Interstate Bakeries (IBCIQ-OTC)
by A.G. Edwards & Sons (4.10, Sept. 30)
Bankruptcy causes us to move to a Sell rating, and...as of Nov. 1, we will terminate coverage on Interstate Bakeries, due to the uncertainty presented by the recent bankruptcy filing. Our rating prior to coverage termination was Sell/Speculative for shares of Interstate Bakeries. Investors are advised not to rely on that rating for future investment decisions....
On Sept. 22, the company announced it had filed for Chapter 11 bankruptcy....while we believe a series of restructuring initiatives could well produce some enterprise value over and above the current $530 million or so in net debt (our estimate) and $180 million in equity value (current market capitalization), we are not inclined to wait around and assume the risk associated with continuing to hold the stock in the early stages of a bankruptcy reorganization.
We were well aware of the challenges at Interstate leading up to this bankruptcy filing and believed, essentially to the end, that while the company would technically be in violation of its debt covenants, the banks would offer some reprieve to help extract this company from financial peril. While that did not occur, we sense that the burden of significant union demands, and a short-term squeeze on cash...essentially created the perfect scenario for this bankruptcy filing.
While low-carb trends and energy costs were key trends working against the company, the final tipping point was the deficiency of the information-technology system, which in turn kept the 10-K from being filed and the former CEO and current CFO from signing the Sarbanes-Oxley provision in the document.
The brands and the organization likely have value beyond today's level, and we believe that value could be extracted in some way -- restructuring the asset base, breaking union contracts, asset sales, or through other means. Although fully participating in any value creation is always questionable following a bankruptcy filing, especially for equity holders. The fate of Interstate is really in the hands of the lenders. |
