Investors Pressure Coffee Firm to Act To Lift Stock Price

By CONOR DOUGHERTY
Staff Reporter

Disgruntled shareholders, including some members of the family that runs venerable Farmer Brothers Co., are looking to put pressure on management in hopes of boosting the company's stock price.

The Torrance-based coffee distributor is one of the area's oldest and most veiled public companies. It has long been considered undervalued, but past attempts to prod management into price-enhancing moves have been frustrated by the firm's 86-year-old chief executive, Roy F. Farmer.

"These people are running this like it's their own little candy store," said Robert Harwood, a securities attorney at Wechsler Harwood Halebian & Feffer LLP in New York. "If the controlling people don't fulfill their fiduciary obligations (to benefit shareholders) they could be held responsible."

Farmer, son of deceased company founder Roy E. Farmer, has put down a number of shareholder insurrections over the years. He owns 9 percent of the company's stock, but through trusts he controls most of his family's shares, representing 43 percent of the votes.

Some shareholders charge that Farmer has used his voting power to control the company's board. They claim that the elder Farmer is purposely keeping the stock price down, because he's primarily concerned with passing control of the company to his son, also named Roy E. Farmer, who is its president.

"The chairman's son is the president and heir apparent. One reason why they keep the stock price down is they're going to have to pay inheritance tax when (the elder Farmer) dies," said Steve Crowe, who is Roy F. Farmer's nephew. "That represents a significant conflict of interest."

Officials from Farmer Brothers Co. refused to comment.



Family feud

Crowe, president of Hotel Development Corp. in Santa Monica, is the son of Farmer's sister, Catherine E. Crowe. Catherine Crowe has voting rights on the 203,000 Farmer Brothers shares, or 10.6 percent stake, that she owns. But Steve Crowe and his sister, Janice, can't vote the 12 percent stake that they own. Those shares are in trusts controlled by Roy F. Farmer.

Steve Crowe's main complaint is that since so few Farmer Brothers shares are in the public float, there's little liquidity in the market for a selling shareholder. Rather than split the shares or issue stock dividends, Farmer exploits the thin trading to buy back chunks of stock for a discount, through the company's employee stock ownership program.

"At some point we're going to have to sell a major portion of (Catherine Crowe's) stock to cover the cost of her inheritance tax," Crowe said. "By limiting the liquidity, they're forcing shareholders to sell stock back to the company at a discount."

Farmer Brothers is known for producing cheap coffee used widely in restaurants and hotels. It has been debt free and profitable for more than 50 years, but among investors it's long been considered an undervalued gem.

The stock is currently trading at $306 per share, but some investors believe the shares are worth as much as $400 each. The company has $144.90 per share in cash and liquid investments, and its coffee-distribution business generated $20.30 per share in pre-tax operating earnings during the last four quarters reported.

Over the past two decades, shareholders have tried everything from friendly letters to proxy battles in efforts to shake the company into action. In November of 2000, institutional holder Franklin Mutual Advisers LLC, owner of nearly 10 percent of the stock, opposed the re-election of Farmer Brothers' board. Franklin claimed that the "management and ownership structure are more akin to a closely-held family operation than to a publicly-held corporation."

Franklin lost the vote.



Activist involved

This time, Farmer has attracted the attention of a shareholder activist who has shown a knack for moving intransigent boards.

"I have been encouraged by more than one investor to review the situation," said Gary Lutin, an investment banker and corporate governance expert.

Lutin wouldn't say what he planned to do, or which Farmer Brothers shareholders had contacted him. But in the past he's started out by conducting shareholder "forums" that puts pressure on the management of companies, including Dun & Bradstreet and Amazon.com.

Lutin characterizes these meetings as friendly, but they typically turn adversarial. His involvement has helped place dissident directors on the boards of Lone Star Steakhouse and Willamette Industries, whose management eventually gave in to a hostile takeover bid by Weyerhaueser Corp. (Lutin said he's spent more than he's gained from these activities.)

Eric Von der Porten, manager of Leeward Investments in San Carlos, has participated in Lutin-chaired forums and said even proposing such a meeting can be effective. "It lets the company know shareholders are interested and watching," he said.

Clues into a potential dissident strategy may lie with the case of National Presto Industries, a Wisconsin-based housewares maker. Starting with a Lutin-sponsored shareholder forum three years ago, investors began pressuring the father-daughter team running the company to conform to the requirements of the Investment Company Act of 1940.

The act requires companies with more than 40 percent of their assets (excluding cash and government securities) in investment securities to be classified as investment companies, with independent boards and professional fund managers overseeing their investment pool.

Like National Presto, Farmer Brothers has a lot of investment securities. Lutin puts the number at $132 million, or 52 percent of the company assets that are subject to the rule.

While securities lawyers say it's not a simple leap from the formula to an investment-company classification, last week the Securities and Exchange Commission notified National Presto that it was considering enforcement action under the 1940 act.

Indeed, Farmers can be looked at as two different companies one, an investment fund with $279 million in cash and liquid assets; the other, a profitable coffee business with $215 million in annual sales and net income of $36 million in 2001.

"It's possible one of the reasons the combined company stock is trading at such a significant discount to its apparent value is that it lacks that regulatory oversight of the $279 million," Lutin said.

Crowe said he and his family have long searched for ways to resolve their dispute with the Farmers including the suggestion that Farmer take the company private all to no avail. "I've offered to meet with them and they've basically stonewalled me," he said. "I think they're using this lack of liquidity to take advantage of us."

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