Dean Foods Sells Morningstar for $1.45 Billion

Dean Foods (DF) sold Morningstar for $1.45 Billion. “Dean Foods expects to realize $887 million in proceeds, net of taxes and expenses.” It will use all the proceeds to pay down debt. “Dean Foods’ management expects its net debt to EBITDA ratio to be below 3.0x at year end 2012.”

I actually sold my position on DF below $17 at a loss because I got scared of the volatility of WhiteWave. Today, it is up trading at $17.55. I expected them to pay some of the proceeds to pay a special dividend, but it looks like that is not happening. This changes a bit of my valuation on the lower side because Dean gets a low multiple of FCF. 

I expect the stock to trade around this price for a while. I will revisit this stock when they actually distribute the WhiteWave shares to shareholders. 

Disclosure: I do not own Dean.

Abbott Board Approves Spin-off

Abbott (ABT) announced today that its board approved the spin-off of its research-based pharmaceuticals business Abbvie (ABBV). For every one share of Abbott, investors will receive one share of Abbvie. The distribution is expected to be paid on Jan 1st 2013 to holders of common stock at the close of Dec. 12. 2012.

Read more about it here.

Disclosure: I do not own ABT

Genie Energy Files Renewal of Exchange Offer

As I mentioned last week, Genie Energy (GNE) is renewing its offer to exchange common shares for preferred shares (GNE-PA). Today, they filed papers with the SEC to begin the exchange offer. 

Here is the are the details.

Investors have until January 15th 2013 to exchange shares one for one. You will have to contact your broker to do the exchange.

It should be interesting to see what happens. The common shares did go up as I expected. However, they still currently trade at a discount ($6.48) to the preferred shares ($6.98). 

I still expect the common shares to move up from here. However, there are some risks so I took some profit over the last couple of days. 

  • All 7+ million of common shares get converted. Once they get converted, there could be huge selling pressure on the preferred as most investors really don’t want the preferreds. So, the price of the preferred could go down after the conversion. 
  • It is possible that if everybody tries to convert, the exchange offer could be oversubscribed. If this is the case, the conversion happens on a pro rata basis. So, you might not be able to convert all your shares. 
  • I am interested to see what happens to the common after the conversion. It is possible that everybody that converted might want to get back into the common after the conversion causing the price to at least stay above $6. 
  • The common shares might be worth more to the die hard Genie Energy fans because they have more of a stake on the upside of the Shale operations after the conversion. 
Like I said, I did take about a $.50 profit on some of my position. I will sell everything if the common shares go above $6.70. I will buy more if the shares go down to the $6.30+ range.
 
I really do not want to hold the preferreds.
  • Management is intent on doing the conversion. This makes me a little uncomfortable.
  • In the SEC document, it clearly states that Genie might use the preferreds to raise capital in the future. If they do that, it could put pressure on the price.
  • I do not feel comfortable with IDT Energy to generate enough cash flow to support both the dividend and capital expenditure. 
 
Disclosure: I am long GNE 

McGraw-Hill sells Education Unit for $2.5 Billion

McGraw-Hill (MHP) will not be spinning-off its educational unit, but instead it will sell it to Apollo for $2.5 billion.

“The Company will use the estimated proceeds of approximately $1.9 billion, net of tax and certain closing adjustments, from this sale to sustain its share repurchase program, to make selective tuck-in acquisitions that enhance McGraw Hill Financial’s portfolio of powerful brands, and to pay off any short-term borrowing obligations.”

“McGraw Hill Financial expects 2012 revenue of approximately $4.4 billion with nearly 40% from international markets.  The Company will provide 2013 financial guidance for McGraw Hill Financial when it announces its 2012 fourth quarter and year-end financial results.”

Here is the press release.

Disclosure: I do now own MHP.

Arbitrage Opportunity on Genie Energy

Genie Energy (GNE) reported yesterday that will renew its offer to exchange common shares for preferred shares (GNE-PA). I reported about the interesting exchange offer last month.

To recap the offer, investors have the right to exchange their common shares on a one to one basis for the preferred shares. The preferred has the following features:

  • Has a liquidation preference of $8.50 per share.
  • Annual dividend of $0.6375 per share.
  • Redeemable following October 11, 2016 at 101% of the Liquidation Preference plus accrued and unpaid dividends.
  • Redeemable following October 11, 2017 at Liquidation Preference plus accrued and unpaid dividends,
  • Genie does not have to redeem the issue at all.
  • It is senior to the common shares.

This presents an interesting option because the common stock is trading around $6 and the preferred is trading around $7.  You could potentially buy the shares of the common stock at $6 and exchange it for 7 after conversion.

Obviously, you could short out the preferred. However, there is not much liquidity on the preferred.

I was able to buy shares at $6.01-$6.15 this morning. I expect the common and preferred to converge.

At current common stock price ($6 and change), you are getting a yield of over 10% (.6375/6). Like I said, they should have no problem paying interest on the preferred for a while, since they have a strong balance sheet. 

Disclosure: I am  long GNE

Dean Foods Upgraded at Goldman

Dean Foods (DF) got upgraded at Goldman Sachs today and increased the price target from $20 to $22. 

“We view DF as a compelling sum-of-the-parts story as: (1) we expect a full spin-off of WhiteWave around mid-year 2013 and DF currently owns 87% of WWAV; (2) we see potential for further upside to value if management is able to consummate its intended sale of Morningstar; and (3) we expect DF’s remaining Fresh Dairy Direct (FDD) business to re-rate higher on stabilization of raw milk prices, improved balance sheet and healthy cash generation profile.”

The stock is up about $.60 to $17.20 on the news.

I continue to hold Dean Foods and agree with Goldman on valuation. Read my full analysis on Dean Foods here.

Disclosure: I am long Dean.

Penn Up 30% On Spin-off Announcement.

Penn National Gaming LogoPenn National Gaming (PENN), the North American casino and racetrack operator, is up almost 30% or over $11 to $48.76 this afternoon after it announced to separate into two companies with a tax free spin-off. 

One company will the REIT which will own majority of PENN’s assets and lease them to the other operating company (PNG). PENN shareholders will receive one share of the REIT and $15.40/share of taxable dividend comprised of $5.40 cash dividend and additional REIT shares. The REIT expects to pay a $2.36 annual dividend based on 2013 guidance. 

The transaction is expected to occur in Q4 of 2013 and an S1 filing has not even occurred.

Here is the investor presentation below.

GDE Error: Unable to load profile settings

Disclosure: I do not own PENN

Nacco, Engility, Tyco

Nacco Industries

Nacco Industries (NC) declared a special dividend today of $3.50 and extended its $50 million stock repurchase plan. The company is up $1.50 at around $55.  After the spinoff, I thought it was 20% undervalued and should trade around $53. At $55, I think it is fully valued.

Here is the press release

Engility

Engility (EG) reported third quarter results. The company raised 2012 adjusted earnings forecast and reported an increase of 5% in funded backlog ($788 million). I did not see the margin improvement that I would have like to see for me to buy the stock. Obviously, the market liked the result and stock is up over 6% to almost $20.

Read my analysis here and see the results here.

Tyco

Tyco (TYC) reported third quarter results this morning. The company beat on revenue, but missed on earnings. It also issued a lower 2013 outlook. The stock is up a little bit today. I continue to think the post spinoff Tyco is full valued and does not have much upside. It trades at 15 times 2013 earnings forecasts and does not have much top line revenue growth. Management is targeting 15% earnings growth over the next couple of years mostly through margin improvements. 

See the results here.

Disclosure: I do now own any of the stocks mentioned.

Genie Energy Third Quarter Results

Genie Energy (GNE) reported third quarter results this morning. In my analysis of Genie, I thought the stock was undervalued, but I ended up not buying any shares because I was not comfortable with the churn rate of 6.6% a month at IDT Energy.

In the current quarter, the churn rate is still 6.6% and SG&A expenses were up 46.9%. The SG&A expenses were higher because the company is spending a lot of money trying to acquire customers. The management acknowledged that “reducing churn remains a key operational objective at IDT Energy.” However, I believe churn rate will be high unless they change their business model. Currently, customers are not signed to any long term contracts and are not guaranteed to save money. 

I would continue to avoid these shares until results improve at IDT Energy. Right now, the company is a lottery ticket. If investors really want to get into the company, then maybe longer term options might be the best way to play it.

I don’t like the preferred (GNE-PA) over the long term either. They will not have any problem paying the preferred dividend because the float is so small and the balance sheet ($95.5 million in cash/no debt) is very strong. However, if Genie spends a lot of money on the shale initiatives and nothing pans out, the company could be in trouble.

Disclosure:  I do not own Genie.

Lumos Networks Spin-off

Lumos Networks LogoLumos Networks (LMOS) has not had much luck after it was spun-off NTELOS (NTLS) last year in November. The stock, at $8,66, is down almost 40% from its IPO. However, investors would be wise to take a second look at this busted spin-off.

Business

Lumos is a “fiber-based network service provider in the Mid-Atlantic region.” It has a 5,800 route-mile fiber-optic network presence. The network is not fully owned by Lumos. “83% of our approximately 5,800 route-mile network is under long term leases or Indefeasible Rights to Use, or IRU, agreements that provide us access to fiber owned by other network providers.”

The company has two sources of revenue:

  • Legacy Voice and Network Access
  • Strategic Data

Legacy Voice and Network Access

The Legacy Voice and Network Access source provides “wireline communications services to residential and enterprise customers”. Network Access charges are fees charged to other telephone companies by Lumos for the use of its local network. As you can guess, with the proliferation of cell phones and VoIP enabled services like Vonage, this source of revenue is in a free fall. To make things worse, this July, FCC reduced network access rates and has plans to entirely eliminate them over time.

This source of revenue comprised over 49.7% of total revenue in the third quarter of 2012. Of that Network Access’s revenue was 18.7% and Legacy Voice was 30%.

Revenue from this source declined 11.3% and will fall at a faster rate due to FCC’s reduced rates. Unfortunately, this segment has the highest margins. So, there should be overall margin compression.

Strategic Data

The Strategic Data source has three segments: Carrier Data, Enterprise Data, and IP Services. See Figure 1 below.

Lumos Strategic DataFigure 1: Strategic Data (Source Lumos Networks)

The Strategic Data contributed to over 50% of overall revenue and grew 16.7% in the third quarter.

Carrier Data

The growing consumption of data by cell phone users is putting a heavy burden on the nation’s wireless networks. The Carrier Data segment helps alleviate that problem by directly connecting the Lumos fiber optic network to cell towers. It is a very profitable investment. See Figure 2 below.

Lumos Fiber to Cell Investment ReturnFigure 2: Fiber to Cell Site Economics (Source: Lumos)

Lumos has an existing contract to double the number of connections to cell towers from 150 to 300 by the end of 2012. According to the original spin-off filing, it approximated that its fiber network was near 1,000 cell towers. In early 2012, Lumos estimated that 2,000 cell towers within 3 miles of their network. More recently, it estimated that 5,000 cell towers within a 10 mile network. It wants to double the number of cell sites every year.

This segment is the most important as it is not only profitable, but grew 25% in the third quarter and contributed almost 50% of Strategic Data’s revenue.

Enterprise Data

In the third quarter, Enterprise Data’s revenue grew 12% and contributed to 36% of Strategic Data’s revenue. The enterprise data revenue will grow as it connects more buildings to the fiber network. The number of on-network buildings grew over 20% to 1,150 from 949 last year. Lumos also has opportunity to up-sell to its existing enterprise customers.

IP Services

IP Services grew 8% in the third quarter, and contributed to only 18% of Strategic Data’s Revenue.

Valuation

At Friday’s closing price of $8.66, here are some of Lumos’s financial facts:

  • Market Capitalization of $186 million.
  • Enterprise Value of $486 million. It has a debt of around $300 million.
  • Adjusted 2012 forecast of EBITDA of $88 million.
  • 2012 forecast Capital Expenditure of $60 million.
  • Dividend of $12 million or $.56/share or 6.5% yield.

Obviously at a 2.1 ratio of Market Cap/EBITDA or 5.5 EV/EBITDA, the stock looks cheap. Also, most of the $60 million capital expenditure goes to future growth with very good return on capital. The big question that needs to be answered is that can the Strategic Data keep growing at a double digit rate to offset the decline in the Legacy Voice and Network Access revenue.

The growth largely depends on the Carrier Data segment. It has steady cash flow (5 to 10 year contracts with wireless carriers), and great return on capital. If it can grow the number of cell sites like it plans to, then this is a very cheap stock. However there are a couple of concerns:

  • The company has a contract to add up to the 300 cell sites. It has added 261 sites at the end of the third quarter. However, it has made no mention of any additional contracts after the 300 cell sites. 
  • It does mention that there are 2,000 cell sites within 3 miles and 5,000 cell sites within 10 miles. So, as it adds more sites, the return on capital will be possibly less and less as it is cheaper to add cell sites which are closer.
  • If it adds all 2,000 cell sites, and has EBDITA of $40,000 per cell site, the annual EBDITA would be $80 million/year. Although this would make the stock cheap, it is assuming the very best scenario.

As a result, I am keeping on the sideline with this stock to see what management says in the fourth quarter with regards to the cell sites. It wants to double the cell sites every year. So, the expectations will be that will add an another 300 sites next year. I will add a position if this is the case.

One thing to note that I did not mention is that this is a very competitive industry and Lumos Networks is a very small player. So, I will be very cautious with this company.

Here is the latest investor presentation.

Disclosure: I do now own LMOS