LL - LL Flooring Receives A Non-Binding Offer At $5.85 Per Share

2023-10-16 18:56:14 ET

Summary

• Live Ventures has made a non-binding offer of $5.85 per share in cash to acquire LL Flooring.
• The offer appears to be at a good price for LL Flooring.
• Live Ventures may have challenges funding the deal given that the deal price (including assumed debt and adjusted working capital deficit) is more than its current enterprise value.
• Potential acquirers will need to have sufficient liquidity to deal with LL Flooring's cash burn in a turnaround attempt as well.

LL Flooring ( LL ) has received another non-binding offer , this time from Live Ventures ( LIVE ), which offered $5.85 per share in cash. This was slightly higher than founder Tom Sullivan's non-binding offer of $5.76 per share, which was rejected by LL Flooring's Board of Directors and then l ater withdrawn by Sullivan.

I had mentioned before that I believed LL Flooring's intrinsic value was trending to around $4 per share by early 2024, so any offers in the upper-$5 per share range would appear to be beneficial to shareholders unless LL Flooring's business performance trends have substantially improved since Q2 2023.

At its current price of $3.66 per share, I consider LL Flooring a hold despite the significant 60% premium with the $5.85 per share offer. There is a high amount of uncertainty about the deal eventually going through. It is a non-binding offer and LL Flooring's Board of Directors could also reject it like it rejected Sullivan's offer.

As well, the deal size (including assumed debt and adjusted working capital deficit) is around 40% bigger than Live Ventures' current enterprise value, resulting in potential challenges for Live Ventures to fund the acquisition.

The Offer

Live Ventures has made a non-binding all-cash offer at $5.85 per share for LL Flooring. It indicates that this would add up to approximately $194 million based on 33.2 million fully diluted shares.

LL Flooring also had $40 million in credit facility debt at the end of Q2 2023 along with a substantial amount of accounts payables, customer deposits and store credits and other current liabilities.

LL Flooring's current liabilities (excluding settlement accruals and operating lease liabilities) exceeded its current assets (excluding inventory) by approximately $109 million at the end of Q2, 2023. This is what I will refer to as LL Flooring's adjusted working capital deficit. LL Flooring does have $286 million in inventory, but it is uncertain what price it would get for that inventory if some of that started getting liquidated to generate cash flow.

Factoring in those items, the total deal value would be closer to $340 million, or a bit under 0.4x LL Flooring's projected revenues for 2023.

Live Ventures' CEO Jon Isaac mentioned that the Isaac Capital Group (which he controls and manages) owns over 4% of LL Flooring's common stock currently.

Notes On Live Ventures

Live Ventures reported $27.4 million in revenues in Q2 2023 from its Retail - Flooring segment, which it entered via its $84 million acquisition of Flooring Liquidators early in 2023. This segment reported a slight $0.3 million net loss in Q2, 2023. Live Ventures was expecting this acquisition to result in $125 million per year in revenues going forward. Thus, Live Ventures paid approximately 0.7x to 0.8x revenues for Flooring Liquidators.

The Retail - Flooring segment accounted for 30% of Live Ventures' revenues in Q2, 2023, while its Flooring Manufacturing segment accounted for another 30%. So, around 60% of Live Ventures' revenues are related to flooring in some way.

Acquiring LL Flooring would make sense for Live Ventures in that context, although the deal looks relatively big for Live Ventures to handle.

At last report, Live Ventures had a market cap of approximately $86 million. It also reported approximately $150 million in net debt, based on its long-term debt (including the current portion), notes payable and finance leases less cash on hand. I have chosen to exclude operating leases from Live Ventures' net debt for the purposes of calculating its enterprise value.

The $194 million potential cash purchase price is thus 0.8x Live Ventures' current enterprise value. Adding in assumed debt (including the working capital items mentioned above) could make the full acquisition cost of LL Flooring over 40% more than Live Ventures' current enterprise value.

Financing And Cash Burn

Another way to look at Live Ventures' ability to handle an acquisition of LL Flooring would be to look at how an acquisition would affect its free cash flow.

Live Ventures reported $26.3 million in adjusted EBITDA during the nine-month period ending June 2023. It reported $9.6 million in adjusted EBITDA during the three-month period ending June 2023. Thus, $35 million to $40 million in adjusted EBITDA per year appears to be a reasonable expectation for standalone Live Ventures.

With that amount of adjusted EBITDA, free cash flow for standalone Live Ventures would be around $25 million to $30 million per year excluding working capital changes and assuming a minimal capex budget. Live Ventures already has interest costs that appear to be $10+ million per year going forward.

The interest costs for $194 million in new debt (to pay for the LL Flooring offer) would likely be $20+ million per year in the current market environment (with an interest rate of over 10%). These additional interest costs would reduce Live Ventures' free cash flow to under $10 million per year, without factoring in potential cash burn from LL Flooring's operations.

I had previously estimated LL Flooring's cash burn rate (not including working capital changes) at $75 million per year if its business results remained unchanged from Q2 2023 levels. Thus, the starting position for Live Ventures (post LL Flooring acquisition) may be to have an overall rate of cash burn of $65 million per year, which is over 0.7x Live Ventures' current market cap.

Thus, I think it could be challenging for Live Ventures to finance the deal. Live Ventures did mention that there was no financing condition to its offer, but its offer is non-binding anyway and subject to due diligence.

Live Ventures could reduce its debt by issuing new stock, but that would require a lot of dilution given its current $86 million market cap. Live Ventures would also try to implement new strategies to reduce LL Flooring's cash burn, but it also takes a while for new strategies to potentially have an impact.

Valuation

I am continuing to keep a hold rating on LL Flooring at its current share price of $3.66 per share. Live Ventures' $5.85 per share offer looks pretty good to me, given that I estimated LL Flooring's intrinsic value at around $4 per share in early 2024 based on its current business trends.

The multiple to revenue is significantly less than what Live Ventures paid for Flooring Liquidators, but LL Flooring's profit performance is also significantly worse than Flooring Liquidators. LL Flooring reported a $21 million net loss before income taxes and a $39 million net loss after income taxes in Q2, 2023, while Live Ventures' Retail - Flooring segment had a minimal net loss in that quarter.

There are significant questions about whether the deal will end up going through, though. It is uncertain whether LL Flooring will accept this offer after turning down a relatively similar price several months ago. As well, Live Ventures would have to arrange financing for a deal (including assumed debt and adjusted working capital deficit) that is bigger than its current enterprise value, while also maintaining enough liquidity to deal with potential cash burn from LL Flooring.

Conclusion

Live Ventures has made a non-binding offer for LL Flooring at $5.85 per share. This offer appears to be a good price for LL Flooring given its relatively weak recent results. I previously estimated that LL Flooring's intrinsic value would decline to around $4 per share by early 2024 based on how its business results were trending.

However, there are various barriers to the deal going through. It is uncertain whether LL Flooring will accept the offer, and the offer is also non-binding, so Live Ventures can easily withdraw the offer.

The deal price (including assumed debt and adjusted working capital deficit) for LL Flooring is also bigger than Live Ventures' current enterprise value, so arranging enough funding for the deal could be a challenge. The additional interest costs and LL Flooring's current rate of cash burn would likely result in Live Ventures having significant cash burn immediately post-acquisition.

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