Spinoff & Reorg Profiles

October 2005 Excerpt

Copyright 2005 William E.  Mitchell

SPINOFF CALENDAR

This
month, to supply more grist for your analytical mill, we are including a list
of announced spinoffs worldwide.  These
are not recommendations merely a list of current activity, to review as you
see fit. 

We
have included only spinoffs announced by management as certain to occur, and
which are intended to be available to outside passive minority
shareholders.  The list does not include
private sales or other uninvestible events, nor the legions of companies that
announce they are ‘considering’ a spinoff
(often done merely to signal the existence of the unit to analysts, or its
availability to acquirers), nor the raft of Canadian income fund spinoffs (a
tax benefit applying only to Canadians). 

Events
are shown regardless of quality or price.  The date shown is generally the record date
for distributions or the initial trade date for IPOs.  Trading symbols are provided if available. 

SLIM PICKINGS

‘Safe’
and ‘cheap’ were not in attendance this month among spinoffs and rights
offerings, in contrast with the past 3 months. 
While there is still a long list of deals in various stages of
completion, they are either too expensive (Treehouse, Expedia), too exposed to
imminent cyclicality (Fidelity National Title, Patriot Bancorp), or too odoriferous
(Ameriprise) to warrant recommendation. 

After
looking at essentially all such opportunities, as well as their parents a
couple dozen companies in all we decided that, rather than send you an
underwhelming spinoff, we’d look a little farther afield. 

PROFITS ON COATTAILS

This
month’s selection is one of yet another interesting class of situation:  companies controlled by an adversarial or distrusted
investor.  It begins with an anecdote
about simultaneous investments in two micro caps located just a few miles apart
in the Hawaiian
Islands. 

In
1999 and 2000, the author bought shares in landholders Maui Land &
Pineapple (MLP) and Castle & Cooke (CCS). 
MLP owns large sections of west Maui above the Kapalua resort,
while Castle & Cooke owns 98% of the largely undeveloped island of Lanai.  In each case there was a long-established, modestly
profitable operating business, fairly priced, and in each case there were tens
of thousands of acres on the books, valued at their acquisition cost before
World War II, when Hawaii was a sleepy, remote U. S.  protectorate.  Both appeared wildly underpriced. 

The
situation didn’t go unnoticed.  Soon
after, effective changes of control occurred at both companies.  In 1999, shortly before his masterfully timed
exit from AOL stock, Hawaii native Steve Case purchased
40% of Maui Land & Pineapple from a longtime family acquaintance.  In 2000, Castle & Cooke’s CEO, David
Murdock, made a tender offer for C&C through Flexi-Van Leasing, a private
firm controlled by himself. 

The
Castle & Cooke offer looked egregious. 
After a shareholder suit, the price was raised twice, but in the end, investors
were forced out of C&C for about 20 times earnings, with no premium paid
for its 55 miles of undeveloped oceanfront. 
Depending on how development is managed, history may rank this deal with
Donald Bren’s 1977 acquisition of the Irvine Ranch, which vaulted him into the
Forbes 400. 

Meanwhile,
15 miles east, there were signals that Case, whose MLP position accounted for
under 1% of his net worth, might see Maui Land & Pineapple more as a
personal project than an investment — perhaps best crystallized by his 2005
announcement in Business Week that MLP would be a vehicle through which he
could blend profit with philanthropy. 
Preferring to handle my own philanthropy, I sold the stock. 

Do
these two vignettes suggest you can’t win against concentrated ownership? Is this just another perpetration of the rule
of the Man? Actually, no:  both investments turned out very well.  Though Castle & Cooke’s new owner will no
doubt make a killing, my own 25%, 4-month return was hardly unfortunate.  And MLP quadrupled from 2000 to 2004, before
settling back recently. 

The
biggest lesson, from Castle & Cooke at least, is that investing gains are
not zero-sum.  If someone else wins, it
doesn’t automatically imply that you lose. 
U. S.  financial regulation and
the threat of shareholder suits are powerful forces leveling the playing field,
and forcing a better alignment of major shareholders interests with your
own.  They generally can’t get away with
a home run without giving you something for your trouble.  A secondary lesson is the more general one
that as you buy more cheaply, it becomes harder to lose money. 

The
risks and of course they exist fall into two categories. 

First,
beware influential shareholders with non-financial incentives.  We hope Steve Case succeeds in preserving Maui‘s bucolic farmland and
native Hawaiian heritage.  As tourists or
retirees, we may benefit.  As shareholders,
we’ll pass. 

Second,
the wealth and influence of major shareholders does not make them infallible.  In particular, they may repeat tactics that
have worked in the past, whether they apply now or not.  If a controlling shareholder has a long
history of unprofitable empire-building or risky debt/equity swaps, one would
need to be alert to the similar tactics in any new investment. 

In
such situations, investments may still work out if an adversarial large
shareholder is unable to act against
you, whatever his intentions, simply because of the pressure of the rule of
law. 

This
month’s selection, M & F Worldwide (MFW), certainly has a well-known 39% shareholder
in former corporate raider Ronald Perelman. 
Perelman’s career has seen, to put it gently, occasional problems with debt
overload and litigation; in fact, he
lost a shareholder suit concerning this very company in 2002.  This appears to be scaring off investors, but
we will argue the risk in this case is tolerable. 

FEEDBACK

If
you find we’re routinely leaving out information you would find relevant to
your decision-making, please email bmitchell@spinoffprofiles. com
with your suggestions.  When we receive a preponderance of sensible requests for
a particular element, we’ll include it in future issues. 

M & F Worldwide

BACKGROUND

M & F Worldwide is 37. 9%
owned by MacAndrews & Forbes Holdings (Mafco Holdings), a holding company
controlled by Ronald Perelman.  In 2002, Mafco
merged Panavision, a debt-laden movie camera manufacturer, into M & F Worldwide
(NYSE:  MFW).  MFW shareholders sued, forcing the unwinding
of the merger. 

TERMS

By court judgment in 2002, M
& F Worldwide received $90. 1 million in cash and stock, and shares in
Panavision were returned to the seller. 

CURRENT
STATUS

The transaction was completely
unwound by December, 2002. 

AUTHOR
OWNERSHIP

Author does not own M & F Worldwide. 

Company Information

BUSINESS

M & F
Worldwide is a holding company whose primary asset is Mafco Worldwide
Corporation, the world’s largest producer of licorice products.  Mafco primarily sells licorice flavoring to
the tobacco and candy industries. 

In addition to
scale, M & F appears to enjoy high customer switching costs.  Tobacco, to perhaps a greater degree even
than branded foods, relies upon a precise and predictable flavor.  The licorice-based flavor-enhancing products
of M & F are a complex component of a complex flavor, and thus tobacco
product manufacturers have a barrier to switching suppliers.  M & F apparently enjoys both unusually
high pricing and unusually low cost, relative to current and potential competitors. 

This assertion is
borne out by the numbers:  in 2004, net
profit was 27% of sales, an astronomical number for what initially may appear
to be a commodity supplier. 

This business has
the right qualities to withstand a high-inflation environment.  It requires low capital investment, limiting
the need to pay tomorrow’s inflated prices to replace plant and equipment.  As a sole supplier to branded consumer goods
makers, it can probably raise prices at the same rate as its customers.  Conclusion: 
M & F’s real income will tend not to decline with inflation. 

Increasingly, the
company sells to overseas customers.  Readers
of Spinoff & Reorg know that we will continue to be bearish on the dollar
for as long as large current account deficits persist.  If you agree with that assertion, you may
find foreign revenue attractive as we do. 
In 2004, the company purchased half of a small company that distributes
licorice products in Asia, and we expect this to continue the
company’s trend of increasing offshore revenue. 

Over the past
several years, the company has paid off all its long-term debt, adding a clean
balance sheet to the list of positives. 

ANALYSIS

Two features of M
& F Worldwide immediately raise our interest.  First, it is invisible:  as best we can determine, not a single news
article has been published on the company in at least 6 months, and the company
is not followed by any analyst;
practically nothing has been printed about M & F since the lawsuit
was settled in 2002.  Second, the company
mints cash. 

M & F’s licorice
business was actually the cash-generating engine inside Ronald Perelman’s very
first acquisition, candymaker MacAndrews & Forbes, in 1980.  At different times it has owned various
businesses, including one that now faces asbestos liability, though M & F
makes a convincing case it is indemnified from liability there. 

The unusually low
share price may result in part from Perelman’s recent history of shareholder
suits, as well as bankruptcies brought on by excessive debt. 

Perelman’s long
track record of success began to unravel with Marvel, a then-vibrant and
dominant comic book publisher.  Perelman
raised $500 million in Marvel bonds in 1993 to fund acquisitions, but the debt
load sank Marvel into bankruptcy, wiping out the common shareholders, including
Perelman himself. 

Concerns about
Perelman don’t seem to apply to M & F Worldwide.  The company has been paying down debt for
years, finishing it all off in 2004. 
Meanwhile, the 2002 suit, we suspect, will act as a disincentive to
future actions that might be interpreted as inappropriate. 

In short, we see
in M & F Worldwide a company that was unattractive two or three years ago
due to debt levels and the unwanted merger. 
The reality has changed, but due to lack of coverage, the perception has
not. 

VALUATION

On June
30, 2005,
the company reported it held $5. 55 per share in cash, no debt, and total
liabilities excluding tax deferments of just 88 cents per share.  It has generated an average of $1. 67 per
share in free cash flow per year over the past 5 years ($1. 03 in 2004). 

This implies a
share value over 22 at least 50% above the recent market price of 15. 

POSSIBLE TACTIC

Buy and hold.