Monday, April 02, 2007

Cigs, Candy and Pop

If you are a value investor, chances are you are well aware of the buzz surrounding Altria's (NYSE: MO) spin-off of Kraft (NYSE: KFT). In short, today Altria completed the spin-off of its 89% stake in Kraft by distributing those shares to Altria shareholders. We have discussed spin-offs here in the past. And we have participated in them in the Model Portfolio. In a March 22nd email to my brother I described a strategy to play the Altria spin-off:

"The one stock we should probably own is MO. I like the stub strategy. Basically, you buy MO and short KFT. When you receive the KFT spin-off shares, you cover the short position. This way you have created a 'stub' for the MO piece that will be left over afterwards. It's a common strategy to play spin-offs."

If you want to learn more or refresh your memory about the wonderful world of spin-offs, refer back to or order yourself a copy of Greenblatt's book. In this case, on March 22nd, Altria was trading at around $86. Kraft was trading at around $32. So you could have created the 'MO Stub' at about $57.5. Meanwhile, Altria When-Issued shares (which excluded the Kraft portion) were indicated in the mid $60s. At least based on that information, you would be looking at a neat 13% return. Indeed, Altria ended today above $68 as a standalone. Kraft ended below $32. Ignoring the slight gain on our short position, this trade would have resulted in an annualized gain in excess of 270%. Not bad. There goes the Efficient Market Theory again.

In any case, apologies for not writing about this earlier. It would have made for a nice arbitrage opportunity. Here are a few more you may want to consider. One is the upcoming and confirmed split of Cadbury Schweppes (NYSE: CSG). Our friend Nelson Peltz is at it again just as he did with Heinz (NYSE: HNZ), a former Model Portfolio holding. He has amassed a 3% stake. Cadbury will be split its candy and beverage businesses. Who hasn't heard of Trident gum and 7 Up or Dr. Pepper? The confectionary business would be a shoe in for a merger and private equity players must be salivating at the prospects of owning the beverage business. Upon news of Peltz's move, the stock rocketed 10% or so and has inched up since. But dig around a little and you may be surprised to find that a hefty 10%-25% return has been left on the table, based on a sum of the parts analysis, even after the recent run up in the shares.

The other opportunity has nothing to do with cigarettes, candy or pop but has everything to do with the business of security. Brinks Co. (NYSE: BCO) has been the recent recipient of much attention from the hedge fund activists including Pirate Capital and MMI Investments which have taken sizable positions in the company. Pirate's founder eventually got his way and was given a seat on the Board. Since then this one seems to be flying under the radar a bit. Meanwhile, the folks at MMI have been kind enough to share their diligence with us. A bit of sleuthing on the SEC web site and you will come across a set of slides filed by MMI laying out various scenarios under which Brinks management would be able to increase shareholder value. Let me know if you would like me to send the file to you. Needless to say you could be staring at a 10% - 25% return on your investment if you buy the shares at a current $63 with manageable downside risk. So as we did with Harrah's (NYSE: HET), if you are sitting on some cash, you may want to park some with the folks at Brinks.

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