In case you missed it – Mr. Paulson unexpectedly hopped onto Hartford Financial Services Group’s (HIG) Q4 call last week during the Q&A and went after the CEO. Paulson just happens to be the company’s largest shareholder, owning ~9% of the shares, and was likely disappointed with the company’s (or really the stock’s) dismal performance. So…he decided to let CEO Liam McGee know just how he felt (it’s not Eisman-esque, but still enjoyable):

Operator: Your next question comes from the line of Lawrence Farley with Paulson & Company.

John Alfred Paulson: Good morning. This is John Paulson speaking.

Liam E. McGee: Hello, John.

John Alfred Paulson: Liam, I want to go back to the slide 17 talking about the potential separating the Life and P&C business. And the – I know you’re doing a strategic review but there’s no slide talking what about what the potential would be, just that there’s challenges. Goldman Sachs came out with, I think, a very good analysis a few months ago where they showed this - they estimate the upside to doing a tax free spin-off of P&C could be over 70% of what the current stock price is trading at. Now, I agree that there’s going be challenges but isn’t your job to really overcome those challenges to achieve the maximum value for shareholders? Now, I would say that Hartford needs to do something drastic because the stock is the lowest valuation relative to book value of any major insurance company. Last year Hartford stock was down 38% while the P&C stocks were up 14% and even declined much more than the Life index which was down 21%. So what I’d like to see you do is not merely come back and say yes, we’re looking at strategic options but there’s challenges to achieving them but what – first of all, do you agree that you could create as much as 70% value for your shareholders by spinning off – separating P&C? And secondly, is 

(52:10) incentive to overcome the challenges that it’s going to take to spin this off and how long do we have to wait to hear if there’s going be a positive recommendation to separate these two businesses?

Liam E. McGee: Thanks John for the question. First of all, the analysis and the intent of the comments was to acknowledge that the challenges are significant, not to say that they could not beovercome. Second of all, our analysis, including the frictional costs, if you will, that are in that third category would suggest that a split would not create the kind of shareholder value that that particularreport suggested. And third, in addition I think your sense of urgency about realizing greater value for shareholders is shared by me and by this team. And so I hope I answered your questions distinctly and directly…

John Alfred Paulson: Partially, Liam, but if you share the interest all shareholders have in increasing shareholder value I’m surprised that as part of the discussion you don’t talk about how much value could be created by separating the P&C business from the Life business. And not the only slide you devote to it talking about that there’s some obstacles to overcome and not talking about the upside in weighing the upside of the separation against what the obstacles are.

Liam E. McGee: John…

John Alfred Paulson: And better yet, not just listing those obstacles but what I’d like to see is how you will overcome those obstacles to result in a more fair valuation for Hartford. Not that there’sobstacles but how you’re going to overcome those obstacles. That’s what I as a shareholder look for you as the management to do.

Liam E. McGee: Thank you, John. And I – that is our mindset. Our purpose in the slide was to identify the hurdles. You can – if you heard our language we did not say they were not surmountable, number one. We said there were significant costs to surmount them in a number of areas, so we felt we owed shareholders that disclosure. Number two, we do not believe that splitting them in the current environment for the reasons that we cited will create shareholder value. And third, again I’ll reiterate, we have an incredible sense of urgency on looking at all ideas to create shareholder value.

John Alfred Paulson: Well, I think you need to do a much better job of explaining that because Goldman’s report is a very good report on a path to separate the business and create what theyestimate as a 70% increase in shareholder value. And then you merely say there’s some obstacles and you don’t equate what the costs are to the benefit and what value do you think could be created. Because right now with the stock performing as poorly as it has relative to both P&C and life companies, I think you need a better explanation of what you’re going to do to enhance shareholder value. Merely that you’re working hard and you’re committed but there’s obstacles. What we need you to do is overcome the obstacles to enhance the valuation for your shareholders. Not merely point out that there’s obstacles.

Liam E. McGee: Okay, John. Thank you. I hear you loud and clear.

John Alfred Paulson: I hope so.

You know, a part of me really questions the sincerity of Mr. McGee’s ‘Thank You’ at the end. While a fun read, the reason of mentioning it on this blog is obviously the potential spinoff of the life insurance business from the company’s P&C insurance. The inclusion of the infamous ‘slide 17′ in its earning presentation shows the company was already feeling some pressure to spin. Some of the obstacles to a spin mentioned include maintaining competitive credit ratings for both companies, obtaining regulatory approval, a potential writeoff of tax assets and a few other items.

The drama didn’t end there though and earlier this week, Paulson took his spinoff demands one step further by formally filing a 13D with the SEC outlining the case for a breakup of the company. In the letter, Paulson & Co states that a spinoff is by far the best choice for the company to maximize shareholder value and that the move could increase value by as much as 60% alone. No small potatoes. According to Paulson, a spin off would:

Create two pure play insurance companies – one in life and one in P&C – whose management is focused solely on each companies’ own strategies, distribution channels and capital requirements.

Enable each of the respective companies to achieve a multiple consistent with its industry, which, for the property casualty business, would mean a multiple of approximately 1.1x book value versus Hartford’s current multiple of 0.4x — the lowest of any major US insurance company.

Reduce complexity, which limits sell-side coverage and investor interest

The filing then goes on to detail those claims and also highlights the fact that many other large insurance companies such as Travelers (TRV) previously separated these businesses. The section on ‘complexity’ and sell side coverage issue is also interesting and the filing notes that “only 3 of 19 P&C analysts cover Hartford” and that only three of the 15 life-insurance analysts that cover Hartford also follow P&C companies. The fund isn’t too impressed by the supposed obstacles to a breakup and believes that those challenges “are both over-rated and readily manageable.”

While Goldman and other sell side shops may also agree that the company should make a move (I haven’t seen those reports), apparently not everyone is convinced. The stock recorded a nice pop after the conference call and again after the filing of the 13D (that should make Mr. Paulson happy) so it seems that the market supports the move. While the outcome remains to be seen, I am sure the CEO is really feeling the heat. ‘Unlocking’ that much value is certainly enticing to investors and tough to argue against. We will keep you updated as this story progresses.

Disclosure: Author holds no position in any stock mentioned.

Paulson To Hartford Financial – Spin Or Else? is a post from Stock Spinoffs - Finding Value in Special Situations. All Rights Reserved.

Another activist benefactor is Jana Partners, who recently sold 3.9 million shares of the Marathon Petroleum Corporation (MPC) right after the stock jumped 10% on the announcement that it plans to pursue a spinoff of its pipeline operations. An idea pushed hard by Jana. The WSJ estimates the firm booked ~$44mm in gains. The fund still maintains a 4.5% stake in the company though and “intends to retain a significant interest” in Marathon. While some of these moves are likely just portfolio rebalancing, it must be nice to have that kind of power and flexibility.

Disclosure: Author holds no position in any stock mentioned.

The Joys Of Activist Investing is a post from Stock Spinoffs - Finding Value in Special Situations. All Rights Reserved.

While I imagine many investors have already dumped their shares, buyers of this spin have fared quite nicely as MMI opened at ~$25.60 on its first day of trading. Analysts often tout the potential to be acquired in more digestible pieces as a spinoff benefit. Typically, this requires some patience to realize though as certain tax-free benefits of a spinoff can be lost if bought out too quickly. Some other recent spins where analysts have highlighted potential takeovers include Ntelos (NTLS) and stainless steel company Aperam (APEMY). Any other ones on your radar?

Disclosure: Author holds no position in any stock mentioned.

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Take U.S. Rare Earth Minerals(USMN). An impressive name, to be sure, for a company that sells clay, and not much of it at that. The company sold a grand total of $13,199 worth of product in the quarter ending September 30, 2011. The company spent $236,200 on SG&A during the quarter.

The company has been far more successful peddling its stock than its mud-based products. Over the past year, the number of shares outstanding have more than doubled as the company has sold over $400,000 in new stock. The company has come a long way from its roots as an empty shell called America’s Driving Ranges. Founders Paul Hait(a former Olympic swimmer) and Dennis Cullison have received millions of shares as compensation for their roles as CEO and as “Principle[sic] Financial Officer”(we hope his math skills are better than his spelling), which filings show they have disposed of often and in volume, each disposing of millions of shares last year.  In addition Hait and Cullison are the majority beneficial owners of M Strata which owns the claims the company mines, and receives a royalty on all products sold.

Apparently, managing such a sprawling enterprise, whose revenues are now approaching that of a failing roadside ice cream stand, is an unwieldy business, so the company has now announced it will be spinning off BioMultimin. The company claims the that “This decision was made due to the recent increased demand and sales of Micro Excelerite(R) human consumption and cosmetic products”.  With a grand total of $3,603 in revenue in the most recently reported quarter, the new company will have less revenue than a poorly located soda vending machine.

If you have a fetish for owning worthless paper, this may be an opportunity for you to get two for the price of one. Otherwise, we suggest you set your money on fire rather than buy this stock- eating the ashes is likely as efficacious as BioMultimin’s products.

Disclosure: The author holds no position in any stock mentioned.

When One Plus One Equals Negative Two- Tiny US Rare Earth Minerals To Spin Off Even Tinier Division That Wants You To Eat Mud is a post from Stock Spinoffs - Finding Value in Special Situations. All Rights Reserved.

Additionally, Brazilian power company MPX is planning to spin off its Colombian coal mining assets. The new company, CCX, will supply Colombian coal to MPX’s thermoelectric power projects in Brazil and Chile. CCX is developing a major compliance coal integrated mining system in Colombia, consisting of a deep-water port, a 150-km railroad and estimated resources to support a 35 Mtpa-production. Shareholders of MPX will receive 1 share of CCX for every one share of MPX owned. The company, like Vigor, will be listed on Sao Paulo’s Novo Mercado stock exchange. The split is expected to occur during Q2 and is tied to the planned JV between MPX and German power group E.ON. MPX also said that it will propose an extra payment to its bondholders of 3.45 reals per security if the CCX spin off is approved.

While I do wonder just how much (if at all) the investment ‘thesis’ behind spinoffs extends beyond the US, we are dedicated to bringing you all spinoff related news and analysis from around the globe.

Disclosure: Author holds no position in any stock mentioned.

How Do You Say Spinoff In Portuguese? is a post from Stock Spinoffs - Finding Value in Special Situations. All Rights Reserved.

The Spin Master

conference call.  Diller is indeed a veteran of many spinoffs, including Expedia(EXPE) and its new progeny, TripAdvisor(TRIP)

Ross Sandler – RBC Capital Markets

Just two quick questions. Barry on that theme of using the past to kind of look at the future, given the early successes of the Expedia, TripAdvisor spin, and the success of the original IAC split-up, do you think there is any efficiency to be gained by separating personals now that is a more global business?

….

Barry Diller

Well, I am the spin master. I am so pleased because we started doing this before it kind of became a bit popular spinning things off and when they got to be, we thought, of sufficient size that they ought to be up on their own. And that general sensibility prevails. But I do not think that it makes sense at this time. I don’t think my colleagues at all disagree with me that we would now spin off the personals business or spin off the search business. So I think the real test on that is: are they being maximally managed and in this configuration? And I think results would – could kind of confirm that.

As far as the future, I think that depending upon what happens with this company, company is this IAC company, having gone through these multiple spin-offs over these last years, is right now, at very good size with very good prospects. And I think we are going to keep these configurations for a period of time depending upon what happens and grow things and all sorts of other issues pertains. But I don’t certainly contemplate it.

So, no plans by “Spin Master” Barry Diller to spin off IAC’s Personals business, which consists mostly of Match.com. But check back in 6 months- this wheeler-dealer is always spinning.

Disclosure: The author holds no position in any stock mentioned.

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Barry Diller: “I am the Spin Master” is a post from Stock Spinoffs - Finding Value in Special Situations. All Rights Reserved.

that it is committed to spinning off its Space Systems/Loral (SS/L) segment. SS/L designs, manufactures and integrates satellites and space systems for a wide variety of commercial and government customers. The unit appears to be growing rather nicely over the past few years. Loral will retain its ownership in satellite communication service provider Telestat and some other miscellaneous stakes including its 54% holding in XTAR.

The company spent most of its Q3 conference call discussing the spin and according to CEO Michael Targoff, it is “targeting to effectuate the spinoff early next year” although he personally thinks the spin will take place “in the first quarter or second quarter.” He also noted that “there are absolutely no other business reasons” that the company wouldn’t move forward with the spin and that “management and employees of Space Systems/Loral are excited about the prospects of functioning as an independent company.”

Sounds like a done deal, no? Unfortunately, while there may be no “business reasons”, there is still one significant roadblock in the way – MHR Fund Management’s equity stake and how to deal with it. As a result of some earlier difficulties at the company, MHR Fund Management, a private investment firm, currently owns close to 60% of LORL’s shares. Not all of those shares have voting rights though, but if the company were to execute a spinoff that might have to change. Apparently, Delaware court law has some things to say about this issue and requires certain things including the formation of an independent committee to work it out. Perhaps the CEO can do a better job explaining the situation:

A condition of the spin is a resolution of the terms of the stock to be distributed to MHR with respect to their nonvoting shares. To that end, the Board of Directors has formed an independent committee to negotiate this with MHR…we have a new charter that was — the result of that loss of years back, that provides on its face that in a distribution of SS/L stock — it doesn’t say it in these words but I’m paraphrasing for you — all the shareholders would receive the same thing. The implication of that would be that if we simply distributed voting stock to all the shareholders, MHR will get voting stock as well, which would take their voting stock to 60%. Needless to say, Delaware law has a lot to say about these subjects. And I’ve had discussions with MHR and they’re willing to work something out short of that. And under Delaware law — that we all learned all too well, and unfortunately, in some respects — you need to have a committee to — an independent committee to negotiate hopefully a resolution of that or an alternative. And so that’s what we’re doing and it’s in process.

and in case that wasn’t clear, here is some more:

It’s an issue for the company. Delaware law, for a long time, has imposed on a Board a host of obligations in connection with what they define as a “maintaining of control by a shareholder” and especially a shareholder already has a large position. And I’m not going to give a recital, I could, and maybe partly I’d be happy to do it, a recital of how I understand that and what the implications of that are and how it affects corporate America. Those of you who read the Delaware law decisions from time to time realize that some of the decisions impose obligations and constraints that some of us would think are overboard and unnecessary. But they do. And so that’s the issue.

Well…maybe he couldn’t do a better job so perhaps one of our readers can. I think a safe takeaway is that if the shareholder issue is resolved, the SS/L spin should be a go during the first half of the year. It has been a few months without any reported progress, but I would expect a deal to get done. That would mean the Form 10 and additional documentation should be released in the near future at which point the analysis can really begin. Why wait though? Why not just ask someone else, maybe say the CEO, to do the work for you? That seems to have been the approach taken by Merrill Lynch’s Jeffrey Smith during the call. In this unusual exchange, Mr Smith actually asked, “would you [Mr. Targoff] consider talking about what you see the value in the different parts after the spin?”

Mr. Targoff’s response:

Wow. Typically, people think that sometimes when you spin a company off, the values of both components are highlighted and the total trading values would be greater than the combined value. I certainly think there’s good reason to think that could happen here as well. You can look at SS/L — and we have our reported numbers and I talked about what they’d be for the quarter and assuming they are in that range — you can look at the EBITDA run rate and, even with a somewhat softer margin next year, get to a value that all of you can calculate, and I don’t necessarily think it’s appropriate for me to do that arithmetic. But that’s one piece. And then you have Telesat, a run rate in excess of $600 million of EBITDA, with the new satellites taking it up to wherever you want to project it, and you can look at the comparables in terms of SES and Eutelsat and draw a conclusion. And I think at the end of the day, if you do that analysis, you would probably agree that this spinoff will probably trade in higher than the combined is today. But I’m not going to be any more specific.

Wow indeed (I know, I know, I am just being harsh). Well…can’t blame him for trying. We will keep you updated.

A special thanks goes out to an alert reader for pointing out we missed this one.

Disclosure: Author holds no position in any stock mentioned.

Satellite Spinoff In The Air For Loral is a post from Stock Spinoffs - Finding Value in Special Situations. All Rights Reserved.

The refining business is tough and earnings can be very choppy, especially when compared to the almost bond-like midstream operations such as pipelines. That is precisely the reason why InvestorPlace’s Aaron Levitt thinks the MLP might be the more interesting opportunity. In fact, after the 10+% stock price jump post-spin (and $2b buyback) announcement, it is easy to forget that its recent earnings report was ugly and badly missed analyst’s expectations. Not everyone is down on refining though and some people think it makes for a good investment.

It will be interesting to see how these refining companies fare independently, without any other operations smoothing out earnings a bit. There might be a reason so many of these companies were integrated in the first place. Perhaps these moves could lead to industry consolidation? Time will tell, but if the company decides to move forward with an MLP it does not expect to complete a filing before the end of Q2. As always, we will keep you updated in the meantime.

Disclosure: Author holds no position in any stock mentioned.

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Does Two Spins A Marathon Make? is a post from Stock Spinoffs - Finding Value in Special Situations. All Rights Reserved.

Disclosure: The author owns shares in RSE

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Rouse Announces Record Date For Rights Offering is a post from Stock Spinoffs - Finding Value in Special Situations. All Rights Reserved.

Viking Global Investors is run by Andreas Halvorsen, a former member of an elite Norwegian Naval unit. Halvorsen, who has an MBA from Stanford, previously worked for Julian Robertson at Tiger Asset Management, and has been one of the most successful of the so-called “tiger cubs”.  The firm is no stranger to the online travel industry, having previously disclosed a stake in Priceline(PCLN). That position, initiated in the second quarter of last year, was reduced substantially by the third quarter filing, and we wonder if it was liquidated to purchase TripAdvisor.

Disclosure: The author holds no position in any stock mentioned

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