The merger between MGP Ingredients, a producer and supplier of distilled spirits, and branded drinks company Luxco has been called an “abysmal failure” by Ben Axler’s activist short selling firm Spruce Point Management.
The firm published a report on Wednesday criticizing the $445 million levered merger, which finalized earlier in April, adding that MGPI’s MGPI, -3.57% migration into branded spirit sales has “failed” according to new reporting disclosures.
Shares in MGPI were down 2% when the market opened on Wednesday.
The 44-page report also highlighted that Luxco’s branded spirits are being sold between 5% and 50% below suggested retail price. It said that MGPI is making “unusual” cash flow and reporting revisions that point to “historical financial misstatement.”
“MGPI has long promised investors it would diversify away from commodity ingredient solutions, into a leading distiller of whiskies, bourbons, and premium spirits.
“By our assessment, MGPI can’t possibly succeed in branded spirits given its spends just 3% of sales on marketing vs. 9% to 17% by peers and reports no R&D expense that would enable it to innovate with new products to meet changing customer preferences,” the report said.
Spruce Point issued a strong sell opinion, claiming a 35%–55% downside risk ($45.70 – $66.00 a share) “as investors recalibrate their expectations for declining profits and the justification for giving MGPI an expanded multiple in recent years.”
MarketWatch has approached MGPI for comment.