Monday, June 22, 2009

Liquidate Loews? Please.

Loews Corporation (L) is a company that gets far too little attention from the investment community. Somewhat akin to Berkshire Hathaway (BRK.a/BRK.b), Loews is a conglomerate with wholly-owned subsidiaries and publicly-traded holdings. The company invests capital using value investing principles and has a sizable presence in insurance. I think it is one of the most compelling investment vehicles around or it could be.

The story of Loews and the Tisch family is fascinating and deserves the attention of investors. This is a success story that needs be told, but it is beyond the scope of this article. It has been told (sporadically) elsewhere.

The issue at hand is the significant and persistent discount that exists between Loews' market value and its NAV (net asset value). It is an economic vacuum that must be filled.

To illustrate the scope of the problem, let's start with the following reference point:

Current Loews share price = $26.50
Shares outstanding = 435.2 million
Market capitalization = $11.53 Billion

The company holds equity stakes in 3 publicly traded companies.
Boardwalk Pipeline (BWP) 130,000,000 shares
CNA Insurance (CNA) 242,100,000 shares
Diamond Offshore (DO) 70,104,620 shares

Combined value (as of today): $12.5 Billion ($28.60 per L share)

That's right. These holdings alone are worth more (according to Mr. Market) than the company that owns them. Do the math!

This can't be right... Aren't markets efficient? Loews must have a pile of debt, right? Nope.

The company has $1.5 Billion in NET CASH ($3.40 per Loews share). And it's profitable.

In buying Loews, investors get a portfolio of cash and stock that is worth 21 percent MORE than their purchase price. But wait... there's more.

If this were not bad enough, Loews also owns a hotel business, a large natural gas business (Highmount) and some sizable preferred positions in CNA and BWP. Yup, just like Warren Buffett. They have fat yields too. Currently, all this stuff has a value of negative $2.4 billion. These holdings may not trade on the NYSE, but a value of less than ZERO?

Are you getting the point?!?

All told, I calculate the NAV of Loews to be around $43 per share. I like round numbers. That's 60% more than the current quote. How is this possible?

For one you need the world's worst investor relations department (there, I said it). This is only my opinion, but how hard is it to illustrate the merits of getting $43 worth of stuff for $26?

In short, Loews is its own worst enemy and if this doesn't change quickly, the holding company should be unwound. At the very least, the company should distribute the public shares it holds. At least then the market would have to reconcile the negative value that is being placed on "everything else".

There is a precedent for this. Loews distributed (ok, exchanged) its holding in Lorillard (LO) a year ago. Why stop there? Loews could force Mr. Market to realize his mistake, but they take a pass day after day.

When a closed-end mutual fund sells at a persistent discount to its underlying NAV (net asset value), investors clamor for an open-end conversion. Open-end mutual funds sell at NAV, so a conversion erases any discount. This article is my feeble attempt to highlight the issue and perhaps close the discount gap. Call it enlightened self interest.

Loews isn't a loud, boisterous company. Management doesn't go out of its way to communicate with investors. It merely tolerates quarterly conference calls and, in general, isn't seeking any publicity. Having managers who are not cheerleaders is a good thing (thank you Martha Stewart). I like managers who aren't too touchy feely. In fact, I greatly admire Loews and its management. But this situation is ridiculous and the investor relations staff is incompetent.

Loews' structure is different, but hardly complex. Because of its 89% ownership of CNA, the insurer's books are consolidated onto Loews' statements. This makes the company appear more complex than it really is. But should I be the one telling this story?

The persistent discount is a disgrace. It is costing Loews' shareholders money and it should be addressed. Stock repurchases have done nothing to close the gap. My approach would ensure a return for shareholders and take Mr. Market out of the equation.

The options as I see it are:
A. Educate the investing world about the obvious undervaluation
B. Force the issue through an unwind of the holding company

But Loews chooses Option C: None of the above.

How Loews' management can tolerate this year in and year out is beyond me. They need a real IR department and a commitment to educating investors. Better yet, start distributing shares in BWP, CNA, and DO.

The Loews holding company is obsolete. The discount is a screaming tribute to its failure.

5 comments:

  1. Great write-up! As a fellow shareholder, I agree with your sentiment.

    I read somewhere that the discount is due to potential tax consequences if the businesses were indeed sold. Do you think this is true?

    Also, how would the holding company treat the private companies - Highmount and Hotels - in an unwind?

    Thanks again!

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  2. I am not an expert on the tax consequences of such a deal, but there is no way they could account for the size of the discount.

    If Loews distributed the publicly traded holdings to the public, the private holdings could be retained. The result would be a company that the market would be forced to gradually revalue. So a partial liquidation, rather than a full liquidation.

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  3. Dear Mr. Lonely Value Investor,

    I enjoyed reading your write-up on Loews. However, I think you could be focusing a bit too much on Mr. Market yourself. If the Tisch family is anything like Buffett, they are probably more interested in the fundamentals of the businesses they own/control than what the market thinks they are worth on any given day. Long-term value investors tend to focus on the businesses rather than market prices. Would you suggest that Berkshire Hathaway distribute the shares of its publicly-traded holdings?

    One other point: Holding company discounts are very much the norm. This is because such structures can lead to inefficiencies and concerns about agency problems (even with honest managements). In my part of the world (Asia), discounts can run as high as 70%-80% during bear markets.

    Keep up the good work.

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  4. Interesting about Loews, but Tisch isn't Buffett... until last year Tisch remained CEO of Diamond Offshore, and he's still Chairman there. Can you imagine Buffett thinking he could run a highly specialized, technically advanced, physically challenging offshore drilling company? Tisch majored in econ and finance, not engineering or resource mining. Part of Buffett's brilliance is the ability to identify good management, put them in place, then back off. Something tells me Tisch isn't backing off if he's Chairman of DO and a Director of CNA.

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  5. I am also a fellow shareholder and love to continue to see the deep discount, so I can keep purchasing. Tisch is a long term value oriented investor who you can tell is disappointed with the discount, but that's why they have been doing so many share repurchases. If you are looking at this short it might be disappointing, but if you look at this with a long-term window (5-10 years) then its a great opportunity. I find their conference calls and IR more than adequate and would be concerned if they were pumping the stock. If you listen to enough calls you can start to get a very good feel for Tisch's style and read more into his comments.

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