Is This Situation Special Enough?
May 10th 2012 12:08PM
Updated May 10th 2012 12:12PM
In his book You Can Be a Stock Market Genius, author and investor Joel Greenblatt highlighted the opportunity hidden in mergers and acquisitions, spinoffs, and restructurings. Some deals are so complex that the true value of a stock won't be unlocked until well after the fact, giving savvy investors a chance to get in early and grab hold of shares at a discount. Huge profits are possible, and he achieved 50% annualized returns for a decade investing in them.
We'll look at some announcements presenting an opportunity for profit and pair that with the views of the 180,000 members of Motley Fool CAPS to see what they think of the businesses involved. If the best and brightest in the investment community like these stocks, it may be worth your time to dive in further.
But not every deal is worth your money. It takes diving into the filings to understand the nuances, so don't use the stocks below as a buy list -- more due diligence is needed on your part.
Type of Situation
|JAKKS Pacific (NAS: JAKK)||****||Buyout||$20 per share by P/E firm OakTree Capital Management|
|Sunoco (NYS: SUN)||****||Acquisition||$50.13 per share by Energy Transfer Partners (NYS: ETP)|
Again, this is just a starting point for further research. Do your homework before committing real money to these special situations.
It hasn't been all fun and games for toy maker JAKKS Pacific, which is under pressure from two private equity groups, one of which has been trying to buy the company since last year.
Oaktree Capital Management offered $20 a share for the company, but JAKKS management rejected the bid as too low. Last month asset management firm Clinton Group agreed to a standstill deal in exchange for the toy maker buying up 80 million shares at the $20 price. It also wants JAKKS to sell itself.
However, the buyback agreement puts some pressure on Oaktree, which owns more than 5% of the company's stock, to sweeten its offer (Clinton owns just under 5%).
JAKKS is suffering from the same trends in the toy market that have hampered the results of its larger rivals, Hasbro (NYS: HAS) and Mattel. Kids have been moving away from traditional toys and board games, opting instead for electronic and video game entertainment instead. Not a real surprise, but Hasbro's been caught flat-footed, despite agreements with Activision Blizzard and Electronic Arts, as sales fell 7% in the first quarter. Mattel saw sales ease back, but profits plunged.
With all the takeover talk, JAKKS stock is up 33% in 2012 and its buyback maneuver has set a general floor for the stock, even though it currently trades below that. A number of analysts think Oaktree could come back with a new offer worth at least $22 a share, a 39% premium from JAKKS' price when the original offer was made.
With a little bit of arbitrage room to play in here, I'm rating JAKKS to outperform the market on CAPS. Keep an eye on the deal's developments by adding JAKKS to your watchlist and let us know in the comments section below or on the JAKKS Pacific CAPS page whether you think Oaktree will make the higher bid.
Even with Western Refining finding its stock 30% higher this year, the industry is still suffering, and others in the space like Valero and HollyFrontier find their shares trading lower. The industry depression is leading to consolidation, as evidenced by Carl Icahn buying CVR Energy and Energy Transfer Partners' will to pay $5.3 billion for Sunoco.
Icahn himself has said he has more targets in his crosshairs, including Valero, HollyFrontier, and Tesoro. He'd like to sell CVR for $30 a share after his bid is completed.
Yet so depressed are things that even Energy Transfer doesn't want Sunoco's refineries -- it's working on a separate deal for them -- but rather is more interested in its pipelines that would give it entry into Sunoco's northeast markets. Traditionally a Texas-based natural gas transfer company, Energy Transfer sees Sunoco's liquids business as a new profitable venture for it.
They're not alone, as many natural gas companies including Encana and Cimarex Energy (NYS: XEC) are making the move to liquids, which carry higher profit margins these days.
CAPS member ibarz was expecting Sunoco to profit from consolidation as far back as last year, but does this deal position Energy Transfer in the sweet spot of the industry? Let us know in the comments section below and add Sunoco and Energy Transfer Partners to your watchlist to see how the deal progresses.
Checking the mercury
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At the time this article was published Fool contributor Rich Duprey owns shares of Hasbro, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Hasbro and Western Refining. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Hasbro, Mattel, and Activision Blizzard. Motley Fool newsletter services have recommended creating a bear put spread position in Mattel and a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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