Wednesday, January 20, 2010

A Spin-off for Loews?

Loews Corp (L) is set to announce earnings on February 8th. With that date fast approaching, I thought it was time to revisit our running discussion of the company.

The only news out of the company of late was the a 455,069 share stock sale by Jonathan Tisch. Mr. Tisch is a member of the controlling family and as a director of the company, this was a reportable event. The stock proceeds of $16.6 million may seem significant to mere mortals, but the 2009 Loews proxy attributes some 8,341,929 to Mr. Tisch. Total value: $313 million. So other than a (minor) portfolio adjustment, Loews has been very quiet.

To bring the uninitiated up to speed, Loews is a conglomerate with an eclectic mix of assets. With roughly 430 million shares outstanding and a current share price of $37.60, the company's total market value is $16.1 billion.

For this purchase price, investors receive a company that owns:

90% of CNA Financial (CNA) or 242,382,673 shares
50.4% of Diamond Offshore (DO) or 70,104,620 shares
72% of Boardwalk Pipelines (BWP) or 114,219,466 shares

These stakes alone are worth $16.4 billion.

In honor of Ron Popeil, let me say, "But Wait! There's More!"

In addition to these fine equity holdings, you also get the following items for free. And without those pesky handling charges!

Loews also owns a nice collection of non-public assets including:

Highmount Exploration and Production (natural gas)
Loews Hotels
Boardwalk Pipeline General Partner
$1.25 billion of CNA pfd stock
22.9 million Boardwalk Class B units
$100 million of Boardwalk sub debt

And if you "order now" they'll throw in $1.9 billion in NET cash.

For those of you who are counting, this non-public asset stub is valued (by Mr. Market) at the low, low price of NEGATIVE $300 million. You don't need an HP 12C to realize that Loews is demonstrably undervalued.

Sadly, despite fluctuations in the stock price, this value disparity never seems to narrow. Is it because Loews' investor relations isn't telling the story? Who knows.

The point is that frustration must be running high in the management suite at Loews. The Tisch family members are value investors at heart. The unrealized value at Loews must be a thorn in their collective sides. They've even created a chart to illustrate the company's assets. Unfortunately, I must be the only one digging around their website to find it!

The June 2008 sale/exchange transaction with Lorillard (LO) was an attempt by Loews to reconcile the NAV discount problem. The company exchanged shares of Lorillard/Carolina Group for Loews shares. It was effectively a share repurchase of Loews shares and the sellers got the company's tobacco stake in return.

Nonetheless, the discount persists. But don't be surprised if Loews tries again.

If Loews distributed its public holdings to shareholders, Mr. Market might get a clue. The remaining assets of Loews would be $1.9 billion in cash and the considerable non-public holdings listed above. Presumably the market would finally assign a positive value to these assets at that point. One wonders if Mr. Market can count?

Don't look for such wholesale actions from Loews. Any steps in this direction will likely be gradual.

In a recent Investopedia article entitled Potential Spin-offs in 2010, author Will Ashworth makes this prediction:
(M)y first prediction is that Loews spins off its hotel division, which generated $380 million in revenue and $73 million in in 2008. What kind of value could Loews fetch? Hyatt stock sold for 15-times EBIT. At a similar multiple, Loews might be able to get as much as $1.1 billion for the division. And it could achieve a higher rate of return on its capital elsewhere.
Read the history of how the Tisch's created Diamond Offshore and you'll see that taking bold action and building shareholder value are not just slogans for Loews.

These guys know value when they see it. They make a habit of repurchasing Loews shares when the value is compelling. Shares outstanding are down 40% over the last 15 years. Expect to see more buybacks in the not-to-distant future.

If the Loews hotel chain is worth $1.1 billion, then I estimate the cash and non-public assets are worth at least $7 billion. Add this to the publicly-traded assets ($16.4 billion) and you get a net asset value (NAV) of $54 a share - 40% above the current share price.

It must have pained Jonathan Tisch to sell at these levels.

Loews is redefining the term "conglomerate discount". It's not a discount, it's a chasm. It's not warranted and needs to be closed. Bold moves are needed.

A spin-off of the hotels would be one step in the right direction. Loews management can force Mr. Market to revalue the company and its about time they did so.

Otherwise I'll have to forgo the "Popeil Pocket Fisherman" and opt for "Hair in a Can".

Disclosure: The author owns L shares.

18 comments:

  1. I agree with you. Spin-off is a very reasonable choice. If they wish, Tisch family can still control those subsidiaries. Maybe Loews will become smaller, but it's really good for both Tisch family and shareholders if market can realize true value.

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  2. You mention "$1.9 billion in NET cash"

    Conglomerates with consolidated subsidiaries are always tricky for me,
    and insurance float always complicates things.
    Can you explain how you arrive at that figure?

    Cash and short term investments on the top level balance sheet are $7.4bn together, long term debt alone is $9.5bn.

    Thanks
    Mungo

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