Wednesday, November 15, 2017

BBX Capital: Bluegreen Vacations IPO

BBX Capital (BBX) is familiar to many investors who fish in the same small cap value and special situation ponds.  Most of the company's (and predecessor BFC Financial) colorful management team and history has been hashed out other places, the company fell off my radar until they recently announced the listing of their timeshare company, Bluegreen Vacations (BXG).  At the mid-point of the indicated range, BBX's remaining 90% stake in Bluegreen would be worth considerably more than BBX's market cap resulting in the remaining assets being valued below zero.  There are a few moving parts here and I know some readers know this company far better than me, but hopefully I got the numbers directionally right.

Bluegreen Vacations Corp (BXG)
The timeshare business is hot again -- Wyndham (WYN) is spinning off their exchange and timeshare business, ILG and Marriott Vacations Worldwide (VAC) are reportedly in talks to merge and Hilton Grand Vacations (HGV) is up ~60% since it was spunoff in January.  Sensing an ideal market for a new issuance, BBX Capital is floating up to 10% of Bluegreen in an IPO scheduled for this week.

Bluegreen Vacations is a typical timeshare business, they have a mix of VOI ("vacation ownership interests") sales from their own developed properties but have moved toward a capital light model where they sell VOIs for third parties for a fee.  Once a timeshare is sold, Bluegreen then provides financing for up to 90% of the cost of the timeshare for a mid-teens interest rate that fully amortizes over 10 years.  Once the timeshares are sold and financed, Bluegreen then manages the timeshare resorts for a fee in a cost-plus model under a long term contract.

The difference between Bluegreen and their peers is in the end consumer they serve.  Bluegreen is primarily focused on "drive-to" destinations and a more value focused/lower end demographic, think more Myrtle Beach and Panama City, less Hawaii and Aspen (although they do have resorts in both locations).  Their average customers income is around $75,000 versus $90,000 for the timeshare market as a whole, certainly below average, but still solidly a middle class demographic and the average timeshare is ~$13k verus $20+k for the other publicly traded companies.  Prior to 2008, Bluegreen didn't utilize FICO scores in making credit decisions on their timeshare loans, basically anyone was given financing, now they have 41% of sales paid in cash within 30 days and those that do finance, have on average FICO scores of 700.  And remember, timeshare lending is a pretty great business, if someone defaults, Bluegreen will generally cancel their timeshare after 120 days delinquent and simply return the points to their inventory to be sold to someone new.   Nearly a friction-less foreclosure process. To reach their target consumer, Bluegreen has partnered with Choice Hotels and Bass Pro Shops (they have displays/reps in stores), as well as promoting their product through kiosks at outlet malls that are often located near drive-to resort towns.  In total, they now have 211k timeshare owners and manage 67 resorts.

The IPO has an offering price range of $16-18/share, there will be a total of 7,473,445 shares (including the underwriter's option) offered, half new shares from Bluegreen and half coming from BBX Capital as the selling shareholder.  After the IPO, public shareholders will own 10% of the company and BBX Capital will own the remaining 90% of shares.  To skip straight to the main thesis: BBX will own 67,261,010 shares of BXG, at the IPO mid-point of $17, that's an implied value of $1.14B for their remaining stake, plus the $63.5MM in cash received from selling their shares via the IPO, that's significantly more than BBX's current market cap of $871MM.

Back to Bluegreen itself, what's the valuation look like at the mid-point of $17/share?  Bluegreen has done $148.8MM in EBITDA over the 9/30 TTM (subtracting interest expense on VOI securitizations), will have cash of $181.6MM after the IPO and $237.7MM of recourse debt.  At the $17/share mid-point, I then have the enterprise value at $1,326MM for a 8.9x EV/EBITDA multiple.  There's probably a bit of apples and oranges going on with the consensus EBITDA multiples on Bloomberg, but timeshare peers (VAC, HGV, ILG) all trade for 10.5-12x EBITDA, so while almost 9x does seem expensive on its own, Bluegreen is relatively cheap compared to peers.  It really is an opportunistic time to IPO it again, getting a good historical multiple while still appearing cheap against comparables.

Rest of BBX Capital
BBX Capital outside of Bluegreen has $140.4MM of cash as of 9/30, following the IPO of Bluegreen,they'll have about $181.3MM in cash with $42.2MM of non-Bluegreen debt.  So again, just the value of net cash and Bluegreen shares is worth about $12.47 per BBX share and the stock trades at $8.50 today.

Additional Assets at BBX Capital:
  • BBX Capital Real Estate: Mostly as a result of the failed BankAtlantic predecessor, BBX has a grab bag of real estate that they foreclosed on and are still in the process of redeveloping for future sales.  The real estate is marked at $180MM on the balance sheet as of 12/31/16, but like other similar financial crisis real estate plays, they marked the assets down at rock bottom prices, much of which has recovered since.  Hard to place a value on these assets, but it's likely significantly higher than $180MM.
  • BBX Sweet Holdings: Collection of candy companies, the largest of which is IT'SUGAR, purchased for $58.4MM back in July, it has 96 retail stores in 26 states and DC.
  • Renin Holdings: Manufactures interior closet doors, wall decor, hardware and other products for the home improvement industry, its tiny, generating $900k in pre-tax income in 2016.
The well documented reason for much of the undervaluation is BBX's Chairman and CEO Alan Levan.  Levan has had an on-again, off-again battle with the SEC over rosy comments he made in 2007 while running BankAtlantic and then being slow to mark down clearly impaired assets as the financial crisis unfolded.  Levan and his Vice Chairman control 76% of the voting power, and as seen in their merchant banking activities, fancy themselves as savvy middle market investors.  The market tends to discount these controlled mini-conglomerates for good reason, but with the IPO of Bluegreen looming (possibly pricing tomorrow, 11/16), some of the discount should dissipate further.

Disclosure:  I own shares of BBX.  I also have exposure to a tiny piece of HGV through my pre-spin HLT call options that expire in January.

Friday, November 10, 2017

VICI Properties: Caesars REIT, OTC Listing, Dividend Catalyst

One of my favorite investment themes are non-dividend paying REITs because they often trade at a discount as a result of being shunned by yield focused retail investors.  Pair that theme with an illiquid OTC listing, plus the REIT's only tenant being a company that I'm already long the equity and you have my attention.

VICI Properties (VICI) is technically a spinoff of Caesars Entertainment (CZR), however it wasn't distributed to common shareholders, instead as part of the bankruptcy reorganization, former creditors of Caesars Entertainment Operating Company (CEOC) received shares in VICI Properties.  Ownership in VICI Properties is essentially the same as being a senior (if not the most senior) creditor in the new Caesars Entertainment's capital structure.  VICI owns the Caesars Palace property in Las Vegas along with 18 other CZR casinos (non-Las Vegas regional ones) that are critical to the operation of the business, absent these casino properties Caesars would struggle to exist.

Without even looking at comparable gaming REITs (MGP, GLPI) -- would you lend Caesars Entertainment money at a 7.4% effective yield with critical real estate as collateral?  I would, again I'm bias because I own the equity too.

Portfolio/Asset Base/Valuation
VICI is starting off with 19 casinos, 32.5 million square feet, ~12k hotel rooms, 150 restaurants, 4 golf courses and 53 acres of undeveloped land near the Las Vegas strip.  Click on the below for a complete list of the properties.
All of the properties are triple net leases (they get reimbursed for property taxes and insurance) with Caesars Entertainment Operating Company (CEOC) as the tenant and the parent company fully guaranteeing the lease.  As part of the lease agreement, Caesars must dedicate a percentage of revenues towards capital expenditures to maintain and keep the properties competitive in their markets.  This is standard for most triple net lease agreements, but still a nice protection against normal wear and tear depreciation.  There are three leases:
  • CPLV Lease Agreement: Covering just the Caesars Palace in Las Vegas, the company's flagship property, located in the center of the strip.  Las Vegas is benefiting from positive tailwinds, record visitation levels in 2016, and the opening of the expanded Las Vegas Convention Center.  The base rent is $165MM with an initial 15 year term and a 2% minimum escalator.
  • Non-CPLV Lease Agreement: This is a master lease agreement covering all the non-CPLV casinos other than the Joliet property below and generally speaking, Caesars cannot vacate or remove a property from the master lease without triggering a default.  Most of these casinos are mature stabilized casinos, some in good markets, others not, but the master lease agreement helps insulate VICI from regional downturns or other individual location risks.  The base rent is $433MM with an initial 15 year term and a 2% minimum escalator.
  • Joliet Lease Agreement: The Harrah's Joliet property (permanently docked riverboat casino) is 80% owned by VICI via a joint venture (other 20% is owned by John Hammons), thus it has a separately lease agreement with Caesars that functions similarly, just without the same master lease protections.  Being somewhat local, I'd consider it a lower end casino in the area, the base rent is $39.6MM with an initial 15 year term and a 2% minimum escalator.
There are additional casinos (Harrah's Atlantic City, Harrah's New Orleans, Harrah's Laughlin) in the queue to drop down to VICI , giving it some built in rent and dividend growth from the start.

VICI also has the right of first refusal on any new domestic property proposed to be owned or developed by Caesars outside of the greater Las Vegas area.  Caesars is itching to grow post emergence and has made it clear they intend to pursue M&A and other greenfield opportunities; partnering with VICI and its lower cost of capital on these efforts makes complete sense going forward.

MGM has its own REIT, MGM Growth Properties (MGP), that is similarly structured although MGM owns most of it as they chose to IPO a piece of it rather than a complete spinoff.  MGP trades at about a 6.25% cap rate, and it's a better credit than CZR, plus most of the value in MGP is Las Vegas versus regional casinos and MGM has better growth prospects internationally.  Gaming & Leisure Properties Inc (GLPI) is about the same size as MGP, but is entirely regional casinos, and is two major tenants are primarily regional operators in Pinnacle Entertainment (PNK, still own this one) and Penn National Gaming.  I would say both are lower credits than Caesars, they operate primarily outsides of Las Vegas, transferred substantially all of their real estate to GLPI (Caesars still owns their non-Caesars Palace Las Vegas real estate), and they don't have the scale or ambition to compete in international growth markets.  GLPI trades for about a 7.3% cap rate.  I'd argue that VICI should trade for only a slight discount to MGP at about a 6.5% cap rate.

VICI Properties
Shares outstanding: 246.2 million shares
Market cap (@$18.50/share): $4.56B
Net debt: $4.61B
Enterprise Value: $9.17B

NOI: $685MM = 7.4% cap rate
FFO: $435MM = 10.47x FFO
EBITDA: $640MM = 14.32x EV/EBITDA

Another way to think of it, annual interest costs are $247.5MM, removing that from NOI leaves $392.5MM for common shareholders or a 8.6% cash yield that should grow (slowly) over time.  Not an incredible deal, but I think investors will find it attractive in today's market?  Over the next year or so as the company joins the ranks of is peers in paying a dividend and up-listing to a normal exchange, it'll pull some of those gains forward.  Due to leverage, small differences in the assumed cap rate change the math pretty quickly, at a 6.5% cap rate, VICI shares could be worth ~$24.  An additional reference point, the Caesars recently issued senior notes at a coupon of 5.25%, others can speak better to the credit differences between the notes and the master lease, but it speaks to the improving credit quality of Caesars post emergence.

Why is it Cheap?
  • VICI is essentially a bankruptcy reorg; its in the hands of former creditors (although highly sophisticated ones which explains why it's only marginally cheap) that are not natural long term holders of a REIT.
  • The company currently trades over the counter, there's no bid/ask spread that I can see on my limited brokerage platform, its a bit tricky to get shares and liquidity is sporadic.
  • It has yet to declare a dividend, there's no company website or investor presentation, nothing that would cater to the eventual retail REIT holder.
  • VICI's only has one tenant in Caesars Entertainment, which just emerged from bankruptcy, one tenant REITs tend to initially trade at a discount until management has an opportunity to add to the tenant roster over time, although MGP trades at a premium, but its arguably a much better credit.
Each one of these items will dissipate over time as VICI lists on an exchange (no timetable set as of yet), declares a dividend (again, no timetable), and diversifies its tenant roster with M&A.

Risks
  • Rising interest rates will hurt all REITs, especially ones that are essentially long term bonds like a triple net lease. VICI does have CPI linked escalators in their lease agreement with Caesars to help stem some of the blow, but quickly rising rates would hurt cap rates across the industry.
  • VICI at the moment is all but in name a long term bond on Caesars Entertainment, that comes with its own risks, it just emerged from bankruptcy, more of a mid-market target demographic in Las Vegas and elsewhere compared to peers.
  • Casinos aren't easily repurposed like other types of real estate, a distribution center or fast food outlet can be moved to another tenant fairly easily.  For example, there are several empty casinos in Atlantic City (including the massive Revel) that are boarded up and would take significant capital to repurpose if it can be done at all.
Here's the 10-12 as its a bit hard to find, and no company website yet: https://www.sec.gov/Archives/edgar/data/1705696/000119312517316387/d392523d1012ga.htm

Disclosure: I own shares of VICI and CZR

Entercom: CBS Radio Reverse Morris Trust

Entercom Communications (ETM) is the fourth largest terrestrial radio group in the country with 125 AM/FM stations in 28 markets, its well run but family controlled and operates in mostly middle tier cities.  Next week, Entercom is completing a transformational merger where they will merge with CBS Radio's 117 stations, primarily in the largest markets, via a reverse morris trust structure.  The combined company will be the second largest radio company behind iHeart (IHRT) but with a significantly better balance sheet.  Reverse morris trusts tend to be interesting for a few reasons:
  1. The company splitting off the division typically offers shares in the new combined entity at a discount, here CBS is offering shares in the new ETM at a 7% discount in an exchange offer.
  2. Due to the above discount and the mechanics of the split-off, there is some technical selling pressure on the smaller company.  Former CBS shareholders will own 72% of the new ETM and pre-deal ETM already has limited float due to its controlled status, the result is a short interest in pre-deal ETM over 50% currently.
  3. Most RMTs I've seen feature significant strategic rationale (plenty of easy cost synergies) and a fair amount of leverage, in combination they often lead to great investment results if the deal rationale is correct and management is competent.  I believe both are in place here.
In the deal prospectus, the combined company lays out the case for radio and potentially why it's not a dying industry:
  • Highest, most stable reach of any media, reaching 93% of all adults across the United States.
  • Radio listenership has remained stable over the past 10 years, growing from 234 million listeners in 2008 to 247 million listeners in 2016.
  • Time spent listening to the radio has been relatively stable since 2014 (me: but must be down from 2008?) according to Nielsen's Total Audience Report.
  • Radio offers a cost-efficient way for advertisers to reach a broad diverse audience.
This is all somewhat surprising to me and not sure I entirely buy it?  Satellite, streaming services and podcasts all provide more engaging and tailored content to listeners, but it's possible that many people still enjoy free radio that's programmed to cater to a broad audience taste.  To this point, Entercom has historically been growing revenues at mid-single digits despite the negative industry headlines.  CBS Radio on the other hand, with its more heavy emphasis on news programming and sports talk radio (which I think has been particularly disrupted by podcasts?), has been declining mid-single digits in recent years.  Another disruption to think about is less on radio medium itself, and more on the advertising model in general, any media company reliant primarily on ad spend is in competition with Facebook and Google, both of which have a better mousetrap to offer advertisers.

With all that out of the way, the radio business does produce a healthy amount of cash as its generally asset light.  I've been burned before by taking management estimates in proxy's at face value, especially rosy ones in declining industries, but here's what management put forward as the 5 year outlook for the new ETM:
After the merger takes place, there will be 142 million shares, at today's price of $10.55/share that's a proforma market cap of about $1.5B, the company will have $1.8B in debt, for an EV/EBITDA multiple of 6.8x using the 2017 EBITDA number above (2018's $542MM seems bold, but would be closer to 6x).  Comparing Entercom to peers it looks somewhat cheap, IHRT and CMLS are both distressed, I don't have their bond prices handy but I'm guessing the EV's are inflated taking their debt at face value as both will likely be restructured in the coming year.
But I'd still argue that a 6-6.8x EBITDA multiple is a bit low for this type of business, especially if you believe management's estimates are achievable.  I'm skeptical of the revenue growth forecasts, but the below synergies seem fairly reasonable as there will be a lot of overlap between the two organizations.
Management is well regarded, Joseph Field started Entercom in 1968 and still remains on the board, he was a buyer of shares in May and June as the stock slid down to $9.65-$10.25.  His son, David, runs the company today, the Field family is relinquishing formal control of the company through their super voting shares, but will still control about 25% of the vote post merger and 8% economic ownership.

In summary, a marginally cheap business with some technical factors artificially putting pressure on the stock price that should start to unwind in the next few weeks.

Disclosure: I own shares of CBS (exchanging for ETM) and ETM

Thursday, October 26, 2017

LGL Group: Gabelli, Rights Offering, Acquisition Proposal

LGL Group (LGL) is a micro-cap ($15MM market cap with a vintage space age logo) that makes frequency control components for the defense, aerospace and electronics industries.  Their market is mostly a commoditized industry but they've been shifting towards higher margin offerings in recent years with some success.  LGL Group has about $10MM in federal NOLs plus some other state and research credits, but this isn't a typical patent troll type NOL shell.  Mario Gabelli is a significant shareholder, not via his GAMCO mutual funds but directly in his/his family's names and his son Marc is on the board.  LGL is a very small holding in comparison to his net worth in GAMCO but like Carl Icahn's involvement similarly small companies, Gabelli has a lot of energy, loves the investment game and especially taking advantage of tax assets.  I think its clear based on the type of business this isn't a vanity project, he owns LGL to make money even if it's small in comparison to his net worth.  I've seen him speak on several occasions and he's always mentioning the tax disadvantages faced by old fashion open ended mutual funds compared to ETFs or especially real estate held for investment.  Plus he loves boring small industrial companies (where he started his career as an analyst), so his investment in LGL Group makes perfect sense.

This is another simple thesis with a near term catalyst, LGL announced a rights offering beginning on 9/5/17 to raise a little more than $11MM to pursue acquisitions, likely to monetize their NOLs without creating an "ownership change", the offering was expected to close on 10/10/17.  The rights offering was a little unconventional because it was announced at a small premium ($5.50 exercise price) to the share price at the time of the announcement and it was going to be tradeable, at a premium, what value would the rights have if you could just buy the shares directly for cheaper?  I looked at it then, as I try to look at all rights offerings, and passed.  But on 10/5, they issued a press release announcing the rights offering would be pushed back until 10/25 because they received a non-binding cash offer for their two operating businesses making the situation a lot more interesting.  Then on 10/23 they pushed the rights offering expiration back again to 11/13, likely to give both sides more time to agree on a deal?

The shares today trade for $5.66, we know that Gabelli was a buyer at the rights offering price of $5.50 as he's essentially backstopping the rights offering and along with the current CEO will have effective control of the company after the rights offering settles.  With the potential cash offer on the table, I think it significantly de-risks the situation:
  • On the upside, we could either get straight taken out at a premium or receive a significant cash infusion to the holding company.
  • On the downside, the two sides can't come to a deal, you still have an improving operating business, the rights offering closes and the company receives a cash infusion for additional acquisitions knowing that a proven capital allocator is effectively in control of the company.
The company has $6MM in cash and marketable securities on the balance sheet, no debt, and the operating businesses did about $1MM in EBITDA over the trailing twelve months ended 6/30 (but EBITDA for the first six months of '17 was about double '16, so there's some ramp to the business happening), putting the EV/EBITDA at approximately ~10x, not on the surface particularly cheap.  But several things strike me:
  1. The investment group submitted their bid after the rights offering was announced so they must believe their offer is the superior path and has some urgency to it; 
  2. Gabelli likely can't buy significant amounts of shares on the public market, either for liquidity reasons, or because he has non-public material information, but he can have the company conduct a rights offering and acquire shares that way, oversubscribe, and gain control of the company; 
  3. The company is run by a 40+ year industry veteran in Michael Ferrantino, however he came to LGL in 2014 to spark a turnaround, he's 74 years old, the business trajectory is turning for the better, is now the time to cash out and retire?
It's worth noting that the company did receive a similar offer for parts of their operating business in June 2013 and turned it down, but the offer spurred strategic review that led them down their current positive path, so it's certainly possible the same thing happens again and a short term catalyst speculation turns into a longer term bet on the jockey type investment.

Disclosure: I own shares of LGL

Monday, September 11, 2017

Perfumania: Prepack Bankruptcy, Small Equity Consideration

Here is another small special situation -- Perfumania (PERF) is the largest specialty retailer and distributor of fragrances and related beauty products in the United States, they've suffered from the Amazon effect and resulting decrease in mall traffic like many other specialty retailers.  On August 26, Perfumania filed for chapter 11 bankruptcy protection, primarily as a way to bring their mall landlords to the table as they explicitly call out that significant landlords would only negotiate with them if the company was in bankruptcy.  All of their other creditors will be unimpaired including the controlling family, the Nussdorfs, who are both their largest creditor and equity shareholder.

The Nussdorf family owns just under 50% of the equity, they're proposing to pair up with another large investor, the Garcia family, to recapitalize the company and inject $14.2MM into Perfumania.  Their plan is to take the company private and then shutter much of the 226 retail store footprint, instead focusing on the distribution side of the business.  In order to speed things along and ensure a quick stay in bankruptcy, they're throwing a bone to the minority shareholders by giving "the opportunity to receive consideration of $2.00 per share in exchange for completing a shareholder release form."  The company's financial advisers call it a "gift" and that the company has no value on a going concern basis.

There are some NOLs here to protect, and the Nussdorf family has loaned the company $85MM, their interests are somewhat aligned to see this company restructured and perform well moving forward.  But time is critical for any retail turnaround story, hence the need to rid themselves of any delay from angry shareholders.  The opt-in date for the shareholder release form is 10/6/2017, or less than a month away, and shares currently trade for just over $1.80 per share representing a fairly decent short term return opportunity.  There's risk here, if the deal gets pulled or the plan doesn't get approved by the court (both seem unlikely?), we already know the equity is worthless, size appropriately.

Disclosure Statement: https://www.sec.gov/Archives/edgar/data/880460/000088046017000031/exhibit991disclosurestatem.htm

Disclosure: I own shares of PERF

Wednesday, September 6, 2017

ZAIS Group: Going Private Offer

This news hurt a little this morning, but there's a potential silver lining, I mentioned ZAIS Group (ZAIS) last year on the blog as the external manager of ZAIS Financial Corp (ZFC) that was being merged into Sutherland Asset Management (SLD).  ZAIS Group at the time was a struggling structured credit manager, their flagship hedge fund was bleeding AUM (still kind of is) and their base management fees didn't cover their operating expenses (still don't).  In February of this year, the company announced they were looking at strategic options and hinted at a going private deal which makes sense since this a controlled entity with the founder Christian Zugel maintain voting control of the former SPAC.

Since then, they've issued a sixth CLO and are warehousing a seventh, they've posted positive gains in their two main hedge funds for the year, and as a result are back to earning performance fees.  Their accounting is a little tricky with consolidation accounting for some of their CLOs and not others, plus it was a micro-cap and very illiquid, I tried for a while to establish a position and come up with my own valuation, no real luck.  But this morning, Christian Zugel filed a 13D in a manner similar to what Icahn did over at Tropicana (TPCA), but here he's already entered into a transaction with one major holder of ZAIS shares for $4 and wants the board to consider the $4 cash offer for the remaining shares he doesn't already own.
The stock traded below $2 yesterday, its still just at $3.38, I'm guessing this goes through without much of a problem and its mostly illiquidity, micro-cap, and obscureness causing the wide spread.  Kicking myself for not being more aggressive about buying it earlier, but I bought into today's news.

Disclosure: I own shares of ZAIS

Tuesday, September 5, 2017

NACCO Industries: Hamilton Beach Spinoff

For the first time in a while there are a number of interesting spinoff situations on the horizon, one of which is NACCO Industries (NC) separating their small household appliances business, Hamilton Beach Holdings (HBB), from their legacy lignite coal mining business.  This split was announced in August with a quick turnaround for the spin to be done around the end of September.  From the surface this spinoff makes a lot of sense, why is a manufacturer of blenders and toaster ovens paired with a coal miner?  Who knows.  Both businesses should trade for different multiples and its no surprise that paired together they trade at a discount to peers.

NACoal/NACCO Industries (NC)
North American Coal Company (NACoal) is the coal mining operating subsidiary of NACCO Industries, despite being in the coal industry its structured as a fairly decent business.  Much of their operations are conducted in their "unconsolidated mines" segment where NACoal functions more as a service provider earning a small cost-plus margin arrangement and avoiding commodity related pricing risks.  How this works is their customers are large electric utilities that run coal fired power plants, often times these coal plants are located on top of or next to their coal power source.  The utility companies will finance and take on the cleanup cost liabilities for the mine, and will contract out the actual operations to NACoal.  There is no pricing risk as each mine exists to service one customer in perpetuity, their contracts are long dated, often times the length of the expected life of the mine.  For accounting purposes these mines are VIEs and since the customer has most (almost all) of the risk in the venture, NACoal is not considered the primary beneficiary and thus doesn't consolidate the results.

The business spits out a lot of cash, but it is declining albeit in a slow fashion.  What utility would invest significant sums to build a new coal fired power plant today?  Very few, if any.  Power plants last decades and even if the current political administration is coal friendly, I doubt many future ones will be the same.  As a result, NACoal's reinvestment opportunities in the coal business are pretty nil, they do have some small side businesses doing mining related services that operate under similar cost-plus arrangements and that's likely where any future cash will be deployed going forward.  Not great, but NACoal shouldn't be viewed as a royalty trust with a finite life.

In valuing the coal business, I think it should more closely resemble the multiple of an independent power producer versus the recently reorganized coal miners, most of which trade for 4-5x EBITDA.  The power plants NACoal services are primarily base load plants, there's some fluctuation in the results due to power demand/pricing, operational turnarounds, etc., but mostly its a fairly steady predictable business.  They should see some uplift in the coming years due to new contracts coming online (maybe the last of the new coal plants?) and something like fellow blog-name Vistra Energy (VST), which actually does its own coal mining, trades for around 7.5x EBITDA.  I think that's a fair multiple for NACoal given the drivers of the business, they did $35MM in EBITDA in 2016, 2017 will be higher, but we'll just go with $35MM, at a 7.5 multiple that's a $262MM enterprise value.

Hamilton Beach Holdings (HBB)
The spinoff will house a fairly popular small household appliance brand (they outsource all their manufacturing) in Hamilton Beach and then a struggling retailer that has little value in Kitchen Collection.  Hamilton Beach makes blenders, coffee makers, toaster ovens, juicers, indoor grills, etc., it sits mostly in that middle ground between a consumer staple and a durable, these aren't everyday purchases, but aren't large appliances that are big ticket items.  In terms of branding, Hamilton Beach sits in the middle again, they sell through Walmart, Target, Kohls, and Amazon, maybe not the best positioning to take, but they are moving more upscale with their recently launched co-branding efforts with the high end Wolf appliances.  That move upscale has flowed through in their results with widening margins and anticipated revenue growth for 2017 (much of their business is weighted towards the holiday selling season).

Kitchen Collection is a small household appliance retailer (they sell other brands in addition to Hamilton Beach) that operates primarily in outlet malls.  The concept has been hit pretty hard by declining mall traffic, NACCO has been closing stores pretty consistently since 2012 when they had 312 stores to just 209 today.  Kitchen Collection about breaks even and is likely of little value, hopefully they can manage the wind down as to not disrupt the overall HBB results.

There are a number of consumer brand rollups, Newell Brands (NWL) or Spectrum Brands (SPB) for example, that would be a logical buyer of Hamilton Beach at some point.  Both NWL and SPB trade for 14-15x EBIT, Hamilton Beach (with no contribution from Kitchen Collection) should do at least $45MM in EBIT in 2017, even putting a discounted multiple on the business of 12x would equal ~$565MM for the spinoff.

Add the two pieces up, $262MM for the parent and $565MM for the spinoff, minus $54MM of net debt (which is at the parent) and you get an estimated equity value of ~$775MM versus a current market cap of $475MM.  Another way to put it, the market is likely putting little to no value on the coal business despite its asset light nature and consistent cash flows.

Other/Risks
  • This is a family controlled company, there will be a dual share class at HBB as well, which speaks to some of the discount.  Maybe HBB should be 10-11x then?  Still cheap.
  • NACCO did another spin in 2012, Hyster-Yale Materials (HY), which performed great post-spin but has since normalized.  Different business, different time, but I think it shows the lift in multiple possible at HBB after it gets free of the NACCO conglomerate discount.
  • There are two mines that are consolidated at NACoal, one is shutdown and in runoff which is causing some impairments and messy accounting, the other, Mississippi Lignite Mining Company is run in a similar fashion as the unconsolidated mines, however NACoal is on the hook for the operating costs.  The majority of the capex for the business is related to operating the consolidated mine.
  • Management is pitching the spinoff partially as a talent planning event, current CEO Al Rankin Jr (part of the controlling shareholders) is stepping down as CEO, elevating the two executives who currently run NACoal and Hamilton Beach to CEO of each respective company.  Rankin will then become Executive Chairman of Hamilton Beach and Non-Executive Chairman of NACCO Industries, not quite the same as "going with the spinoff" but noteworthy and sounds like he'll have more of an active role in the spinoff than the parent.
  • HBB certainly has some private label risk, some Amazon risk, etc., but doesn't appear to be immediately in the cross-hairs of either.  On the positive side, its a way to "play" the millennials finally moving out of their parent's basement theme, increased household formations, and other demographic tailwinds.  Additionally, HBB's business is mostly domestic, they're making a push to expand to developing markets where there is growth in the middle class.
Disclosure: I own shares of NC