The Muellers

I wrote about Mueller Water Products (NYSE: MWA MWA-B) last July. At the time only the Class A shares were publicly traded. Later on, Walter Industries (NYSE: WLT) completed the spin-off of Mueller by distributing its Class B shares to its shareholders. The Mueller stake in the Model Portfolio is of the B kind and resulted from owning Walter shares to begin with. But for the AA Value Fund which I update you on from time to time, I purchased Mueller A shares before the B shares began trading.

Back in June I began noticing that the A shares are more volatile but also outperforming the B shares. This was baffling because apart from a smaller float and different voting rights, the A shares represented the same economic interest in the business as the B shares. In fact, if anything, the B shares should have been trading higher than the A shares. The company’s management team was just as surprised about this and didn’t have a good answer for it during a presentation on June 12 at the JPMorgan 2^nd Annual Basic and Industrials Conference (which is still available on Mueller’s web site if you care to listen to it).

The gap between the A and B shares on June 27^th was mind boggling. I sold the A shares at $16.9 and bought a larger amount of B shares at $14.9. Today, that gap has narrowed and the B shares trade at ONLY a 7% discount to the A shares. This situation was also mentioned by Barron’s The Trader column on July 16^th. So far the switch has worked out well with the B shares declining less than the A shares since the end of June. Plus, we own more of the company now and have 8 votes per share as opposed to 1 vote per share. Ah, so much for the efficient market theory – AGAIN.

Below is an update on the AA Value Fund which I last updated you on in January. For the first 6 months of 2007, the Fund was up 21.5% vs. S&P 500’s 6% increase. No capital contributions have been made to the Fund since the beginning of 2003.