Trans World chief's buyout plan runs into opposition

On November 9th, I wrote about Trans World Entertainment Corporation (NASDAQ: TWMC) CEO Robert Higgins' offer to acquire the company for $5 per share. On Friday, shares of TWMC closed at $5.25, indicating that investors expect that either Higgins will raise his offer, or a competing bidder will emerge. What happened?

Sherwood Investments, which owns 4.34% of the company, put out a press release containing a letter to Mr. Higgins and the board, voicing the opinion that the offer was "grossly inadequate", and urging the company to solicit other offers.

Sherwood's argument is pretty hard to dispute: At a price of only $8 per share the entire Trans World business would be valued at under $250 million or $259,000 per store (using the 963 stores reported as of August 4th, 2007) which is less than their replacement cost. Furthermore, $8 per share would represent less than the $11.81 per share of tangible equity on the most recent balance sheet and half the cost of current inventory. Let us remind you that just last year Trans World paid $78.8 million for 335 Musicland stores from bankruptcy. That deal equated to $235,000 per bankrupt store and now you are proposing to pay $161,000 per store for all the stores which represents a 31% discount, and Trans World is a going concern!

Why should shareholders accept $5 per share when liquidation should generate proceeds in excess of $8 per share? We are certain that in making a "preliminary proposal" you realize that significant additional consideration would need to be forthcoming in order to satisfy your minority shareholders.

The paltry valuation that Higgins is placing on the company with his offer is underscored when you consider that Trans World actually closed 125 of the 355 Musicland stores that it acquired, according to the most recent 10-K. Using the 210 stores from the Musicland acquisition that TWMC currently operates, it really paid more than $375 thousand per store -- 2.3 times as much as Higgins is offering for Trans World.

Trans World's board will in all probability have to solicit other offers to avoid a proxy fight and, if Sherwood is right, that auction process would make Trans World a screaming buy at its current price.