) --

Jones Soda


should be shopping for a better deal than the 30 cents per share offer that came in earlier this month from Big Red.

It's very likely that Jones stock could be worth much more -- the current offer places no value on the business, simply liquidation value alone, and I am convinced that $35 million in annual revenue is worth a significant amount to someone in the soda industry.

Jones, a Seattle based firm that markets soft drinks toward a premium market because of the use of real cane sugar as opposed to alternatives, disclosed after the market closed Dec. 21 that a cash offer had been made at 30 cents per share. As of Sept. 30, there were 26,454,729 shares outstanding. This is an offer for the entire business of around $8 million.

This offer comes from Big Red, which caters mainly to the Southern U.S. with a line of sporting markets, similar to


(PEP) - Get Report

Gatorade or


(KO) - Get Report


Jones Soda stock price has been rising since the offer and recently traded at $0.48 or about a $12.4 million valuation, so the markets are pricing in a counteroffer or at least Jones shopping around for more bids.

A business doing more than $30 million a year in revenue must be worth more than the net current asset value, and potential acquirers should see benefits that they will see through distribution and shared employees that can perform functions for more than one company.

The benefit here for Big Red is that it can buy the company and use the staff it already has to manage Jones and turn the financials around. Big Red was the sixth-highest selling soft drink company from 2002-2004, which tells us that their distribution must be in a much better situation than Jones Soda is currently in. This also means that they probably have finance/accounting staff members that can absorb the work from Jones, further reducing their expenses.

As of Sept. 30, Jones had current assets of $14.7 million and liabilities of $3.7 million, or $11 million NCAV (Net Current Asset Value). There are assumptions here are that receivables, inventory, and others assets (largely GABA ingredients, which is their energy drink) are fairly priced. If we estimate a quarterly cash burn of about $1 million for Jones, this picture changes from $11 million NCAV to $10 million NCAV for the period ended Dec. 30, and Big Red's offer is about $8 million.

This means that Big Red can acquire the company and immediately realize an overall cash gain, although lawyer fees, severance packages, etc. might be factored in here and wipe out any gain. Jones Soda also had about $30 million in net operating loss carry-forwards as per their last annual statement, and so depending on state tax law, it's possible there could be some benefit here, although that's rather unlikely.

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Let's say that by the time the acquisition is done, they end up spending $1-2 million. For a company doing $30 million a year in revenue, that's a steal. Competitors like Pepsi and Coke trade anywhere from 2-4 times revenue, and so a public company could easily make an acquisition and see their market share increase much more than it cost to acquire, assuming earnings can be returned to profitability. That's not an easy task, but the acquirer will experience synergies allowing it to reduce headcount and increase profitability.

Jones should be shopping around for more bids at a better price. Other soda companies could probably see the same benefits as Big Red will, and especially with an offer on the table now, others will take a look and give a serious answer in a timely manner, because otherwise they might lose out on this opportunity. They should be approaching companies like

Hansen Natural

( HANS),

Monarch Beverages



(COT) - Get Report


Pepsi, Coke and

Dr. Pepper/Snapple


probably won't be interested because Jones Soda is not large enough of a deal to really move the needle, unless they see something here that could become even more valuable, which could potentially be the GABA line.

--Written by Ankit Gupta, author of the SelectedFinancials blog.

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Ankit Gupta is a private investor who blogs about his stock picks at

. Gupta focuses on undervalued companies, with a strong margin of safety, but also a strong case for why they will make a better investment than others. Ankit used to run his own business, later selling the client base, and is now on the board of Purdue's Publishing Foundation while finishing his degree at Purdue University.