Value Investors Club / Mueller Water Products, Inc. (MWA.B)

Mueller Water Products, Inc. MWA.B

September 30, 2008 - 7:27pm EST by

rskfrarb210

			2008	2009
Price:	6.50	EPS
Shares Out. (in M):	0	P/E
Market Cap (in $M):	828	P/FCF
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT

Description

Relative Share Arbitrage: Economically equal shares of stock with disparate voting rights.

Sometimes old trades make their way back into your view. I’m recommending a relative arb position in Mueller Water Products (“Mueller”) to capture a spread of 36.7%.

Mueller has two classes of stock:

30 million Series A shares (the “A shares”), closed at $8.98/share

86 million Series B shares (the “B shares”), closed at $6.50/share

Mueller’s A/B share structure resulted from a two-step, tax-free spin-off in 2006 by Walter Industries. Mueller’s A shares and B shares have economically equal rights, but B shares have 8 votes per share while A shares have 1 vote per share.

It is these superior economic/voting combo rights that the B shares maintain which make this an interesting opportunity, because it is the B shares that are currently trading at only 72% of the value of the A shares. This is the deepest discount since March 2007 and quite the discount compared to the 5% premium the B shares traded for on July 7, 2008.

Long B; short A.

Now you might be thinking to yourself, “Haven’t I seen this idea already?” Yes. Yes, you have. About 10 months ago. See http://valueinvestorsclub.com/Value2/Idea/ViewThread.aspx?id=3041 and

http://www.gannononinvesting.com/2007/04/on_the_mueller_mispricing_a_sh.html

Risks:

The risks here are the obvious ones in this kind of trade: market irrationality persists; spread widens due to short squeeze (SI = 38%); borrow issues, etc.

Catalyst

Absolutely none.
There is no manual-arbitrage opportunity here; cocoa warehouse receipts won’t work here.

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