Breaking: Berksire(BRKB) offers to buy remaining 19.9% of Wesco
From the just-filed 13D
The original purpose of the purchases of the Shares, all of which occurred more than 30 years ago, was to increase the ultimate control by Blue Chip of Wesco. On August 25, 2010, Berkshire’s management determined to propose to Wesco a cash-stock election transaction in which it would acquire the remaining 19.9% of the shares of Wesco that it does not presently own in exchange for Berkshire Class B shares and/or cash valued at the book value per share of Wesco as of a time reasonably contemporaneous with the closing of such a transaction. Berkshire would intend to structure such a transaction so as to be tax-free to Wesco shareholders electing stock, subject to applicable limitations. Berkshire expects to discuss such a transaction with the independent directors of Wesco. Berkshire would only proceed with such a transaction if it is approved by the Board of Directors of Berkshire and the Board of Directors of Wesco (including a majority of the independent directors of Wesco), as well as by a majority of the shares of Wesco not owned by Berkshire voted at any meeting that may be called to consider such a transaction. Berkshire does not know whether any of these approvals will be obtained. If no transaction is agreed upon and approved, Wesco will continue to operate as it does presently as an 80.1%-owned subsidiary of Berkshire.
The More Things Change…
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Federal Reserve Board Statement from February 7,1929, as quoted by Galbraith in The Great Crash 1929
When [the Board] funds that conditions are arising which obstruct the Federal reserve banks in the effective discharge of their functions of so managing the credit facilities of the Federal reserve system as to accommodate commerce and business, it is its duty to inquire into them and to take such measures as may be deemed suitable and effective in the circumstances to correct them; which, in the immediate situation, means to restrain the use, either directly or indirectly, of Federal Reserve facilities in aid of the growth of speculative credit.
Galbraith suggests that connoisseurs may wish to read it both backwards and forwards, but either way, it is one insanely long sentence, utterly devoid of content. It is well-known that Bernanke is a student of the Great Depression. How have inept statements like this impacted his public statements?
Global Cash Access(GCA) Plunge Overdone
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It’s 2AM. Your stubble-covered face glows in dim light of the casino floor. Lights flash, bells ring. You’re about to get lucky. And you run out of cash.
Enter Global Cash Access(GCA). GCA has contracts with many of the nation’s largest casinos to provide ATM services on their floors. GCA provides other cash services as well, and the nation’s only gaming-focused credit bureau. If you’ve ever paid the fee on one of these ATMs, you know this is a lucrative business.
Going into trading on July 21, GCA was at nearly $7, down from a high of $9.26 in April. It was expected to earn between $.75 and $.78 in 2010, for a fairly attractive valuation. Then, yesterday morning, the company filed an 8-K revealing that Harrah’s, its largest customer, would not be renewing its contract which expires at the end of November.
The market reacted swiftly and violently to this news. Almost immediately, the stock plunged over 40%, and it has continued to fall today, July 22, 2010. Management, clearly stunned by the magnitude of the decline, hastily scheduled a conference call, where they were unable to present many new details. From the data available to us, the stock’s move seems like an overreaction.
While Harrah’s has been the company’s largest customer, it has dropped from 19.3% of revenue in 2007 to 14.1% in 2009, and 13.8% in Q1 2010. The company informed us that this deal did not have better than average margins, that they would be able to reduce SG&A somewhat, and that it would be immaterial to their 2010 projections, despite the deal being missing for the last month of the year. This implies growth in non-Harrah’s customers over the balance of the year.
The company’s revenues from Harrah’s were $94MM last year. If that revenue were 100% margin, the company would swing to a loss. A more likely margin is 25%, which I arrived at by looking at cost of revenue as a percentage of revenue. By this measure, operating income would decrease by about $23.5MM. Assuming that decrease carries straight through to net income, and a $.75 per share earnings number for 2010, 2011 earnings should, conservatively, be somewhere around $.40 per share, leaving the company trading somewhere near 9 times forward earnings at its recent price of $3.60. Perhaps this is a reasonable multiple given the risk of margin compression and additional customer defection(though on average only 1/3 of the customers have expiring contracts in any given year). There are certainly big questions about why Harrah’s decided not renew and what their plans are. To my mind though, this is an attractive multiple for a profitable business with a temporary setback, and worth a small stake.
Disclosure: I own shares in GCA
Preliminary Launch of stockspinoffs.com
We at Inelegant Investor are pleased to announce the initial launch of stockspinoffs.com. Stock Spinoffs will be a clearinghouse for information on upcoming and proposed stock spinoffs, featuring a calendar of upcoming events, as well as news and analysis of each spinoff.
We have chosen to launch this after being asked several times where this information could be found. We were unable to find a comprehensive, free resource and therefore chose to build one. It is still very much a work in progress and we are aware that it is currently incomplete. We ask for your help in making this as comprehensive and useful as possible. Please send suggestions, information and analysis to
[investor at inelegantinvestor dot com], twitter us @inelegantinvest, or leave a comment here.
Flashback: Warren Buffett Gets All the Attention, But Hank Greenberg Is Posting Better Returns
It’s July 23, 2000. The Bubble has burst, though bottoms haven’t been reached. The World Trade Center still stands tall. Enron is one of the world’s most respected companies. The New York Times declares Hank Greenberg a better investor than Warren Buffett.
As the article points out, over the previous 5 and 10 year periods, AIG had substantially outperformed Berkshire. The article goes on at great length to paint Greenberg and Buffett as “Polar Opposites”, Buffett, “invests like a riverboat gambler,” while Greenberg “may act like the tough guy, but when it comes to investing A.I.G.’s capital, he turns cautious.”
ONE plays the part of the hayseed, the other the quintessential New York tough guy, complete with flinty stare and a vocabulary that might stun the crowd at a hip-hop concert. One loves bridge and jokes that he reluctantly drags himself around a golf course; the other is a bundle of energy whose idea of relaxation is rocketing down a frozen ski trail.
The events of the subsequent decade make the article seem laughable. Greenberg was forced out of AIG by NY Attorney General Spitzer, and AIG required nearly $200 Billion in government capital to avert the most spectacular corporate collapse in American history. Were AIG’s flaws already present? Could a careful investor have detected red flags back then?
One more hypothetical nags at us: what would the world look like today had Greenberg managed to hold onto his job as AIG CEO and if Buffett had lost his in the midst of a 1970s SEC investigation. It would be a different world indeed.
175th Edition Of The Festival Of Stocks
We are pleased to welcome you to the 175th Edition of the Festival Of Stocks. The Festival Of Stocks is a blog carnival dedicated to featuring posts on a variety of stock market topics.
Though the Inelegant Investor has published only sporadically of late, we were a frequent participant in early Festivals Of Stocks, including the first edition. We hope that hosting this will mark the beginning of our return from a long hiatus.
This week’s posts offer a wide variety of different perspectives and approaches.
Dividends Value provides a nice analysis of an interesting P&C insurer in Harleysville Group Inc. (HGIC) Dividend Stock Analysis
Dividend Growth Investor offers Five Consumer Stocks For 2010
ZachStocks examines the Healthcare bill and how investors might profit in Weakened Healthcare Bill Exposes Stock Risk
Fat Pitch Financials is the driving force behind the Festival Of Stocks, and this week, updates us on the (out)performance of the Fat Pitch Financials Portfolio in Fat Pitch Financials Portfolio 2009
I’ve always liked Stillwater Mining(SWC) as a play on Platinum and Palladium, but ETFdb explains what the state of Palladium ETFs is today in Definitive Guide To Palladium ETF Investing: Palladium ETFs 101
Bargaineering explains to us some of the mechanics of dividend investing.
The Sun’s Financial Diary wonders: Is The January Effect Real?
Wisebread has a 4 step program for those who would like to learn to invest in Learn to Invest in 2010: 4 Steps to Educating Yourself
The Digerati Life has advice on investing specifically for those who may be getting a late start on planning for retirement in Retirement Investing Advice For Late Start Investors
We know nothing of the Australian stock market, but the Australian Stock Market Investing Blog has much to say about 2010 Share Market Floats- What Can Investors Look Forward To?
Dough Roller provides a comparison of discount online brokerages.
Foreigner’s Finances weighs in with a review of Zecco.
Good Financial Cents writes about the yield curve and what it means for economic growth in The Yield Curve Flashes Green
Learning Stocks explains the basics of How To Read Stock Charts
We don’t follow forex, and have little interest in technical analysis, but for those who do, Forexoma explains How Forex Market Reacts to Bollinger Middle Band
Saving To Invest reviews 2009 and looks ahead to 2010
We’ve enjoyed hosting the Festival Of Stocks and look forward to reading and participating in future editions.
As always, the schedule of past and future Festivals can be found here. Next week’s Festival will be hosted by The Kirk Report.
Highlights from Steak N Shake(SNS) Chairman Sardar Biglari’s 2009 Letter
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Steak N Shake(SNS) has posted the annual letter from Chairman Sardar Biglari. Biglari has made great progress with the company since taking over, swinging from a loss of $23 million in 2008 to a profit of $6 million in 2009. The capital structure has been greatly strengthened. After beginning the year with just $6.9 million in cash and $30.7 million in debt, the year ended with $54.4 million in cash and investments, and just $18.6 million in debt. The swing in cash was largely driven by a decrease in capital expenditure to $5.7 million, down from $31.4 million 2008 and $68.6 million in 2007.
The fear when slashing capital expenditure is a decrease in sales, but Q4 featured a 20% increase in customer traffic and a 10.1% increase in same store sales, the best quarter yet in the recent reversal of a multi-year tend of declining sales.
Biglari also announced a 1 for 20 reverse split, effective December 18, in order to discourage speculation in the stock, marking an interesting counter to Buffett’s recent decision to split Berkshire Hathaway B shares as part of the Burlington Northern acquisition.
Biglari reitierated that increasing intrinsic value is his only goal, and promised that “Rest assured, we
will fire ourselves if we fail to create value over time.” Towards this end, we are told again of the holding company structure and Biglari as the sole authority on allocating capital.
Biglari provides a brief history of his involvement with Western Sizzlin(WEST) and the upcoming merger, but does not mention his most recent move, the acquisition of a 9.9% stake in Fremont Michigan Insurance Corp(FMMH)
Biglari has produced impressive results in his short career, and it would appear that he is poised to build on his success and continue to deliver superior returns on capital.
Disclosure: I own shares in WEST,SNS, BRKB,and FMMH
Berkshire Hathaway Bags An Elephant
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For years, Warren Buffett has spoken of searching for an elephant of a transaction. Berkshire Hathaway’s(BRKA,BRKB) announcement today that it will be acquiring Burlington Northern Santa Fe(BNI) in a $44 Billion deal represents the final capture of an elephant that has been in Buffet’s sights for several years as Berkshire has consistently bought to acquire almost 22.6% of the company prior to today.
The deal will consist of 40% stock and 60% cash. That Buffett is paying with Berkshire stock says something interesting about his appraisial of Berkshire’s future prospects. Buffett has in the past lamented stock deals he’s done(in particular the General Re deal). Buffett stated that stock is included in this deal in order to provide tax free treatment for BNI shareholders. Using stock implies that Buffett believes that BNI will grow intrinsic value at a faster rate then the rest of Berkshire.
Also of note is that Berkshire will be splitting Class B shares 50-1 in order to be able to compensate even the smallest BNI shareholder in stock. Buffett has been notoriously resistant to splitting his stock. It will be interesting to see what impact this has on Berkshire. We believe it represents a significant step in Berkshire’s transition from an investment partnership run by Buffett to a global corporation that will thrive in a post-Buffett era. It is also likely that the split will pave the way for Berkshire’s addition to the S&P 500.
Disclosure: We own shares of Berkshire Hathaway
Steak N Shake($SNS) Looks To Invest Excess Cash
The Steak N Shake Company(SNS) filed an 8-k this afternoon disclosing that it has amended its credit agreement to “permit the Company to use up to $10.0 million of surplus cash to make investments of any lawful nature, so long as no event of default exists.”
In addition, the Company has granted “Chief Executive Officer, Sardar Biglari, full power and authority to make all investment and capital allocation decisions on behalf of the Company”
Biglari, through the Lion Fund, Western Sizzlin(WEST) and other affiliated parties controls 10.1% of Steak N Shake’s outstanding stock. After taking control of WEST, Mr. Biglari gained approval to invest cash and has made various investments including SNS. His operating strategy of halting new company-owned stores, refranchising others and focusing on increasing sales and profitability of existing stores seems to be paying off as SNS earlier this week reported impressive same-store sales gains in a very difficult environment for casual dining. SNS is now doing sufficiently well, that Mr. Biglari and the board believe that cash might be deployed for a better return outside of its core business.
Though Mr. Biglari has shown a soft spot for casual dining stocks(he held a significant stake in Friendly’s prior to WEST and SNS, and at one time attempted a tender for part of JBX), he has also purchased a financial adviser, tendered for ITEX, a bartering company, and purchased real estate for development. It will be interesting to see where and when Mr. Biglari decides to invest this excess cash.
Disclosure: I have a position in SNS and WEST
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Zicam woes cause Matrixx(MTXX) to lose sense of sell
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In February 2007(sadly one of our more recent posts), we wrote about Matrixx(MTXX) Initiatives. At the time, Jove Partners had filed a 13D urging a sale of the company. Jove noted at the time that the company’s single brand would benefit from the scale of being part of a larger company.
At the time, we noted:
One potential concern are claims that Zicam has caused users to lose their sense of smell. The company has already settled several lawsuits, but it is unclear what potential future exposure might be. This would clearly be a concern of a potential buyer.
What we didn’t discuss was how this particular risk, combined with Zicam being the company’s only product placed the company in a precarious situation.
Today, the FDA warned the public against using several Zicam products and declared that their sale should be subject to FDA approval as a drug. The FDA’s entire letter can be found here. As a result, MTXX plummeted nearly 70% today.  The company had been trading close to its 52 week high, was profitable and well-capitalized. This will likely be a fatal blow to the company. The future holds anemic sales and a slew of new lawsuits. MTXX holders might want to consider taking some Zicam; perhaps it will allow them to live with the stench of this stock.
Disclosure: No position in MTXX
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