A couple of days ago, Sallie Mae (SLM) announced that they would split the company into two to increase share holder value.
Company A will be “an education loan management business comprised of the company’s portfolios of federally guaranteed (FFELP) and private education loans, as well as most related servicing and collection activities.” It’s “principal assets are likely to consist of approximately $118.1 billion in FFELP Loans, $31.6 billion in private education loans, $7.9 billion of other interest-earning assets; and a leading education loan servicing platform that services loans for approximately 10 million federal education loan customers, including 4.8 million customer accounts serviced under the company’s contract with the U.S. Department of Education. In aggregate, this company will own approximately 95 percent of Sallie Mae’s existing assets and remain obligated for the company’s senior indebtedness.”
Company B wil be a “private education loan origination and servicing businesses.” The “assets are likely to include approximately $9.9 billion of total assets comprised primarily of private education loans and related origination and servicing platforms; cash and other investments; and the Sallie Mae Upromise Rewards program.”
The transaction is expected to close under a year. Here is the slide deck. I have never been a fan of SLM’s business, but there may be an opportunity in the preferreds.
I wrote about the floating rate preferred (SLMPB) a couple months back. The preferred went down a bit after the announcement after Moody’s downgraded all debt and preferred because they would be lumped with Company A. However, a funny thing happened, a reader of hypezero emailed me saying that it is possible that the preferred could be redeemed at full par value ($100, currently trading below $70) at the day of the announcement. Here is his explanation:
“Unlike bondholders, Preferred Shareholders are owed a “Fair Allocation” in NewCo. If the plan is to redeem the Preferred Shares before spin-off, obviously no “Fair Allocation” in NewCo. is necessary. Since no disclosure/guidance on Preferred “fair Allocation” was provided I expect the shares will be redeemed prior to spin off.”
I was a bit skeptical, but yesterday/today it is up over 10% on huge volume. The volume yesterday was over 1 million compared with the average volume of 64,000+ Maybe someone with more resources has figured this out as well. The other explanation I thought could make sense was in the preferred prospectus. It says:
- “The board of directors maintains a committee whose purpose is to monitor and evaluate our proposed actions that may impact the rights of holders of our outstanding preferred stock.” Obviously, this split would be a detriment to the preferred. Here is a link to the prospectus.
Obviously, there are risks to this investment:
- The planned split off does not go through.
- The preferred is just part of Company A making it a riskier investment. An analyst did ask about the preferred on the call and the CFO said that the preferred will stay with Company A.
Disclosure: I am long SLMBP
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This quarter there are two new positions as News Corp (NWSA) and BankUnited (BKU) have been discraded:
- BP plc (BP)
- Exco Resources (XCO)
I will have more to say about these companies in future posts.
Disclosure: I am still long AIG
Federated National Holding Company (FNHC), a company I wrote about over a month ago, reported first quarter earnings last Thursday. Results were great as revenue increased almost 50% and earnings per share increased 123%. Shares were up over 13% on Friday.
Even though the stock is up over 25% from the time I purchased it, I believe there still be more upside left. During the conference call, the CFO stated that business is booming in the current quarter. Last quarter, they were writing $2 million in new business a week. Just last week, they wrote $3.5 million in new business and are on pace to do the same this week. Here is what Peter J. Prygelski, the CFO said:
“I can tell you things weren’t trending favorably for a quite awhile where we used to write a $1 million and then went to $2 million, clearly since we’ve turned on all state, volume has increased. We’ve had more underwriters and more adjusters. I have no reason to believe that flow of premium will slow down. We’ve been at that – we’ve been kind of got up to that level of $3.5 million and I think we are going to hit probably close to that again this week.”
All my previous points remain in tact about FNHC. So, I will continue to hold the shares. The only concern I have is that hurricane season in Florida is approaching and a bad season is always scary for insurers.
Homeowners Choice (HCI)
Another Florida insurer that has done quite well (much better than FNHC) has been Homeowner Choice (HCI). Even though, I own their bonds, I have concerns about this company:
- The company was founded in 2006. It does not have much of a track record during the worst hurricanes seasons (2004-2005)
- HCI has grown solely from assuming policies from the state owned Citizens and defunct companies such as Homeowners Choice. They have assumed policies from them in November of 2011 and 2012 (conveniently after hurricane season). Because hurricane seasons have been tame, the company has done quite well from assuming these policies. Look for them to do the same this year in November. If they don’t, expect revenue and earnings to decline.
- Company trades at over 2.5 time book value (expensive for an insurance company).They hold most of their assets in cash and do not earn much money from investment income.
- The company has 20% of their float shorted.
- Nobody knows how profitable the assumed policies are due to the tame hurricane seasons. Also, the certain Citizens policies have restrictions on rate hikes.
I don’t see much upside left in this stock. In fact, the company could in for a huge fall if:
- A major hurricane hits Florida and we find out how profitable/risky these assumed policies are. To quote Warren Buffett, “You never know who’s swimming naked until the tide goes out”
- At some point, they will not be able to assume policies from Citizens. At this point, expect earnings and revenue to decline.
Buying puts on this stock might be a good strategy.
Disclosure: I am long FNHC and HCJ
Dean Foods (DF) will distribute an “aggregate of 47,686,000 shares of WhiteWave Class A common stock and 67,914,000 shares of WhiteWave Class B (WWAV) common stock on May 23, 2013, the distribution date, as a pro rata dividend on shares of Dean Foods common stock outstanding at the close of business on the record date of May 17, 2013.”
Based on the number of shares outstanding on March 31, “Dean Foods common stock will receive approximately 0.256 shares of WhiteWave Class A common stock and approximately 0.364 shares of WhiteWave Class B common stock in the distribution.”
Based on today’s price of WWAV, that is a distribution of almost $11/share. Dean will keep 34,400,000 shares of WWAV after the distribution, which are worth about $600+ million or $3.2+ based on todays price. However, “Dean Foods expects to dispose of its retained shares of WhiteWave Class A common stock within 18 months of the distribution in one or more debt-for-equity exchanges or other tax-free dispositions.” So, most likely investors are not going to see any dividends from the rest of kept shares.
Invest in WWAV or Dean?
I would continue to stay away from both Dean and WWAV. When I originally wrote Dean being undervalued, I was mistaken about 2 things:
- Dean was going to distribute all of WWAV shares. If they had distributed all the shares, the stub (what was left over would’ve been pretty cheap).
- Some of the Morningstar sale proceeds would be distributed to shareholders.
I would assume that WWAV shares would go down initially after the distribution as the new shares flood the market. However, there are two events that might make the shares go higher:
- Earnings report on May 9th.
- Rumors about takeover speculation.
Here is the news release on the distribution.
Disclosure: I do not own shares of DF or WWAV