Kaiser Group (KGHI) is a longer term holding of mine, and not for any good reason. Essentially it has been a value trap that I got into at much too high a price, and much of the potential value melted away this summer when they lost an arbitration hearing. I've been stuck holding it waiting for management to undertake some course of value realization (either acquisition or liquidation), but something very interesting and unexpected just happened, and I felt that makes it worthy of a few thoughts.
There are some very detailed writeups on KGHI on ValueInvestorsClub.com from 2003 and 2005, though a little dated, I can recommend because they explain the old story well and have recent comments that are useful. To summarize quickly, Kaiser's old business was being half owner of Kaiser-Hill (KH), which was in the process of cleaning up Rocky Flat nuclear waste dump. That's done and Kaiser Group is facing the decision to either liquidate and return approximately $40-$42 per share in net cash (with tax refunds) per share to shareholders or to use a big cash pile to buy a new business.
I've had good confidence that mgmt would do the right thing here, especially since Kaiser Group is effectively controlled by Michael Tennenbaum and his sons. I expect them to be pretty savvy and rational about building shareholder value, and honestly hoped for an acquisition that would create significant value in excess of book.
But on Friday, the company did something curious. It announced an ordinary dividend of $6, payable January 16th for shareholders owning it as of January 2nd. This is curious because it's an action that doesn't support either of the two end goals I had hoped for. Since it's an ordinary dividend, it's taxable, whereas a liquidating distribution would be a return of basis, and not taxable. So if this is the start of liquidation, it's a very tax inefficient way to start. And if the company is intending to buy a new business, why dividend out cash until you know how much you'll need for the acquisition? I had a brief conversation with the CFO on Friday that explained nothing..
So where does this leave us? Besides confused, it appears this action may provide an interesting minor "arbitrage" opportunity. Currently my liquidation range estimates are $40-$42 (note that these estimates include assumed tax refunds that won't be available until 2008). So the stock, at $30.50, is trading at about a 25% discount to liquidation. Post dividend, the liquidation average est would be $35, but the basis of a purchaser at $30.50 would now be $25.50 (roughly after dividend tax). That increases the discount to over 27% (even more if KGHI changes the dividend to a liquidating distribution). So the dividend directly makes KGHI even cheaper than before. And if Mr. Market trades the post dividend KGHI at the pre dividend discount, KGHI would be around $26.25, providing a 3% gain in three weeks. Of course if Mr. Market likes what the dividend says about management intentions, we might even see a bigger gain.
It's also possible KGHI may trade "due bills" during early January, meaning it may still be bought after Jan. 2nd, but before Jan. 16th, to still get the dividend. Due Bills rules are always confusing, esp. for a pink sheet stock, so we need to wait and see if that's true in this case.
Note: Long term the value here is dependant upon the performance of management There is also the possibility of potential liabilities from an audit of Kaiser-Hill reducing NAV. As always, do your own math and your own research. And let me know what you think,
good luck,
Randy
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6 comments:
Great write-up and great blog.
One question - what is management's track record in acquisitions? How are you sure that they won't take the assets and diworsify.
wabuffo
Management doesn't appear to have any track record.
"Douglas W. McMinn, 58, has been President and Chief Executive Officer of the Company since September 2004. Mr. McMinn has been a director of the Company since September 2004 and also serves on the Board of Managers of Kaiser-Hill. Mr. McMinn has been a senior officer of the Company and its predecessors for more than 17 years. Mr. McMinn is the Chief Executive Officer of Global Trade & Invest, Inc., a firm which he co-founded to engage in international trading activities and to provide consulting assistance to companies doing business internationally. Mr. McMinn served in the United States Government as a staff member in the National Security Council and as an Assistant Secretary of State for Economic and Business Affairs, U.S. Department of State. Mr. McMinn holds an M.L.A. from Johns Hopkins University and an M.A. from Johns Hopkins School of Advanced International Studies. Mr. McMinn owns 3,000 shares of Kaiser Common Stock."
The CFO has a similar background. So my expectation that any transaction will create value is based on two factors. First I've spoken to the CEO, and he's said the right things (and seemed genuine when he said it). Most importantly, Mr. Tennenbaum has a strong track record. He's no dummy and I can't see him allowing mgmt to destroy value here.
But I also can't explain the tax inefficiency of this dividend. That's not the smartest way to realize shareholder value.
I had been holding with the thought that it was too cheap to sell but not cheap enough to buy.
I hate that limbo stage!
Now, the news of the div is encouraging.
Any guess as to what they might be able to pay out/share within the next 12 months and still have enough reserves to take care of a worst case with the remaining issues?
Tracy
They have about $70M in cash right now, and almost $10M in liabilities. That $60M is worth around $33.50 per share before the dividend. That doesn't include any more monies coming from KH, their future tax refunds ($10M), a note on some property, etc.
But if they have other liabilities (KH escrow), it doesn't account for that either.
Randy - Where have you read about any possible negative reprocutions from the Rocky Flats project? I read every article on the DOE's RF site and all I could find were good things about KH's work there including the fact that they completed the project ahead of schedule.
I don't expect much to come out of the Rocky Flats cleanup, but have to mention it as a potential liability. There is a government audit in place, and it wouldn't be surprising for a gov. auditor to try to justify their existance by denying some expenses.
But they didn't do the work, their subsidary Kaiser-Hill did, so I'm not sure KGHI would have to contribute to any deficiency. They might lose some monies that KH still hasn't dividended back to them though.
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