‘$135,000!!! For one share! Soooo expensive!’ – a friend’s response to Berkshire Hathaway’s share price.
To be sure, it is a lot of money and intimidating when pulling up a ticker. Expensive though? Not enough information there to determine whether or not that is the case. This reaction is typical though and is one reason I have always been interested in stocks with ‘high’ stock prices as a piece of the investor marketplace tends to ignore this slice of the universe. There haven’t been too many of these high-flyers involved in the spinoff world though until Nacco Industries (NC), whose stock has been on a nice run over the past year, recently announced plans to spin off its Hyster-Yale division via stock dividend later this month.
NACCO is a holding company with a diverse set of businesses (see below) and Hyster-Yale represents its material handling unit and the bulk of its revenues. According to the company, it “designs, engineers, manufactures, sells and services a comprehensive line of lift trucks and aftermarket parts,” and has a leading market position in the Americas and worldwide. In 2011, sales of units by Hyster-Yale represented approximately 8% of the global lift truck market and approximately 21% of the lift truck market in the Americas. Not bad. Other competitive advantages include its comprehensive product line, well known brand names (Hyster and Yale – maybe you know them if you are in lift trucks) and a large installed base. Here is a look at the group’s recent financial performance taken from the S-1 (margins are added by yours truly):
|Revenues||$ 2,541||$ 1,802||$ 1,475||$ 2,824||$ 2,720|
|Operating Profit (Loss)||110||46||(31)||(344)||57|
|Net Income (Loss)||$ 83||$ 32||$ (43)||$ (376)||$ 39|
|Adjusted EBITDA||$ 147||$ 82||$ 6||$ 54||$ 106|
According to the company, the lift truck business is highly cyclical and dependent on economic health. As a result, the dip in 2008-2009 is hardly surprising given the worldwide malaise at the time, although it is worth noting that the big loss in ’08 was due to a large non-cash impairment charge. It is nice to see the company rebounding nicely since then (the beginning of ’12 looks more like 2011), although looking out, the current environment is hardly exciting. The website lists the division’s goals as achieving a “9 percent minimum operating profit margin at the peak of the market cycle and an average operating profit margin of 7 percent mid-cycle [and] substantial cash flow before financing activities.” The provided time period probably represents the more challenging part of the cycle, but it still looks unlikely to meet these goals. Additionally, I would expect operating margins to experience some additional pressure as a stand alone company.
Digging a little deeper into the numbers, the company’s revenue base is diversified across many customers (Top 10 customer ~31% sales) and geographically. In 2011, 62% of its sales were in the Americas, 29% in Europe, Middle East and Africa and 9% in Asia-Pacific countries and China. The company also has holdings in some JV’s including one with Sumitomo in Japan and a 20% ownership interest in NMHG Financial Services (‘NFS’), a joint venture with GE Capital which provides financial services to its dealers.
NACCO will continue to own and operate its three other principal businesses, which are mining (The North American Coal Corporation), small appliances (Hamilton Beach Brands, Inc.) and specialty retailing (The Kitchen Collection, LLC). Quite an interesting mix of businesses and none of the others seem to be real bright spots. Not surprisingly, the company lists many of the usual reasons for pursuing this transaction such as increased managerial focus, investor choice and flexibility in managing the business. The new company does intend to continue paying dividends. It seems to make sense in this case though.
The transaction is a bit unusual though due to NC’s unique shareholder structure. The company has Class B shares with strong voting rights held mainly by insiders and controlling family members, however NACCO’s Charter provides that each NC ‘A’ share and ‘B’ be equal in respect to dividends and other distributions. As a result, shareholders of NC will receive one share of Hyster-Yale Class A and Class B for every share of NC owned (regardless of class type). The Class B shares are entitled to ten votes per share (vs. 1 for A’s), are subject to transfer restrictions and are convertible into one share of HY Class A share.
The Class B shares will NOT be listed on an exchange though and will generally not be transferable except in limited cases. This means that ‘regular’ NC shareholders will almost definitely convert all of their ‘B’ shares into ‘A’ shares as they will otherwise be mostly worthless and useless. So even though the company intends to distribute 8.4m shares of each class, I would expect the Class A share count to rise significantly. Only insiders and directors (or corporate raider/activists if they come in) will hang onto the ‘B’s and will therefore continue to control the company.
It is worth noting that there is significant insider ownership of the company and “all individuals expected to be executive officers and directors of Hyster-Yale will beneficially own 1,759,083 shares of Hyster-Yale Class A Common after the distribution.” That is close to 20% of the shares outstanding. This includes significant stakes by future company Chairman, President & CEO Alfred Rankin who is also involved with Rankin Associates which controls a nice amount of shares. Various members of the Taplin family and Dimension Fund Advisors are also large shareholders. I only skimmed through the compensation sections in the S-1, but it appears as if management (and some board members) do receive significant amounts of compensation as shares so it looks like management should be motivated to make this succeed.
The spin is expected to place on September 28th and the new company will trade under the ticker ‘HY’. A rare case where there is not a lot of time to work on a spinoff. There are definitely some concerns – the economy’s impact on a cyclical business, cash flow, governance etc. – but this could be an interesting situation. A reader pointed out that comps should be available for this industry, which should also give a better indicator of what HY’s value should be.
What do you think? I hope to be able to do some more work on this one over the next few days (will be tight), but as always, we will keep you updated on the situation.
(H/T alert readers NG and SK for pointing this one out)
Disclosure: Author is long shares of Berkshire Hathaway (and no, not the A shares).