Can You ‘Handle’ Nacco’s Upcoming Hyster-Yale Spin?

‘$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):

($M) 2011 2010 2009 2008 2007
Revenues  $       2,541  $        1,802  $          1,475  $        2,824  $        2,720
Operating Profit (Loss) 110 46 (31) (344) 57
 Op. Margin 4.3% 2.6% -2.1% -12.2% 2.1%
Net Income (Loss)  $             83  $             32 $              (43)  $         (376) $              39
Net Margin 3.3% 1.8% -2.9% -13.3% 1.4%
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).

8 thoughts on “Can You ‘Handle’ Nacco’s Upcoming Hyster-Yale Spin?

  1. slee

    Check out CASC cascade for relative valuation and more info on the ever fascinating world of lift trucks.

  2. TheSpinDoctor

    Thanks for the recommendation. One of the readers who wrote in about this situation mentioned Jungheinrich and Kion as other possible comps.
    One of the nice things about covering spinoffs is that the enitre stock universe is open to it – so am always learning about new businesses and industries.

  3. asues

    I did a detailed post on NACCO back in December:

    At the time, I thought it was most likely that the company would try to spinoff one of the other business units (they had tried spinning off HBB back in 2007 but pulled it because of the crisis). I was surprised that they chose the lift truck business, as the steady cash flows of NC’s other subs seemed to balance out the cyclicalty of NMHG.

  4. TheSpinDoctor

    Great piece. Thanks for writing in and sharing.
    You seem pretty positive on the coal business – has that view changed at all with ongoing low gas prices and the current regulatory regime setting its sights on coal?

  5. asues

    My initial thesis is that low natural gas prices wouldn’t last forever, and that all of the ‘no-brainer’ coal-to-gas conversions have occurred already.

    I think Nacco’s coal business is insulated somewhat due to its properties (lignite) which make it less influenced by the status/prices of the export market. The coal plants that Nacco sells to are also specialized towards lignite coal, which makes it less likely for those to switch over (although I’m not an expert).
    However, the share price for any coal-related stock has continued to decline, so maybe the market is viewing the situation differently…

    I sold out of NC a few months ago when it shot up over $100, so I haven’t followed the name closely. Thanks for the link to my write-up.

  6. The Enterprising Investor

    so the investor presentation on their site they have the HY business at $140m TTM EBITDA, obviously excluding overhead and the legacy NC at about $85m. Granted that’s of 6/30/12. Did the business improve materially or am I missing something here?

  7. the enterprising investor

    Nevermind, I wasn’t looking at your chart carefully enough. When would WI trading begin?

  8. TheSpinDoctor

    Not sure. Here is the info regarding WI trading from the company’s press release:

    “It is expected that a “when-issued” trading
    market for Hyster-Yale Class A common shares will develop before the
    record date if the NYSE approves Hyster-Yale’s application
    for listing. Even though “when-issued” trading may develop, none of
    these trades will settle before the record date, and if the spin-off
    does not occur, all “when-issued” trading will be null and void.
    Investors are encouraged to consult with their financial advisors
    regarding the specific consequences of trading NACCO or Hyster-Yale
    common shares on or before the distribution date.”

    Didn’t see it listed yet though..

Comments are closed.