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Leading brands (lbix) early warning report - possible scenarios?


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On the 1st of June 2011 I took a small position in Leading Brands (lbix) at $2,55 US a share.



What initially caught my attention was:

- They were trading well under book

- A month earlier they had announced an increase in their repurchase program by $1,000,000 (market cap was around $10 m.)


The Company’s Board of Directors has increased the amount of its share repurchase program as it believes the price of its shares remains undervalued.  As at the date of this release the Company has $1,200,000 US remaining authorized in its share repurchase program.  Since the fall of 2009 the Company has repurchased 445,000 common shares (calculated on a post consolidation basis), of which 32,000 repurchased shares have not yet been returned to treasury. As at quarter end, the Company had 3,579,000 shares outstanding.



- In the second quarter of 2010 they had taken a hit on earning with a one-time charge on a stock compensation plan


As explained in our July 1, 2010 Q1 news release, the Company vested certain stock options in order to dramatically reduce future SBC expenses and eliminate the volatility caused by the variable pricing formula mandated under GAAP using the Black Scholes model on those options. Consequently, the Company recorded a onetime SBC charge of $948,000 in Q2. Therefore, YTD net loss including SBC was $141,000 or $0.04 per share as compared to a net income including SBC of $1,012,000 or $0.25 last year.



When I took a closer look at the compensation plan, it actually seemed reasonable as a good portion had an exercise price at $3 and above.



My initial thesis:

Management´s incentive is to allocate capital in a way that increases per share value as safely as possible. At the current price, share buybacks will not only increase the likelihood of performance options getting in-the-money, but will also increase the % share of ownership of management.


What happened?

- Lbix has used its free cash flow to buy back shares and pay down almost its entire long term debt ($2,5M)

- In may 2012 the company (probably because of the illiquid nature of the stock) announced a dutch tender offer with an cash offer ranging between $4.10 and $5. The resulting offer came out at $4.10.




- As of today, the stock is trading at $4.20 and book value per share is about $3.94. I get a conservative estimate of owner earnings  between $0.4-0.5 on a per share basis.


My dilemma:

- The FCF has been way better than I anticipated, causing me to stay longer than I was planning (I had $3.5 as an exit point). However, the benefit of buybacks is gone at these prices.

- Today, the company issued an early warning report:


VANCOUVER, British Columbia, July 26, 2012 (GLOBE NEWSWIRE) -- Leading Brands, Inc. (LBIX), North America's only fully integrated healthy branded beverage company announces that its Chairman and CEO, Mr. Ralph McRae, has acquired ownership and control of an additional 2.2% of the issued and outstanding common shares of Leading Brands, Inc. (the "Company").


Mr. McRae now has direct and indirect ownership and control of 180,847 common shares and 290,500 stock options that are vested or vest within the next 60 days. In total, this represents approximately 14.4% of the issued and outstanding common shares of the Company on a partially-diluted basis, assuming exercise of all of Mr. McRae's stock options.


Ralph D. McRae acquired the purchased shares for investment purposes and may in the future acquire or dispose of securities of the Company through the market, privately or otherwise, as circumstances or market conditions warrant.



I would be very interested to hear the opinions of the members of the board, as to which scenarios they see unfolding in the near future and which consequences those scenarios might have for me as a shareholder:


A few options

- Is management aiming at going dark? And if so, should I be worried that they might try to rip me off?

- Is management aiming at taking it private? And if so, should I be worried that they might try to rip me off?

- Are they beefing up their stake before a buy-out?

- Business as usual.

- ?



One interesting perspective:

CEO Ralf McRae charges lbix $ 528,000 p.a. in "consulting fees" through a company of his. Lbix has a market cap of $10-13M and 17.78M in revenues.

Prem receives C$600,000 in annual salary as CEO and Chairman of Fairfax, with a market cap of 8.0B

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