the distribution six months after dissolution has been approved. Our analysis indicates a slightly higher liquidation value than management has provided. However, investors should be aware that the margin of safety for this particular investment is smaller than in our typical case, so a smaller portfolio allocation would be desirable if this is in fact the case.

About

Eden Bioscience Corporation is sells harpin protein-based products to the home and garden markets in the United States. The company offers Messenger, Messenger Seed Treatment, and MightyPlant with Messenger Gold products for the protection of plants and seeds, and the promotion of plant health. Its products help plants to grow through stress and improve plants uptake of nutrients. Eden Bioscience sells its products through independent distributors and retailers.

On December 5, 2008, the Board of Directors approved the complete liquidation of the business. The press release indicates the following:

Eden Bioscience Corporation announced today that its Board of Directors determined, in its best business judgment after consideration of available strategic options, that it is in the best interests of the Company and its shareholders to liquidate the Company’s assets and to dissolve the Company. The Company’s Board of Directors approved a plan of dissolution and liquidation of the Company (the “Plan”), subject to shareholder approval. The Company intends to hold a special meeting of shareholders to seek approval of the Plan and will file related proxy materials with the Securities and Exchange Commission in the near future.

The Plan contemplates an orderly wind down of the Company’s business and operations. If the Company’s shareholders approve the Plan, the Company intends to file articles of dissolution, sell or otherwise dispose of its non-cash assets, satisfy or settle its remaining liabilities and obligations, including contingent liabilities and claims, and make one or more distributions to its shareholders of cash available for distribution, subject to applicable legal requirements. Following shareholder approval of the Plan and the filing of articles of dissolution, the Company would delist its common stock from NASDAQ.

In February 2007, the Company completed the sale of its proprietary harpin protein technology and substantially all of the assets related to its worldwide agricultural and horticultural markets to Plant Health Care, Inc. Since that sale, the Company’s business strategy has been to use any revenue generated by its home and garden business to support the Company’s continued operations while it explored whether there may be opportunities to realize potential value from the Company’s remaining business assets, primarily its tax loss carryforwards. Despite its significant efforts, the Company has been unable to identify an acceptable transaction that would enable it to implement this utilization strategy. At the same time, the Company has continued to incur net losses in its home and garden business. Given these and other circumstances, the Company’s Board of Directors, after careful evaluation of strategic alternatives available with respect to the Company’s future operations, concluded that the distribution of the Company’s assets in liquidation was in the best interests of the Company and its shareholders when compared to other alternatives.

On April 3, 2009 EDEN filed the SEC proxy regarding the company’s voluntary dissolution:

Dear Eden Bioscience Corporation Shareholder:

On May 5, 2009, we filed with the Securities and Exchange Commission our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2009 (the “Form 10-Q”). The Form 10-Q, which is enclosed with this letter, contains important business and financial information about our company and should be read carefully.

As previously announced, a special meeting of shareholders will be held on May 20, 2009, at 9:00 a.m., Pacific time, at the Country Inn & Suites By Carlson, 19333 North Creek Parkway, Bothell, Washington 98011, for the following purposes:

1. To consider and vote upon a proposal to approve the voluntary dissolution and liquidation of our company pursuant to a plan of complete dissolution and liquidation (the “Plan of Dissolution”).

2. To consider and vote upon a proposal to adjourn the special meeting to another date, time or place, if necessary in the judgment of the proxy holders, for the purpose of soliciting additional proxies to vote in favor of Proposal 1.

3. To transact such other business as may properly come before the meeting and any adjournments or postponements thereof.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF PROPOSALS 1 AND 2.

The proposal to approve the Plan of Dissolution requires the affirmative vote of at least two-thirds of the outstanding shares of our common stock and the proposal to grant discretionary authority to the proxy holders to adjourn the special meeting requires that the votes cast in favor of the proposal exceed the votes cast against the proposal. Therefore, it is very important that your shares be represented at the special meeting.

Valuation

At $1.40/share, we believe the company is slightly undervalued relative to our estimated liquidation value of $1.64/share, which implies a potential absolute return of 17% at liquidation. Our analysis includes off-balance sheet arrangements, cash burn assumptions from March 31, 2009 filing date to date of liquidation, and the costs associated with liquidating the company’s assets.

eden_balance

Off-Balance Sheet Assets

The company may be able to realize benefits due to its tax loss carryfowards. For the sake of conservatism, we assume no tax benefits in our analysis for liquidating value. The company’s latest 10Q explains the company’s tax situation:

The Company files a U.S. Federal and certain foreign and state tax returns and did not record an income tax benefit for any of the periods presented because it has experienced operating losses since inception. The Company’s total U.S. Federal tax net operating loss carryforwards were approximately $118.8 million at December 31, 2008 and expire between 2009 and 2027. The Company’s total foreign tax net operating loss carryforwards were approximately $4.3 million at December 31, 2008, of which $1.4 million expires between 2011 and 2018 and $2.9 million does not expire. The Company has total net operating loss carryforwards in 19 states that range between $12.6 million to $2,000 per state and expire between 2009 and 2027. The Company’s total general business credit carryforwards were approximately $1.4 million at December 31, 2008 and expire between 2013 and 2026.

If the Company were to undergo an “ownership change” as defined in Section 382 of the U.S. Internal Revenue Code (the “Code”), its net tax loss and general business credit carryforwards generated prior to the ownership change would be subject to annual limitations, which could reduce, eliminate, or defer the utilization of these losses. Based upon an analysis of past changes in the Company’s ownership, the Company believes that it has experienced ownership changes (as defined under Section 382) on March 20, 1996 and October 2, 2000 and absent any other ownership changes in the future, there are no significant limitations on the Company’s future ability to use net operating loss carryforwards generated prior to those dates. The Company does not believe it has experienced any other ownership changes that would further limit its future ability to use net operating loss carryforwards generated after October 2000.

Conclusion

We have added Eden Bioscience Corporation (EDEN) to our portfolio because at its current market price of $1.40/share, the company is trading at a discount to our estimate of $1.64/share value at liquidation, which represents an expected absolute return of 17% if liquidation is approved. However, already at the upper level of the $1.27-$1.42 guidance provided by management, the margin of safety for this investment is not as large as in our typical case.

Disclosure: We currently have a position on EDEN.

Categories: Liquidation · Special Situations · Valuation · Value Investing
Tagged: EDEN, eden bioscience, Liquidation

4 responses so far ↓

  • LUIS // May 8, 2009 at 2:54 pm | Reply

    I just started reading your blog today and am very impressed with your work. It is pretty clear to me that your investment thesis is well thought out and disciplined.

    So with that, I’ll say that your liquidation value seems a little high…Management estimates liquidation value of the firm at between $1.27 and $1.42 per share (DEF 14A form filed on April 1).

    I hope you are right and they are wrong, cause it appears that EDEN has been a major destroyer of wealth since 1994.

    L

    • ValueHuntr // May 8, 2009 at 3:45 pm | Reply

      Thanks L. Yes, my estimate is a bit higher than management expecations. I actually expect the company to benefit from loss carryforwards, but it will take at least 9 more months to realize that benefit. This is not what our typical investment would look like, but I think there is a potential for returns beyond $1.42. We’ll see what happens.

      ValueHuntr

Leave a Comment