There’s a new type of inflation making its way through the mergers and acquisitions world that could see CEOs who are running large-cap stocks that have hit the skids seriously considering taking them private through leveraged buyouts.
The malady has a name.
It’s called “private equity inflation,” and it’s rampant here in North America thanks to private equity firms driving buyout prices sky high.
As a result, this might be the best opportunity for CEOs sitting on dormant stocks to deliver for shareholders. In fact, there may never be a better time to consider a leveraged buyout seriously.
In the first quarter of 2016, private equity firms in North America raised $62 billion, the highest amount ever raised in the first quarter, and more importantly, paid a median amount of 10.8 times EBITDA on their acquisitions.
There’s money out there. You just have to find it.
The pump is primed. These seven large-cap stocks should go private.
Large-Cap Stocks That Should Go Private: Nordstrom (JWN)
This first one seems like a no-brainer.
First, you have an iconic department store like Nordstrom, Inc. (NYSE:JWN), a firm that has been family influenced since 1901 when John W. Nordstrom partnered with Carl F. Wallin to open a shoe store in Seattle. The rest, as they say, is history.
Then, you have a retail industry that appears to be coming apart at the seams — Moody’s just named 22 large retailers on the precipice of bankruptcy including Eddie Bauer, another long-time Seattle institution — and department stores are taking a majority of the hits.
Lastly, the Nordstrom’s own 31% of the company and have already indicated that they are exploring the possibility of taking the company private, and it has $2.7 billion in net debt, 35% of its market cap.
“While the ownership structure could allow the Nordstrom family to be more forceful in pushing toward a privatization, we’re cautious about a department store’s ability to secure a bid of this magnitude given the structural headwinds facing the sector today,” said UBS analyst Michael Binetti in a note to clients. “Even though Nordstrom is doing better than others, department stores are under pressure so the value of the assets they’ve got against their debt could decline.”
That last sentence suggests it’s now or never.
Large-Cap Stocks That Should Go Private: Ford (F)
A former CEO himself, Hackett has already gotten busy making changes. The biggest being to offer buyouts to 15,000 salaried employees with the hope about 10% of those Ford workers will take a package, as part of a cost-savings initiative aiming to save it $3 billion annually.
Bill Ford was the driving force behind replacing Fields with Hackett.
“Jim took a company that defined itself as a furniture maker [Steelcase] and Jim said, ‘No, let’s imagine the future of the workplace. Let’s imagine how people are going to want to work in the future, and then lets build the company around that.'”
Recently, I highlighted the reasons why I felt Hackett’s hiring wasn’t a permanent solution. Quite simply, it needs an Elon Musk. Replacing Fields has temporarily relieved the pressure. However, given Ford stock has severely underperformed both its peers and the markets over the past five years, shareholders are going to turn on Hackett soon enough.
I’m not suggesting a leveraged buyout of Ford would even be possible, but the shining lights of Wall Street are not doing this company, its stock, and most importantly, its shareholders, any good.
Large-Cap Stocks That Should Go Private: Imperial Oil (IMO)
This one also appears to be a no-brainer.
First, Exxon Mobil Corporation (NYSE:XOM) owns just less than 70% of its Canadian subsidiary, Imperial Oil Ltd (USA) (NYSEMKT:IMO). For years, investors have wondered why Exxon doesn’t buy up the remaining 30%. It would be chump change, especially given that Imperial Oil’s stock has tanked over the past five years.
At this time in June 2012, you would have paid almost $43 a share for Imperial Oil stock. Today, it’s hovering around $30. You would have done better with the S&P 500.
Right now, low oil prices are a mixed blessing.
The upside is that it has cratered Imperial Oil’s stock, making it cheaper to buy. On the downside, low oil prices means less revenue. Why would Exxon shell out $10-billion-plus to buy the remaining 30% when it doesn’t have to? There’s a real argument to be made that it shouldn’t make it a wholly owned subsidiary until oil prices are much higher than $50.
Of course, then the deal cost goes up exponentially.
If Exxon is as great an oil company as some people seem to think it is, it should definitely buy back the remaining 30%. Until then, it’s just a toy for traders.
Large-Cap Stocks That Should Go Private: Boardwalk Pipeline Partners (BWP)
Loews Corporation (NYSE:L), the holding company run by the Tisch family, owns 51% of Boardwalk Pipeline Partners, LP (NYSE:BWP), an owner/operator of more than 14,000 miles of natural gas and liquids’ pipelines.
Loews first invested in pipelines in 2003. Since then it has invested approximately $3.2 billion in Boardwalk; through dividends it has made back its entire investment while still owning 51% of the company. Thanks to a good year in 2016 — BWP stock returned 36.8% — its 51% interest is worth about $2.1 billion.
Since the Tisch family are patient investors, I doubt they’ll entertain any thoughts of selling until pipelines get more love from the markets. This year was projected to be a good one for pipelines thanks to the election of Donald Trump, supposedly pipeline friendly, but midstream stocks are in negative territory as we enter the second half of 2017.
Long-term, Loews’ investment will pay off big, but it might be better off out of the spotlight until energy prices move higher.
Large-Cap Stocks That Should Go Private: Icahn Enterprises (IEP)
Carl Icahn’s big gains on Netflix, Inc. (NASDAQ:NFLX) must seem so long ago. Since Icahn sold Netflix stock in June 2015, booking a $1.9 billion profit on his 32-month hold, the video streaming company has rocketed higher. Today, those shares would be worth $6.4 billion, or around 200% more.
I guess that’s why they say you should sell your losers quickly and let your winners ride.
When Icahn isn’t busy advising the president, I’m sure he’s trying to figure out how to deliver some value to Icahn Enterprises LP (NASDAQP:IEP) shareholders who’ve seen IEP stock trundle downward from a high of almost $150 in December 2013 to its June 19 closing price of $50.55, 65% lower in less than three years.
Simply put, Icahn’s businesses have a lot of moving parts, and sometimes those parts aren’t given the valuation they might deserve. As capital allocators go, he’s not nearly as efficient as Buffett. Not to mention he owns 90% of IEP stock. When his bets don’t go, the stock doesn’t go.
Carl, take IEP private and put it out of its misery.
Large-Cap Stocks That Should Go Private: Morningstar (MORN)
I have to say that Morningstar, Inc. (NASDAQ:MORN) is one of the biggest stock disappointments I can recall. It’s a lifeline for people like myself who write about investments and are constantly seeking performance data for the stocks we cover.
Back in September 2012, I suggested Morningstar as a potential acquisition for Yahoo after it sold half of its holdings in Alibaba Group Holding Ltd (NYSE:BABA) as a way to further bolster Yahoo Finance. That, of course, didn’t happen. Recently, Marissa Mayer was sent packing — albeit as a very rich woman.
At the time of my article, Morningstar stock was trading around $60. Today, almost five years later, it’s trading at $77 and change. It’s up, but when you consider Morningstar’s potential, that’s not nearly good enough, especially since an investment in S&P 500 would have beaten it by more than double.
Joe Mansueto, although no longer CEO — he became executive chairman in September 2016 — still owns nearly 57% of the company. He might not be the chief executive but he still owns a majority of its shares and plays a continuing role its success.
As I said back in 2012, $85.50 would be a good place to begin buyout negotiations. Sure, it won’t be Mayer signing the check, but Mansueto’s a much better alternative anyway.
Large-Cap Stocks That Should Go Private: Amerco (UHAL)
Amerco (NASDAQ:UHAL) is the Phoenix-based holding company for U-Haul, North America’s largest “do-it-yourself” moving and self-storage operator. In addition to the U-Haul business, it runs a couple of insurance companies and owns real estate.
Together, this disparate group of entities has grown revenues from $2.6 billion in fiscal 2013 (March 31, 2013) to $3.4 billion in fiscal 2017. Over those same four years, it has grown operating earnings from $499.2 million in 2013 to $742.3 million in 2017.
I like businesses that are growing earnings faster than revenues. Unfortunately, earnings hit a rough patch in 2017. In October 2016 it paid out $41.4 million to PODS Enteprises, Inc. as a part of a litigation settlement. In addition, it has been growing its truck rental fleet which has resulted in higher depreciation expenses while older trucks it’s been selling have generated lower sales proceeds resulting in lower profits.
Long-term, as I said in 2016, Amerco is in reality an investment/real estate company dressed up as a moving and storage business. Case in point, it’s expected to close on the sale of a piece of New York City real estate. The price tag? $200 million. The value on its books? $5 million.
Unfortunately, most investors won’t take the time to understand how it really makes money. If they did, Amerco’s stock would do even better than it already has.
Of the seven stocks, Amerco is the most appropriate situation for taking a company private. The misunderstood businesses always are.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.