Meadow Valley Surprise

Today, I’m going to discuss the second of the three special situations that I mentioned in yesterday’s post on the Puget Energy buyout. This special situation was with Meadow Valley Corporation (MVCO), a construction service and materials company operating in Nevada and Arizona.

The special situation with Meadow Valley involved the buyout of the company by the private equity firm, Insight Equity.  Back in July of 2008, Insight Equity offered to acquire Meadow Valley for $11.25 per share in cash. The original plan was to have this deal close by December 31, 2008.

Things started to get complicated after the steep market selloffs in November. My guess was that Insight Equity started getting cold feet given the current economic climate. Meadow Valley received a letter on December 1, 2008 from Insight Equity alleging that it believed that Meadow Valley may have suffered a “Material Adverse Effect” and that this violated one of the conditions of the merger agreement. Insight Equity believed the material adverse effect “may have” been a result of an alleged decrease in the fair market value of Meadow Valley in excess of $6.0 million since the date of the Merger Agreement. Given all the talk about major government stimulus spending on construction and the solid financial results Meadow Valley just posted, this arguement seemed weak at best. Insight Equity just wanted to push Meadow Valley to reduce their price, or at the minimum, stall the deal.

As luck would have it, I had just decided to buy shares of Meadow Valley in the morning of December 1, 2008 just before the above news broke. I added 500 shares of MVCO at $9.61 for a total cost of $4,811.95. My trade was triggered automatically by my limit order right as the news broke about Insight Equity. If I remember correctly, I think MVCO traded down into the $7 region. I was kicking myself all evening over this trade.

After I settled down a bit, I started to think though what was happening. I came to the conclusion that Insight Equity was being opportunistic and was hoping to push down the buyout price to probably $10 even or they were potentially stalling in order to deal with cash flow problems from the economic turmoil in the financial markets. Regardless, I’m sure they realized that Meadow Valley would also be a potential great play on any major stimulus package.

Meadow Valley pushed ahead with plans as if nothing had changed. By the end of December, they held a shareholder meeting where stockholders approved the $11.25 merger agreement. Then in January when the original merger deadlines where passed, shares of MVCO plunged into the $6 territory. I was a bit worried, but I had decided to load up on Meadow Valley if the deal was called off. It was looking like a good long term value play on the economic stimulus package. By mid-December most market participants had written off any chance of a merger still happening with Insight Equity. However, a member of Fat Pitch Financials Contributors Corner had a long conversation with the Meadow Valley CFO that lead him to believe there was still a good chance that this deal might happen and that the company was in healthy shape.

On February 2, 2009, we received the surprising news that the Meadow Valley merger closed under the original terms. All of us were surprised, and none of us expected it so suddenly without any prior news. In fact, MVCO lasted traded that day at $6.41 and then only jumped up to $11.25 in after hours trading.

On February 4, 2009, I received $5,625 for the 500 shares held in the Special Situations Real Money Portfolio. That was a 16.9% gain on my original (rather expensively acquired) investment. I held the shares for 66 days. Therefore, my average annualized return came out to 93% (16.9 * 365/66) for this emotionally challenging special situation. I’m sure some of the other members of Contributors Corner who bought in January made even more impressive returns on this opportunity.

I have incentivized the members of Contributors Corner by providing three day membership extensions for being the first to share valuable news or research on new or existing special situations that we are tracking. This leverages the years of collective experience we have with these unusual market anomalies. So by joining Fat Pitch Financials Contributors Corner, you not only get my research, but you also get breaking news and analysis provided by our collective efforts at a very affordable price.

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