Description
At its present price, Tecumseh (TECUA) is an event-driven situation that should yield a $15-20 price in 2013.
Tecumseh has been a frustrating name for value investors. It has been written up three times on VIC, at progressively lower prices. Each of the three entry points has performed poorly. My sense is that this name has been left for dead because of how much frustration it has caused in the past. I have been surprised the situation has not been discussed on existing VIC threads, and I believe that the fatigue with this name is the reason for its current price.
For the past few years, the bulls in this name repeatedly believed that TECUA operational performance was about to turn a corner. There was always a reason offered by mgmt for why it did not (e.g., copper prices, new lineup of products), but by 2011, it became clear that TECUA simply could not earn a decent (or even positive) ROI due to Asian competitors. They had a very limited moat, especially in the residential segment.
The good news is that the performance has been so lackluster that nobody, even management, can continue to argue that TECUA should remain a standalone operating company or even an operating company. This has been clear for quite some time, but within the past month we now have the catalysts in place to unlock the value. The stock has rallied strongly from its lows, but I believe it will still double from here.
Caveat:
Let me state at the outset that there is not much in this report that is not contained in Roumell Asset Manaegemt's two letters to the BOD:
http://www.sec.gov/Archives/edgar/data/96831/000101019212000029/schedule13d.htm (May 14, 2012)
http://www.sec.gov/Archives/edgar/data/96831/000101019213000004/schedule13d.htm (January 14, 2013)
I did speak to one real estate expert (about French properties) and researched various industrial/commercial properties on the Interent, but I am not going to pretend I know more about the real estate value in India, Brazil, and France than the report or others on this board. However, the margin of safety is so great here that I am confident enough about the valuation.
Further, this idea has been posted recently by two separate folks on Seeking Alpha. Neither of these posts are mine.
My purpose here is to summarize the situation and to alert VIC members to what I believe is a great opportunity.
Recent Developments:
- On May 14, 2012, Roumell Asset Management (RAM), who owns about 20% of the total shares, sent a letter to the BOD. RAM is not a frequent activist investor. In their January letter, they claim to have only gone activist one other time in their 14 year history. Their letters are terribly polite (no Dan Loeb here) and are clearly understated and conservative. In this letter, RAM makes two essential points: (1) The company needs to exit its residential business while continuing the commerical business. The commercial business has a moat, especially in the repair parts business. (2) Sell off a significant part of the owned real estate.
- On January 14, 2013, RAM sent a second letter. They had clearly grown frustrated with the foot dragging at TECUA. They claim that they were approached by two separate parties regarding the Brazilian assets. And they claim they they were approached by a "highly regarded private investor" interested in investing in TECUA so long as they had a BOD seat. Clearly, these parties were reaching out to the largest shareholder only after first approaching Board and feeling rebuffed.
- This letter clearly caused the necessary conflict within the Board as on January 21, 2013, the Chairman and great-grandson of the Company's founder (Herrick), resigned from the BOD. And significantly, the press release stated explicitly that he resigned because he disagreed with the "pace of the strategic decision making."
- Finally, on January 23, 2013, the Company announced it would explore strategic alternatives, including the sale of company. The Company explicitly rejected the rumor that an $8 bid had been made for the company.
Thesis:
- There is very little probability that TECUA remains in its status quo situation. Herrick was the foot dragger, and he saw that change could not be avoided and quit. The operating results are so poor and the RAM argument so strong that I see very little chance of status quo.
- I see several possible scenarios playing out over next year (in order of preference from worst to best):
-- status quo
-- follow the outline of RAM's May letter. exit the residential business either by selling it or just shutting it down. selling a large portion of the real estate. return cash to shareholders and continuing on as standalone company in the commercial business.
-- piecemeal sale of all the pieces of the business, including all the real estate and the commercial business (and the residential if anyone wants it)
-- sell the entire company
Note that the piece-by-piece sale of the company may yield a higher price than the outright sale of company, but it will certainly take longer.
- Except for the status quo, each of these scenarios yields a significantly higher stock price.
Valuation:
- The key starting point is that the TBV is $14.70 per share.
- The second note is that the balance sheet is fairly easily monetized. We do not know exactly how much Brazil paid in recoverable taxes in December 2012, but there is effectively $25mm in recoverable taxes that require a significant presence of either TECUA or an acquiror. And there is $135mm of inventory, but most of this is commodity raw material, mainly metals. And the rest is finished goods. No doubt there would be some loss here, but even in a complete liquidation, a controlled rundown would minimize the loss versus book value of inventory. Otherwise, the balance sheet can be monetized.
- The third note is that NOLs (not on balance sheet) give company lots of tax-free options in its restructuring.
- But the most important idea is that the owned real estate value on the balance sheet significantly understates the market value. The PPE, net is $165mm. The land and buildings is on the balance sheet at $108mm. The vintage of these properties alone indicates that this number is far too low.
The propery breakdown is:
Hyderabad, India -- (55 acres; 375k sf) -- RAM's consultant valued at $67mm (and more if sub-divided.) It should be noted that the company sold 5 undeveloped acres at its Ballabhgarh location for $0.7mm per acre. This alone would get us $39mm, and from my very rough analysis, the Hyderabad location should be more valuable than the Ballabhgarh location.
Ballabhgarh, India (near New Delhi) -- (310k sf) -- RAM values at $25-30mm.
Brazilian assets -- RAM values at $40-60mm.
French assets (1,084k sf; 3 factories and 1 technical center) -- Interestingly, RAM does not value these assets, but I located each on Google maps (3 are southeast of Lyon and one is in Normandy near Le Havre) and searched for comparables. My work is very rough, but these locations are near major highways and in fairly densely populated areas. Further, from what I can see, they are not run down and have adequate parking/acreage. I looked at comps and spoke to consultant and arrived at value of $25-50 per sf, or $25-50mm total. Let's use $25mm.
This is the techincal center:
https://maps.google.com/maps?q=le+havre&ie=UTF-8&hq=&hnear=0x47e02f2395218b7d:0x5bc1867aaf33af12,Le+Havre,+France&gl=us&ei=RCQbUceeNo_g8wS2x4DoBg&ved=0CLcBELYD
Be sure to streetview this location.
North American assets ($10mm):
Ann Arbor office (50k sf) -- worth about $5mm
Grafton, WI idle factory (343k sf) -- for sale for $2.85mm
Paris, TN factory (190k sf) -- $5mm-ish -- this may be worth quite a bit more as it is a modern facility.
Aylmer, Ontario factory (78k sf) -- $1mm
This is the Grafton, WI factory listing:
http://www.loopnet.com/Listing/17970279/900-North-St-Grafton-WI/
The low end yields $167mm of real estate (land and buildings) rather than the $108mm on the balance sheet.
Whether you believe these estimates or not, keep in mind that TECUA has held all these properties for at least a decade (and some for many decades) and so it is unlikely that the book value attributed to these properties overstates the market value.
----------
The home run here is they get paid full value for real estate and balance sheet and they get paid a premium for the commerical refrigeration operations (and its NOLs). This would get us over $20.
I do not expect this as any strategic buyer here is going to need to go through trouble of selling off some of the properties. And any financial buyer is going to demand a significant discount. Further, the Company is going to be an inefficient seller. It is not going to be well positioned to maximize its real estate portfolio.
However, so long as management moves towards any solution except the status quo, there is plenty of value and margin of safety to protect us.
Risks
The biggest risk is that the BOD pulls back and retains the status quo. This is why I believe Herrick's departure (and reason for leaving) and RAM's presence is so important.
I think the VTNC situation playing out today (2-13-13) is an interesting comparison and contrast. In the case of VTNC, the mkt fears that mgmt will burn the cash from the sale on trying to turnaround the struggling business. That is much less a concern here because the commerical business is not a horrible business. It is far from great, but it is not horrible and unlikely to burn lots of cash. Further, RAM is not going anywhere and will continue to press if the commercial business starts to burn cash.
The other risk is that management ham-handedly handles the restructuring or sale. If a single buyer does not step forward, the piecemeal sale of these various properties around the globe is not going to be easy to manage, and there will no doubt be some slippage.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
The catalyst is the completion of the already announced strategic review.