Saturday, March 24, 2007

Vermont Pure Holdings (VPS): A Candidate to go Private?
Watertown CT based Vermont Pure Holdings is in the bottled water production, distribution, and marketing business. If that sounds like a great business, the truth is, being a VPS shareholder the past few years has been downright painful. Our shares, for one, are under water (no pun intended). Yet we've held on, suspecting there may be brighter days ahead for this tiny $40 million market cap company.

The company built the business over the years on a series of acquisitions, which have resulted in a relatively large amount of long term debt, $33.875 million as of 10/31/06. Yet, this is down from 2005s $37.975 million, so the company is headed in the right direction here. Still, interest expense is an anchor to VPS, and in profitable years such as 2004 and 2005 this represented between 4 and 6 times net income. For instance, in 2005, net income was $871 thousand, and interest expense was $3.4 million. In 2004, it was $660 thousand and $3.5 million. Not a pretty sight.

The top line is headed in the right direction. 2006 sales were $62.7 million, up from 2005's $59.8 million. While the company bottom lined a loss of $20.6 million in 2006, that was after a goodwill impairment charge of $22.95 million, and not reflective of 2006 operations.

The picture we've painted thus far is probably not appealing to many investors. Yet we've begun to believe that there may be a new story emerging here, that being the possibility of VPS being acquired (probably less likely), or effecting the GPT (Going Private Transaction), which allows smaller companies to de-list, avoid SEC filing, and compliance with Sarbanes Oxley, yet still trade on the pink sheets. The main reason for going this route is cost savings, it is simply relatively expensive for small companies to comply with SarbOx, and file with the SEC.

Why GPT?
We see two major attributes that make a GPT possible. First, VPS is primarily owned and controlled by the Baker family (3 Bakers are active in the company), who own about 49%. If large owner/stakeholders wish to keep their company out of the public eye, a GPT is one method to essentially go dark, yet continue to trade. Furthermore, a GPT would be fairly easily accomplished; a company needs to have 300 or fewer shareholders of record in order to be eligible, and VPS currently has 427.

We'll continue to monitor this story, if their indeed is a story here.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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