Description
Zapata Corporation (ZAP) is a holding company with two holdings - a 59% stake in Omega Protein Corp (OME) and a 79% stake in Safety Components International (SAFY). I am proposing a trade of buying ZAP and shorting OME to create a stub. Zapata is fairly illiquid, so this is probably of interest to individual investors only.
Zapata itself has cash balances of 31M and liabilities of approx 11M - net cash of 20M.
So total sum of parts value of Zapata is 20M in net cash + 58M (market value of SAFY stake) + 125M (market value of OME stake) = 203M versus ZAP’s market value of 145M. In other words, the market is valuing the cash of 20M plus the 79% stake in SAFY at a value of 20M. I think when you look at the two businesses the discrepancy in valuations is even harder to justify.
There are 24,414,427 Omega shares outstanding. Zapata owns 14,501,000 (59.46%) shares of Omega. Zapata has 2,391,315 shares outstanding. Thus each share of Zapata corresponds to 6.06 shares of Omega.
Safety Components (SAFY)
SAFY has a market capitalisation of 73M, thus ZAPs 79% stake is valued at 58M.
SAFY is a manufacturer of airbag fabric and cushions for the automobile industry. They have operations in U.S., Mexico, Germany, UK and Czech Republic. Some manufacturing is outsourced to Romania and other low cost countries.
Zapata acquired its stake in SAFY for a total price of 48M in late 2003.
SAFY emerged from bankruptcy in October 2000 and has traded as an OTC stock ever since. The bankruptcy was due to high debt load (over 140M) and downturn of non-core divisions (munitions manufacturing and metals) which have since been divested, and not due to problems within the airbags business.
The company does have some moat in that new suppliers must be qualified to supply the fabric or cushions for a manufacturer and this process may take about a year and may incur significant re-qualifying expenses. Airbags sold in the US must be certified by the manufacturer as meeting D.O.T. regulations. The industry trend is also to reduce the number of suppliers.
Airbags are a growing industry as the number of vehicles to which they are fitted grows, and the number of airbags per vehicle increases. SAFY have grown their sales of airbag fabric and cushions from 178M in 1999 to 244M in 2003
2004 2003 2002 2001
Sales 191 183 244 203
Net Income 8.8 5.6 7.8 6.6
2004 figures are for 9 months to Sept 2004, 2003 9 months to Sept 2003. (Figures for 2003 include pretax charge of 2.7M associated with change of control)
Figures for 2002 and 2001 are for 12 months to March 2003, March 2002
On an annualised basis, SAFY is capable of earnings of approximately 12M, so P/E is about 6.
ROE is in the high teens, with low leverage (14M ST + LT debt).
Free Cashflow (Net Income + Depreciation/Amortization – Capex) has exceeded earnings in the past several years. FCF for first 9 months of 2004, 2003 respectively was 12.8M, 9M respectively and for 12 months to March 2003, 2002 it was 9.7M and 9.3M respectively
Book Value is 74M of which only 1M is intangible and the balance sheet is strong.
Zapata made an offer of 11.49 a share for the remaining stake in SAFY in November 2003 – an offer which was rejected by the SAFY board. However given that they own 79% already they are possibly in a good position to pick up the rest of the shares at an advantageous price.
Omega Protein (OME)
OME has a market cap of 211M. Thus ZAP’s 59% stake is valued at about 125M.
OME is the largest processor, marketer and distributor of fish meal and fish oil products in the United States. OME harvest menhaden (herring-like fish, not eaten by humans) from US coasts using its fleet of fishing vessels and spotter planes. The fish meal is used as an ingredient for animal and pet food products. The fish oil is used as an additive for human and animal feeds.
Fish meal is a commodity product which competes with soybean meal as an animal feed. The price generally tracks that of soybean meal.
The company is trying to reduce is dependence on low margin products by promoting fish oil products as a health additive for human consumption. Omega’s OmegaPure oil is colorless and tasteless, and is the only FDA approved marine source of long-chain Omega proteins. The FDA have indicated that these proteins have health benefits against heart disease etc. Omega are marketing the product to ingredients manufacturers such as National Starch as a healthy additive.
The company has just built a new production facility in Virginia which should allow it to triple processing of fish oil to 100 tons per day. However, as yet the market for the product is unproven.
2004 2003 2002 2001
Sales 93 85 117 99
Net Income 4.3 5.8 12.1 3.9
2004 figures are for 9 months to Sept 2004, 2003 9 months to Sept 2003
Figures for 2002 and 2001 are for 12 months to Dec 2002, Dec 2001
Free Cashflow should normally approximately equal earnings – this was not the case in the past year as OME spent 18M building a new fish-oil processing facility, now completed. Maintenance capex is about 9M versus Depreciation/amortisation in 2003 of 13M
Book Value is 151M which includes 34M in cash and does not include goodwill or other intangibles.
The history of profitablity of this company is spotty - up till now at least, they are at the whim of volatile world fishmeal/fishoil prices, weather can affect the catch size, terrorism can ground the spotter planes etc.
Zapata
Zapata is the holding company controlled by Malcolm Glazer and his family – they own 52% of shares. The company holds stakes in SAFY and OME but has no operations itself. Zapata has cash balances of 31M and liabilities of approx 11M – i.e. net cash of 20M.
Although Malcolm Glazer is now retired as chairman (he is 75 years old) he is still paid 1.5M p.a. as consultant to Zapata and this will continue through to April 2006. Overall Zapata corporate is spending about 3M after interest income per annum (including Malcolm Glazers fees). 4 of the 8 directors are children of Malcolm Glazer
The hair on this investment is that it is controlled by Malcolm Glazer (who was chairman until 2002) and you can never be quite certain what he will do. Problems include
A mixed record on capital allocation.
· Zapata invested millions in the failed Zap.com and Charged Productions webzines in the 1998 to 2000 period
· The Viskase (formerly Envirodyne) investment was written off in 2002
· Zapata invested in sub investment grade debt in 2000 and had to write off 13M.
Various actions which annoyed shareholders:
· Malcolm Glazer appointed 4 of his children to the board (of 8).
· Even though he has retired as chairman, Malcolm Glazer will receive 1.5M p.a. as consultant up until April 2006
· They made a lowball $28 bid to minority shareholders for ZAP in 2002. At the time it barely covered their cash alone.
· Malcolm Glazer sold shares when there was a run up due to dot com puffery in 1998/1999
Although it would be better if Malcolm Glazer were no longer associated with the company I don’t find any of the above to be hanging offences. The record of poor capital allocation is the major issue, but this should be much less important now, since they have only 31M of the cash pile left to invest. If there have been questionable capital allocation decisions in the last few years, then the obvious one is Omega’s 18M investment in new plant.
(Incidentally, one possible catalyst might be Malcolm Glazer’s need for cash to fund his takeover bid for Manchester United Football Club. He is reported to be preparing to submit a new bid which involved a larger cash component. Without additional cash, his takeover plans appear to be going nowhere.)
In the past the discrepancy between ZAP’s price (OME holding plus a large cash balance) might have been justified by management’s terrible record, but I think they deployed the cash well in the Safety Components acquisition, so the anomaly should narrow as the market begins to recognize the value of the acquisition.
Risks
· Widening of the price disparity
· Value destroying actions by management
Catalyst
1. Increasing recognition that purchase of Safety Components was a good investment
2. Closing of discount to component parts
Catalyst
1. Increasing recognition that purchase of Safety Components was a good investment
2. Closing of discount to component parts