My 691% Return * & a New Spin-Off
June 29, 2011
– Comments (9) |
RELATED TICKERS: SUG
, WMB
, SHLD
Wow that was fast. I go away on a short vacation with my family and boom a stock that I only bought a couple of weeks ago soars. Those of you who read my musings from time to time will recall that I wrote about establishing a position in a company that recently agreed to be bought out by Energy Transfer Equity (ETE) earlier this month, Southern Union Company (SUG). My investment thesis for buying a stake in SUG, was that Mr. Market was underestimating the value of the purchase offer which was made in the form of a strange merger security rather than a straight cash or stock deal (see post: An investment idea that I haven't heard anywhere else yet...A new "Merger Security"). I viewed this as a trade that had very, very little downside and a decent, but not huge upside.
I always knew in the back of my mind that the possibility of another, higher bid being made for SUG existed, but that was never the reason I made this trade. I suppose that a competing offer was essentially another free embedded call option in this low risk trade. Well what do you know, another company, one that I coincidentally currently own a small position in Williams Companies (WMB), decided to make a more aggressive offer for SUG a week or so after I established my position.
This offer, instead of the strange $33/share merger security that ETE was offering, offered $39/share in cash for SUG. Not surprisingly, SUG's stock immediately shot up nearly 19% above the price that I purchased my position at. I decided to sell my stake in the company a few days later and pocket that 19%, for a solid 691% annualized return on my money (I put the * in the title of this article because this isn't an absolute return, but an annualized one). I may have sold a little too early because I have missed out on the $0.50/share that Mr. Market is now betting that another, higher offer will be made for SUG, but I am happy with my profit. My logic in selling is that I don't think that ETE has enough access to capital or the willingness to beat WMB's offer and that I don't see anyone else coming out of the woodwork with a better one. Furthermore, it is very possible that this deal will result in a lawsuit between the three companies that will drag on for an extended period of time or even worse that somehow SUG's management, which is being handsomely in the form of multi-million dollar consulting contracts that are associated with the ETE offer, will somehow be able to force the first deal through.
Anyhow, this was a very interesting situation to be involved in. It will likely continue to be interesting for some time as I follow it from the sidelines. Let's hope that I didn't leave any money on the table by selling too soon.
In other special situation news, late last week Sears (SHLD) announced that it will spin-off a small hardware store chain that it owns called Orchard Supply Hardware Stores. I've never heard of Orchard Supply before. Apparently it's a California chain.
Sears to spin off Orchard Supply Hardware
Is anyone out there familiar with it? Orchard Supply is so tiny compared to SHLD that this deal seems like it might go under the radar. If Orchard shares come under selling pressure after they are issued to Sears shareholders who theoretically night not want them, there might be an interesting opportunity to pick them up on the cheap. Having said that, more often than not this phenomenon...which used to happen quite frequently with spin-offs...doesn't seem to happen any more. It's difficult to say why that is the case, but it's likely a combination of the popularity of Joel Greenblatt's book You Can Be a Stock Market Genius, which extols the virtues of spin-offs, combined with the massive number of hedge funds out there looking for places to park their money. In any event, this is definitely something to keep an eye on and again, if anyone out there is familiar with Orchard Supply, I'd love to hear more about the stores.
Deej
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