Please visit these links at this great site…
Here are the most read posts for the last 30 days…
2- Barron’s Piece on Cramer: Be Wary of Those Defending Him
3- Marlboro Smokeless on Sale in October
Thursday’s Picks
Jeff Macke liked Oracle (ORCL).Open $20.84
Karen Finerman recommended Limited Brands (LTD).Open $23.47
Pete Najarian preferred Titanium Metals (TIE). Open $32.22
Wednesday’s Picks
Jeff Macke said Macy’s (M) is a buy. Open $32.44 Close $33.72 Gain $1.28
Guy Adami liked Nucor (NUE). Open $58.90 Close $58.77 Loss $.23
Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation weeks)
Guy Adami= 24-17 Gain $40.11
Eric Bolling= 10-11 Loss $14.01
John Najarian= 13-3 Gain $15.54
Jeff Macke= 28-21 Gain $9.59
Pete Najarian= 16-15 Gain $22.47
Tim Seymore= 3-2 Loss $.49
Karen Finerman= 9-4 Gain $4.39
Stacey Briere-Gilbert= 2-0 Gain $1.61
Karen Finerman preferred Altria (MO). Open $68.06
Pete Najarian recommended Companhia Vale do Rio Doce (RIO). Open $29.60
So much focus on the upcoming Altria (MO) spin (here included) has obscured a trend folks need to be aware of. Farmers are planting tobacco on almost 50% more acres than just 2 years ago.
The US Gov’t ended it’s tobacco subsidy system in 2004 that set price levels and dictate where and how much of the crop could be grown. As a result, there has been an explosion of planting of tobacco since then. Why? Profits. Let’s compare tobacco to the other oft talked about crop, corn. Despite the higher labor cost involved with tobacco farming (it is harvested by hand), one can expect about $1800 profit per acre of tobacco, compared with $250 for corn even at the current high price of corn. Farms are sprouting in Illinois (from almost zero to 1,000 acres) and planted acres in Pennsylvania have doubled since 2004, not exactly the places one thinks of when they think of tobacco.
So why does this matter for Altria? Economics 100. The US supply of tobacco is exploding and shows no sign of slowing down. This will bring the cost of the product down dramatically and here is the best part (for investors), because it is still so profitable, the increase in acreage shows no sign of decrease. In fact, the majority of farms currently have plans underway to increase their current levels next year. Why? The previous subsidy system prohibited farmers from taking advantage of the price they could receive for the product by expanding production capabilities. Now, with tobacco selling for $1.60 a pound, it is still enormously profitable at almost 1/2 that. Tobacco is still the most profitable crop to grow and US acreage can double or even triple from current level without the danger of farmers abandoning it for other crops because despite smoking rates in the US going down, they are growing internationally and this enables any slack in the system to easily be exported. In fact US exports of the products have grown almost 50% since 2002.
This is really big news for shareholders. The price decrease in US tobacco costs for Altria should be more than offset by any decrease in use of their products for smoking. This of course does not take into account the expected results of their new smokeless products, just cigarettes.
Wednesday’s Picks
Jeff Macke said Macy’s (M) is a buy. Open $32.44
Guy Adami liked Nucor (NUE). Open $58.90
Karen Finerman preferred Altria (MO). Open $68.06
Pete Najarian recommended Companhia Vale do Rio Doce (RIO). Open $29.60
TUESDAY’S RESULTS
Guy Adami recommended buying Microsoft (MSFT). Open $28.72 Close $28.93 Gain $.21
Pete Najarian said Rambus (RMBS) is a buy. Open $18.22 Close $18.80 Loss $.22
Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation weeks)
Guy Adami= 24-16 Gain $40.34
Eric Bolling= 10-11 Loss $14.01
John Najarian= 13-3 Gain $15.54
Jeff Macke= 27-21 Gain $8.21
Pete Najarian= 16-15 Gain $22.47
Tim Seymore= 3-2 Loss $.49
Karen Finerman= 9-4 Gain $4.39
Stacey Briere-Gilbert= 2-0 Gain $1.61
Some thoughts on what Altria (MO) investors can hope for after PMI is spun off.
The Dividend:
CEO Louis Camilleri said when the upcoming breakup was announced that the dividend of the two companies “would at least” equal the current one which after the recent 8.7% increase sits at $3.00 per share (4.5% yield). The key is his use of the term “at least”. Camilleri has in the past telegraphed the future intentions of Altria while not committing the company to anything extraordinary. This is one of those occasions. Camilleri said “Going forward, I would anticipate that Altria and PMI would have net earnings payout ratio targets of around 75% and 65%, respectively.” 2006, PMI generated operating cash flow of $6.2 billion, while remaining Altria (excluding Kraft) generated $3.7 billion and both will enjoy very strong balance sheets. What could happens to the dividend? See below after share repurchase section.
Cost Savings
Currently Altria is a bloated pig here. Their cost per 1,000 cigarettes produced is 10% higher that rival Reynolds American (RAI). Altria is taking steps to alleviate that with the closing of their NY city headquarters. The company estimates an annual savings from the move of about $250 million. The separation of the two entities (PMI and PMUSA) also eliminates an additional bureaucratic layer that Reynold’s, who has no international operations is currently without creating additional savings.
Share Repurchases / Debt
Camilleri said one of the advantages of the breakup would be, “A more optimal and efficient capital allocation to enhance shareholder value coupled with greater financial flexibility resulting from an increase in the combined debt capacity of both entities..” and “both companies will have the flexibility and capacity to further enhance shareholder value through share repurchases.” Great but how much? As of June 30th, Altria sits on $6 billion in cash, $4 billion of debt and should generate almost $15 billion in cash from operations this year, meaning as things stand now, debt is irrelevant. How much could it take on? Currently Altria has a long term debt to equity ration of .27 vs 1.25 for the industry. If we bring Altria up to the industry average, we get to a combined debt level of almost $30 billion dollars which would enable the company to repurchase 20% of the outstanding shares.
Here is the kicker. If they do that, and keep the total dividend payout at it’s current $6.3 billion annual level (which would be fully supported by operations), this would enable them to distribute approximately an additional 75 cents per share to shareholders, just from the number of outstanding share reduction. This would bring the combined yield of the two entities to a whopping 5.6%.
Now, none of this takes into consideration share appreciation that is inevitable due to the EPS increase associated with the repurchases. Will all of this happen? Not right away of course but rest assured, Altria has been waiting to reward shareholders for some time, I expect all of the following to happen to some degree early next year .
Altria (MO) has this way of giving you what you want and then leaving you panting for even more.
On Aug. 25th I posted “The litigation environment surrounding tobacco has not been this good in almost 20 years. Altria (MO) will take advantage of this to announce the PMI spin at the upcoming board meeting Aug. 29th.”
Altria obliged and gave me the spin I wanted to stopped short of announcing the huge dividend increases and share buybacks I also wanted. They did announce an almost 9% dividend increase to 75 cents a share and made no mention of share repurchases. Altria stopped buying its shares in 2003 after it lost access to the commercial-paper market following a $10 billion ruling in a class-action smokers’ suit in Illinois that limited its financial flexibility. A final decision on the timing of the spin will be announced at a board meeting Jan. 30, Altria said in a statement.
A spin would finally complete the breakup of the former Philip Morris Cos., which traces their roots back to a London tobacconist in 1847, and leave it only with the U.S. cigarette operations. Altria’s cigarette ties stretch back 160 years, when Philip Morris opened a tobacco shop in London. Philip Morris & Co. was incorporated in New York in 1902 and introduced the Marlboro brand in the U.S. the mid-1920s.
The US unit, which accounts for one of every two cigarettes sold in the US, is dwarfed by Philip Morris International (PMI). The overseas division accounts for two-thirds of profit and three-fourths of revenue, and its shipments are rising.
Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania said “Ultimately it is the right move”. He also expects the international and U.S. companies to initiate a “generous share buyback program and pay a substantial dividend.”
Louis Camilleri, 52, will take over as chairman and CEO of Lausanne, Switzerland-based Philip Morris International. Michael Szymanczyk chief of Philip Morris USA, will become Altria’s chairman and CEO. Said Cammilleri, “I have seen no credible argument for keeping the segments together”
A separation of the two units will allow for savings of at least $250 million, including the closure of Altria’s New York headquarters. Almost 2/3’s of Altria’s 600 New York jobs will be cut and some employees will be offered transfers to the Richmond, Virginia, headquarters of Philip Morris USA.
The international unit, which has the biggest share of smokers in Italy, Germany, France and Spain, may accelerate acquisitions and resume share buybacks once operating independently, Bonnie Herzog, a Citigroup Inc. analyst in New York, wrote in a note Aug. 26. Altria spent more than $5 billion on acquisitions in Indonesia and Colombia in 2005 to spur growth in emerging markets.
So, that is that backround. Now we need to know what to do going forward. This is easy, nothing. Nothing.
Take your shares in the spin, keep them and keep your PMUSA shares. Altria has been quite possibly the most shareholder friendly company in the history of the US markets, no reason to expect that to change. Cigarette’s, no matter what you want to say about them are a great investment. As Berkshire’s (BRK.A) Warren Buffett once said, (I am paraphrasing) “you make a legal product for pennies and sell it to addicts for dollars, a great business.”
You will be getting shares in what is a US backed government monopoly thanks to the Master Settlement that will pay a huge dividend and will buy back shares by the truckload. In PMI, you will get shares in a fast growing business that throws of huge amount of cash for both acquisitions and a nice big dividend. How much of a dividend? $30 billion in leverage puts PMUSA at 1.8 times debt/EBITDA, a common industrial level and PMI at 2 times. A 75% dividend pay-out on PMUSA earnings would drive a yield of 5.4% if it traded at 14x P/E on 2008 forecasts. PMI would trade on a yield of 4.6%.
What’s not to like?
The litigation environment surrounding tobacco has not been this good in almost 20 years. Altria (MO) will take advantage of this to announce the PMI spin at the upcoming board meeting Aug. 29th.
The Illinois Supreme Court ordered a lower-court judge to stop pestering them for permission to reopen a failed lawsuit against Philip Morris USA over the company’s light cigarettes because he did not like the outcome. In a 4-2 ruling the court demanded Circuit Judge Nicholas Byron stop asking the state’s 5th District Appellate Court if he has authority to reopen the lawsuit apparently recognizing that the judge in the case ought not to try harder to get a favorable verdict for the plaintiffs than their lawyers.
In March 2003, Byron re-wrote current law and in a decision destined to be overturned issued a $10.1 billion judgment against Philip Morris USA, saying the company misled customers into believing they were buying a less harmful cigarette.
The Illinois Supreme Court then wisely overturned Byron’s ruling. Why? The Federal Trade Commission allowed companies to characterize or label their cigarettes as “light” and “low tar,” so Philip Morris could not be held liable under state law even if such terms could be found false or misleading.
In his typically understated style William Ohlemeyer, Philip Morris USA’s vice president and associate general counsel, issued a one-sentence statement: “Philip Morris USA believes the Illinois Supreme Court reached the right result.” Duh…
This is the very reason Altria is currently pushing for FDA regulation of tobacco. It effectively ends much of the potential litigation against tobacco companies in the future.
When the spin occurs I will hold shares in both companies and have no intention of selling either anytime soon.
With all the talk of the upcoming Phillip morrris International (PMI) spinoff from Altria (MO), we seem to have forgot the future of the Phillip Morris USA (PMU) debuts this October.
PMU said on Tuesday it would start selling Marlboro chewing tobacco in Atlanta this October. PMU, the largest cigarette maker with over 50% of the US market said it planned to sell original and wintergreen flavors and long-cut and fine-cut varieties of the product in the test market.
The product will sell for $3 per tin, between the highest-priced and lowest-priced products in Atlanta. PMU said it was using the Marlboro name since smokeless tobacco users believe the brand stands for “flavor and premium quality.”
In late April I posted “Much has been said about the possibility of MO buying UST for the smokeless business. It will not happen. Why? Smokers are quite possibly the most brand loyal folks out there, chew users, not so much (I speak from experience, used to be one). What does MO have? The #1 brand of cigarettes with over 50% market share. If they introduce a new product, it will be accepted much like the instant acceptance a new Budweiser product gets by beer drinkers. It will receive a trial by chew users who will be inclined to like it as it will be perceived as being a quality product. They will have no problems abandoning their current product to try the new Altria one. The cost/benefit of a self-produced product vs. an acquired product is huge for us shareholders as it leaves billions to be returned to us.”
I love the idea of a Marlboro branded chew product. I have very little doubt it will be an immediate hit. Several people I know who chew are excited about the product and are definitely going to give it a test when it is available.
With smoking rates in decline, a new product with the Marlboro brand label will be a big boost to Altria’s (and us shareholders) coffers.
With the anticipated success of this product, a fat dividend increase, a big share repurchse, and the PMI spin all expected soon, it looks to be a very exciting fall for shareholders.
If you are like me and have 20 or more years before you plan on touching your investments, times like this make you giddy.
The DOW is back down to 12,500 and now at levels seen since April and another day or two of this will give us levels back to November 2006. Why then is this great?
1- The economy is still strong and growing. Profits are still rising at a double digit rate and unemployment is at historically low levels. GDP for Q2 will be revised up and there is no recession on the horizon.
2- Cash rich companies are buying back shares in unprecedented numbers.
3- Over 50% of S&P 500 companies profits come from overseas where economies are surging.
What does it mean? The underlying fundamentals are strong which means eventually share prices are going to turn around. What we have is a credit problem and when traders cannot sell off this debt, they sell what they can which is shares companies like in Goldman Sachs (GS), Dow Chemical (DOW) and Altria (MO). I mean, if we look at it logically are the events of the last month going to stop people from smoking OR will it effect Altria’s balance sheet which is laughingly unlevered? No.
So, are my picks down? Yup, so what?!? Paper losses mean nothing to me, purchase prices do at this point in my investing career. Market disturbances like this that cause mis-pricing of equities like we see now are great for me. What I am busy doing now is lowering my cost basis for recent purchases like Goldman, Wal-Mart (WMT) and Citigroup (C). The last time I could have bought shares of Goldman and Dow Chemical at these levels was Sept. 2006, Citigroup , February of 2006 and you have to go back to March of 2006 to buy Sears Holdings (SHLD) at these prices. The sale price if Sears now is so low that Chairman Eddie Lampert is tripping over himself to buyback shares. He has bought as many shares back in the last month as he had almost the entire last year!
In short, the world is not coming to an end and the economy is still very strong. Keep buying…
You know, if Buffett and Lampert are buying more shares every quarter, why aren’t you?
Dinny Divetre opened the Altria (MO) earnings call by saying “As mentioned earlier, my remarks today will focus on our quarterly results. I will not be addressing specific actions Altria may take going forward to further enhance shareholder value except to repeat what I said last quarter.
He continued, “We remain as committed as ever to meaningfully enhance long term shareholder value. We continue to carefully and diligently examine the benefits of a spin-off of Philip Morris International and other possible value enhancing options to decide the optimal long-term strategic course to follow. And once a decision has been made, we will promptly communicate it.”
Okay, we won’t ask. Earning were about as expected, up 5% after charges related to the NC plant closing. Altria purchased another 30% of a Mexican cigarette maker in a deal valued at $1.1 billion, brining it’s stake to 80% and adding $.30 a share to earnings once it closes. The rest of the stuff was rather vanilla until the Q&A.
Q: “It will take some time before Marlboro Snus will really have a meaningful impact on your EPS. So, would it be fair to say that over the near term, we may hear from Philip Morris more news in terms of the adjacency strategies that will make a more meaningful impact on the EPS and also would some of these adjacency strategies be suitable to be exported to other markets, let’s say Western Europe which demonstrates today many of the same trends as we are seeing in the US market.”
A: “Well, we have announced or PM USA rather has announced that it is going to progress with its adjacency strategy and going to go further into the smokeless category. So I think, you can expect further news from Philip Morris USA. As far as the prospects for Snus you’re right, this is a new category and that’s why we are going to go about it very carefully and cautiously and that’s why we are doing this test — we did the test market with Taboka. We learned a lot. We are using many of those lessons in the introduction of Marlboro Snus. And now we will gradually step this up and you can expect more news from us in the future”
Meaning? I would look towards more acquisitions or large investments in existing makers for Altria. They have a huge cash hoard and a painfully under leveraged balance sheet. There is no tobacco related investment out of their reach.
Q: ” Speaking of Snus and smokeless, certainly there is a shift, and depending on what happens with the federal excise tax increase, which certainly will also include other tobacco products. It’s going to depend on the gap. It’s going to depend on how all the manufacturers handle it. If it occurs, where do you see your portfolio makeup in terms of, as you look out the next 5-10 years and I am thinking specifically PM USA? If you use just the first sort of step into smokeless, would you expand like you said into other tobacco products? Do you feel that will become a larger and larger stake of your overall portfolio into a less (inaudible) top-line.”
A: “Philip Morris USA has announced and said many times in the past, they are committed to their adjacency strategy that covers a wide range of non-cigarette products. And if these are successful which we hope they will be, then obviously these products will make up a larger part of the business than they do today. The question remains. Which are going to be successful? Which are not going to be successful? And it’s impossible to predict but I would venture to say that, five years from now certainly non-cigarette products will make up a meaningful proportion of the Philip Morris USA product mix.”
Commenting on more potential M&A, Devitre said “there are always going to be M&A opportunities out there and there are opportunities out there today, but there are many business development opportunities out there today and we just showed you one with our acquisition of 30% of our Mexican business, so there are many opportunities like that. There are also free standing M&A opportunities..”
Clearly two things are happening. First, Altria some how, some way is going to get into the smokeless tobacco business and second, mergers or acquisitions are in their future. It is clear that the Altria we know to day and the Altria we will be holding shares of years from now will be a dramatically different company.
As for the PMI spin? We will wait patiently for the August 29th board meeting for an announcement or at the very least dividend or buyback news…
It appear that Altria (MO) is taking another step to it’s eventual spin of Phillip Morris International (PMI). Today they announced a consolidation of operations that will result in a North Carolina manufacturing plant being closed by 2010. The Cabarrus, North Carolina plant employs 2,500 workers will be closed and manufacturing will be consolidated at its Richmond, Virginia plant. The production for PMI that currently is done in Cabarrus will be moved to Europe, eliminating shipping/freight costs for PMI. Most hourly workers in Carrabus will be offered work at the Richmond facility.
The company expects total savings by 2011 to be $335 million per year. Of the savings, $179 million will go to Philip Morris International and $156 million will go to Philip Morris USA. 2007 charges will be $325 million, or $0.10 off of EPS, mostly taken in Q2 and $50 million will come later in 2007.
This is another step for Altria’s Phillip Morris USA (PMUSA) to separate from the International operations (PMI). With this move PMI will now have it’s own production facilities and be wholly functionally independent from PMUSA. It is starting to look like we may get an announcement of the intentions here at the next board meeting (along with a nice fat dividend increase)in Q3.
I am changing how the portfolio is tracked. It will not effect the performance and will make accessing it easier.
If you follow this link you can see it here. Bookmark it to your browser and it updates I believe at the end of each day. It also allow comparisons to all types of benchmarks. All in all, I think it is much better.
The website assumes all dividends are reinvested, which is something I do anyway, but do not have the excel abilities to track on my current spreadsheet. The way I currently do it is to take the cash and I reflect that as a decrease in the purchase price. While accurate, it painfully understates the effect on results when dividends are reinvested. Icarra does not, track the options I sell but the dividends I receive and their reinvestment outweigh that consideration. They are attempting to add that capability soon and if and when they do, I will update it to reflect that.
There is supposedly a way to integrate the chart into the blog. When I figure it out, I will do it.
Current holdings are (in order of size, LARGEST FIRST):
Goldman Sachs (GS)
Sears Holdings (SHLD)
Altria (MO)
Sherwin Williams (SHW)
Wal-Mart (WMT)
Citigroup (C)
US Oil Trust (USO)
Dow Chemical (DOW)
Archer Daniels Midland (ADM)
Owens Corning (OC)
Leap Frog (LF)
Now, If Sears Holdings (SHLD) gets much cheaper, I may just have to pick up more shares this week which would make it the largest holding. We’ll see.
Sometimes you read something that just strikes you as so ironic.
Under bills now wending through Washington, FDA would be empowered to approve cigarette makers’ marketing claims if a tobacco product is scientifically proven to “significantly reduce harm” to smokers, and the product’s availability would benefit the “health of the population as a whole,” the WSJ reports. That designation could be provide “a potentially lucrative opportunity” for the company.
Philip Morris (MO)\ has a bunch of test products in the works, including one with a carbon filter, and another with a battery-powered device that heats the tobacco. But it’s unclear whether any of them would qualify for the potential FDA-approved marketing claims. And the public health community is skeptical. “We must be extremely wary of claims made by manufacturers,” the dean of the University of Michigan School of Public Health told the WSJ.
Altria has supported this legislation from the beginning while it’s competitors like Reynolds (RAI) have fought it. By embracing it’s inevitable passage and participating in it, Altria has leap frogged over it’s competition in developing products that will take advantage of the new rules.
Here is the irony. While “lights” suits wind their way through the courts across the nation, the FDA will undoubtedly end up endorsing a cigarette that is “lighter” or “safer”. You just cannot make this stuff up.
The government should just back off tobacco companies, every time they try to nail them, they only end up making their business stronger.
I usually ignore things like this but when they cross the line from a well though out rebuttal (like Andy Kern’s Berkshire rebuttal to me that I requested from him and actually posted on my site) to one that takes selective items from a post of mine while ignoring and misstating others to make a point, I need to set the record straight.
In a post, David Cohen states: “Aside from ignoring and/or mis-stating key facts (Bill Ackman is indeed a long term value investor, and Nelson Peltz, who still holds Wendy’s shares, also pushed for the THI spin-off), I think the argument is off-base.” THI is Tim Horton’s International
First things first. I never claimed Ackman was a long or short term investor and as a matter of fact I alluded to him still owning McDonald’s (MCD) saying “he recognizes the bright future there”. What I said was that he had “a short term interest in the company (Wendy’s)”. Ackman first disclosed a Wendy’s stake in April 2005 and by November 2006 (immediately after the Tim Horton’s spin) had liquidated it and yes I consider this short term. Don’t believe me? Let Ackman himself tell you, “We buy things when they are discounted, and once they reach the potential of what we think they are worth, we sell. It could take months, or it could take years. That is our business.” Bottom line? He is “long term” or “short term” depending on the situation and what he wants out of it. Is this any different that what I said?
Nelson Peltz. In my post I said “agitation from activist investor Nelson Peltz and former shareholder William Ackman that action be taken to boost the company’s share price.” I am not sure what the point of restating my comment as though I alluded to something else is.
He continues “Sullivan’s argument is that Wendy’s could be doing much better if it only sold coffee to its customers, as McDonald’s seems to be succeeding in doing. My retort: Can’t Wendy’s (WEN) sell coffee without THI just as it could with THI? What in the world does Tim Horton’s have to do with Wendy’s selling coffee?”
Again this only touches the and I think intentionally misses the core of my argument. It never implied it was the “only” thing they would have to do, just a glaring opportunity they now do not have. Also, the argument was “premium” coffee, not “brown liquid in a cup”. Again to accurately quote my post, “given the overwhelming success McDonald’s (MCD) has had with it’s premium coffee offering.” McDonald’s sold coffee before but the introduction of the premium (Newman’s Own) stuff has lead to an explosion in coffee sales for the chain. Along with the added customer trips come more ancillary sales of food items. There is a reason in every monthly earnings release “breakfast” (coffee) is at the top of the list of reasons for yet another record month at the Golden Arches.
If anyone has been to where Tim Horton’s does business, they are wildly popular, more so than Dunkin Donuts. It is a premium brand in those areas. Are we really going to believe that selling premium coffee at Wendy’s drive thru’s would not lead to increased business? This is true if for no other reason it would stop people from defecting to McDonald’s for a cup and give them a reason to stop at Wendy’s. More customer trips always equal more sales in the fast food business. Selling Tim Horton’s coffee would have assured additional trips to Wendy’s as McDonald’s has proven premium coffee drives business.
Again Mr. Cohen: “I would argue that if the spin-off of THI never happened, then Wendy’s would still be basking in the glory of its well-run THI operation and not focusing on its mismanaged core business. Now that THI exists (and is thriving) on its own, everyone can see how badly Wendy’s is lagging behind McDonald’s and Burger King. With this transparency comes shareholder pressure to improve operations. If the THI spin-off never happened, it never would have been so painfully obvious how badly Wendy’s is managed. With the transparency of the spin-off comes a recognition of problems. While the solutions may not be easy, recognition is the first step.”
Not sure why he “would argue” this after I said “Now holders are stuck with a third rate burger chain that is missing what would have been the fastest growing part of it.” I think everyone new the burger chain was mismanaged and if they did not, they just did not look into the company very well before they bought shares. What Horton’s did was buffer shareholders while they tried to fix it. There seems to be this thought out there that management cannot walk and chew gum. Like the recent Home Depot (HD) sale announcement, it is a short term gain at the expense of long term performance. Neither the Tim Horton’s spin or the Home Depot sale are going to “fix” the problems at the parent nor will they make them any more apparent. They both will make shareholders happy initially and scratching their heads later. Why? Had either Wendy’s or Home Depot fixed what really ailed them and kept the items they sold off, shareholders would have been rewarded in multiples down the road with two thriving businesses that would have had wonderful synergies together.
Now, am I opposed to all spins? No, just the ones done for the wrong reasons. Ones like the Wendy’s and Home Depot spin are like taking diet pills instead of exercising and eating right. You’ll get immediate gratification at the expense of long term benefits. In the post I referenced the Chipotle (CMG) spin by McDonald’s as one that was done right. The two businesses were unrelated (Mexican food vs Burgers and eggs)and the synergies between the two on a retail level were nil. It made sense to cut Chipotle loose to shareholders so they could experience the full benefits of both operations. It was not done to mask problems. Even the recent Altria (MO) spin of Kraft (KFT) was done for the right reason, to fully recognize the full value of BOTH entities, not one.
Mr. Cohen concludes: “Now, shareholders can decide to own either Wendy’s or Tim Horton’s or both. As a shareholder of Wendy’s, you would’ve received your fair share of THI in the spin-off. You can decide to do with that whatever you want, but you can easily create the old Wendy’s/THI conglomerate by just keeping your shares. I don’t understand why having more flexibility in building your position results in a destruction of value.”
I agree, you can own one one, both or neither. You cannot replicate the old conglomerate by owning both, however. You cannot replicate the cost savings of not having two entirely separate corporate structures, the increased purchasing power of the larger combined entity, the savings from combining advertising, the savings from the integration of logistics in getting product to locations and the increased revenue that could be realized from cross selling products with each other.
Having portfolio flexibility and the destruction of value in Wendy’s “Long Term” (which was the title of my original post on my blog) are two wholly unrelated items. This confuses the “price” you received for your shares vs. the “value” in the company. Shareholders had flexibility when they first bought shares and continued to have it as they held them. They could have sold them or added to their position at anytime.
The long term value in the combined entity would have come from what the two businesses could have done for each other to generate earnings for shareholders. My argument was and still is that Wendy’s was better off with Tim Horton’s long term than without.