Bassett Furniture Industries Inc. (NDAQ: BSET) management was caught sitting around on the job, according to at least one activist hedge fund. Costa Brava, which owns just over five percent of the company, recently expressed its disappointment with the furniture business and initiated a proxy contest in order to install its own board members to enforce change. So, should shareholders support these new board candidates?

Costa Brava believes that the board of directors should put a plan in place to reduce the capital needs of Bassett's furniture business and to maximize the value of Bassett's investment and real estate assets. The hedge fund argues that the furniture business has been contracting for several years as Asian imports have severely undercut domestic pricing. Meanwhile, the housing market turmoil has reduced fundamental demand for furniture.

The real value in Bassett is apparent in its balance sheet. Perhaps the most interesting highlight is Bassett's 47% ownership stake in a 3 million square foot exhibition space in High Point, NC. Net operating income from this property are around $30 million, which (capped at 10%) carry an implied valuation of $300 million. Subtracting the $105 million in debt yields $195 million in equity, which means Bassett's stake is worth around $91 million.

Bassett also has cash and investments of over $80 million, hedge fund investments of $51 million, marketable securities of $25 million, and a profitable International Home Furnishings Center (IHFC) division. The IHFC and hedge funds have been subsidizing the furniture business for years. In fact, the "core" furniture business hasn't been able to generate a stable cash flow for nearly 10 years with over $85 million being wasted since 2001.

Costa Brava recommended that Bassett focus on the value in these less risky assets and scale back or eliminate its risky and unprofitable furniture business. The hedge fund's board nominees have vast experience in many different businesses, including real estate and hedge funds. Costa Brava insists that substantial value can be unlocked by monetizing these assets and returning the cash to shareholders.

Bassett responded Monday by issuing a special dividend for shareholders while recanting its prior dedication to unlocking value through its past dividend hikes. However, many believe that these measures may be too little too late. The special dividend was only $1.25 per share and the dividend hike was only 12%. The reality is that these numbers pale in comparison to the amount of value that could be unlocked by the hedge fund.

In the end, this is all great news for shareholders who stand to benefit from such measures to unlock value. It will be interesting to see just how much support Costa Brava receives from shareholders. Combined, these factors make BSET a stock worth watching closely into the April 18th annual meeting!

Related Companies
Ethan Allen Interiors Inc. (ETH)
Stanley Furniture Co. (STLY)
La-Z-Boy Incorporated (LZB)
Furniture Brands International, Inc. (FNB)