Sunday, July 22, 2007

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 2nd 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 27th 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 16th. 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.

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