Wednesday May 22, 2013
Columnist Lee Schafer provides short takes on economic incentives and choices, business strategy and performance, market moves, what business leaders are saying and doing and other topics that pique his interest.
resize text 
email us
follow on Twitter
subscribe via RSS
Bloomberg this week took a look at the upcoming unlocking of restrictions on Cargill-affiliated shares in the Mosaic Co. and reached the conclusion that Mosaic is a takeover target.
Maybe. But it seems far more likely that a buyer for the shares has already been identified and it’s not going to be the likes of BHP Billiton, the large Australian minerals company. It will be Mosaic.
About 129 million shares of Mosaic, or a roughly 30-percent interest, are held by trusts related to the Cargill family. The continued holdings in Mosaic are a result of Minnetonka-based Cargill’s split-off of its 64-percent interest in Mosaic two years ago.
Beginning later this month, the Cargill holders can request that Mosaic register the shares and tee up a secondary offering to sell those shares into the market. Mosaic has a right of first refusal on the shares and can tender for shares at a 20-day moving average price.
On Monday Mosaic management is planning to hold a conference call with investors to discuss its “capital management philosophy,” and while there may not be a plan disclosed in detail then there’s every reason to think Mosaic will be philosophically inclined to buy back those Cargill-related shares.
Recent notes from research analysts like Vincent Andrews of Morgan Stanley & Co. suggest that Mosaic has the cash flow and debt capacity to finance the buy back and still be able to fund capital investments and other growth initiatives.
The market is looking for roughly 10 percent of the outstanding shares of Mosaic stock to be repurchased in 2013, Andrews wrote, and “not coincidently, this is roughly the same of stock that unlocks in 2013” from the Cargill-related trusts.
Oak Ridge Financial’s Ben Crabtree is celebrating the increasing relevance of the price/earnings ratio in the market for bank stocks.
Crabtree is a longtime analyst in financial stocks who writes regularly on community banking trends. While there may not seem to be much new to say about a P/E ratio in investing circles, it’s significant that the market is finally moving away from valuing bank stocks on book value.
Book value is more or less what a business might be worth in a liquidation. That was clearly the way to value a banking company in the depths of the financial crisis and in the period since then, when banks were digging out of problem loans and shoring up their capital.
But it’s heartening for bankers that investors are increasingly looking at earnings and earnings growth to value bank stocks. Not only do overall prices rise when that happens, it suggests that well-managed companies with good earnings potential can separate from the pack.
Crabtree reached his conclusion looking closely at the data for 31 publicly traded regional banks. He saw clear evidence that investors were focused on price earnings ratios, and “to us, this means investing in bank stocks is in the process of normalizing.”
Crabtree’s work for Oak Ridge is meant for the owners and managers of community banks, of course, not folks likely to open trading some day at the New York Stock Exchange. But bankers at smaller, privately held banks have reason to be encouraged as well.
“Just as with stock market valuations, we believe that price/book measures are of secondary importance in arriving at an appropriate value for a possible bank acquisition,” he wrote, a subject that community bankers should indeed find of interest.
The strong earnings growth among the S&P 500 is convincing evidence that the big companies have generally recovered well from the Great Recession, but it’s interesting to hear reports from smaller companies that show the same trend.
This is the segment known as the middle market -- generally companies that are bigger than a mom-and-pop, up through about $1 billion in sales.
“These companies really cut costs during the Great Recession, converting a lot of their fixed costs to variable costs, particularly on the labor side,” said Gary O’Brien , a co- founder of the middle market investment banking firm Quetico Partners. “Now with stronger demand , they have not significantly increased their costs.”
That means that many are making a lot of money.
O’Brien cautioned that his firm works with a selective group of companies and may not have a complete picture. But in his client base the companies and their owners are likely not talking much about a fragile recovery or economic uncertainty. Business is better than just OK.
That rosy view is confirmed by banking companies like Bremer Financial, that the companies that survived the last recession have dramatically improved balance sheets and strong cash earnings. And the recovery of this segment shows up in the data reported by the Federal Reserve Bank of Minneapolis. It reports that non-current and delinquent commercial and industrial loans as a percent of bank capital and allowances have continued to decline in Minnesota, ending 2012 well below the 20-year median.
US Steel's subtle message on its frustrations with regulators
Posted by: Lee Schafer Updated: February 1, 2013 - 2:41 PMThe theme of John Surma’s speech this week to the Economic Club of Minnesota was that the company he serves as CEO, US Steel Corp., has operated taconite mines a long time in the state and remains a major contributor to the economic vitality of northeastern Minnesota
.
It was a hardly controversial message, delivered by a genial CEO to a friendly audience.
There was an agenda, of course, if you listened for it. It turns out US Steel is frustrated with regulators.
“There just seems to be a lot more people involved,” Surma said after the speech, when asked about what’s changed in how his industry is regulated in Minnesota. “There seems to be a lot more discussion, and a lot more people who seem to want to be in a position to say no.”
There is a “lack of clarity” in the process as a result.
What also changed for US Steel is the presence of companies like PolyMet Mining Corp., which is seeking permits to begin production of copper, nickel and precious metals at its mine and processing facility at the eastern end the Mesabi Iron Range.
Behind PolyMet are other copper-nickel mining projects not as far along.
Mining for taconite is hardly a clean industry, but it’s had nothing close to the kind of problems that have cropped up with copper and nickel mining in other parts of the world. PolyMet has been grinding away on its permitting process for years.
Has greater environmental review of mining as a result of copper and nickel projects changed the dynamic for US Steel? Surma responded that copper and nickel mining was a different business and he wished those firms well.
US Steel, no matter how aggravated it becomes, obviously can’t move its mines. Short of a dramatic - and unlikely - contraction in North American steel demand, Surma said, there is not much that would cause US Steel to significantly reduce its level of investment in the state. About a quarter of the company’s $800 million capital budget this year will go to Minnesota.
On the other hand, there are choices that will come up someday, on where to build plants with newer technology or otherwise invest the company’s capital.
It was very subtle, but that message was delivered.
Judging by who joined with Cerberus Capital Management to fund the purchase of 877 stores from Supervalu along with buying up to 30 percent of its stock, this won’t be a corporate finance deal, but a real estate deal.
Or maybe it’s part two of a real estate deal that has so far generated outstanding returns.
Cerberus is a private equity fund manager, but the main business of three of its partners in Albertson’s LLC is real estate. These are firms Kimco Realty Corp., Chicago's Klaff Realty LP, and Philadelphia's Lubert-Adler Partners.
It’s the group that paid about $1.1 billion for the 661 stores of Albertson’s Inc. that no one else seemed to want in 2006, part of the same set of transactions that brought more than 1,100 stores to Supervalu.
Kimco is a publicly held real estate investment trust that owns interests in more than 135 million square feet of neighborhood and community shopping centers, a mostly unspectacular line of business.
And it has collected $245 million in distributions so far from its $51 million investment in the 2006 deal.
REITs don’t usually do that well on their deals.
Kimco told its investors’ Thursday that it's “excited about adding to our successful investment in Albertson’s.”
To real estate people, dying retailers that have some good underlying real estate are opportunities.
Investors call it “unlocking the value,” as the same site can be worth a lot more if you could only clear away the tired and failing grocery store that occupies it.
Once in control of a retailer, you can boot yourself and sublet or sell a given site for a more profitable use. Other avenues to wring out cash include refinancing the stores that sit on owned sites and renegotiating terms on leased sites.
That’s what happened after the 2006 deal for the 661 Albertson’s stores. The investors, through a company known as Albertson's LLC, closed some stores, sold stores to other operators and worked to improve operations and refinance those they kept. Some sites even became locations for retailers like Kohl’s.
Today Albertson’s LLC owns 192 grocery stores.
About 540 of the 877 stores in the new deal are on owned or ground-leased locations. According to a report on Kimco Realty by Stifel Nicolaus analyst Nathan Isbee, some of these sites will be sold, as retailer demand is strongest in urban or dense suburban locations where there are barriers to new shopping centers being built close by.
Isbee said that the investor group will also look to improve the performance of the acquired stores.
In 2006 Cerberus did recruit a good operator to run stores that it kept, CEO Bob Miller, a longtime retail executive. Miller will continue to serve in that role and take over leadership of the store chains that are to be acquired from Supervalu, and will chair’s Supervalu’s board.
The auditors have been dragged into the contentious dispute between the Minnesota Orchestra’s management and its musicians. The musicians, who have been locked out since Oct. 1, are casting the annual audit as some sort of partisan act, in league with management.
The orchestra this week released financial results from its August 2012 fiscal year that included a $5.97 million deficit. That caused the musicians to say they "cannot and will not trust any audit directed by the same management and board leadership that stated that they would consult a PR firm on 'which deficit to report,'" an allusion to the board’s deliberations one year over how much to tap endowment funds to cover expenses.
The musicians may have legitimate gripes about management of the orchestra, but complaining about the accuracy of the numbers isn’t one of them.
To state the obvious, management and the board do not “direct” an audit.
The auditor directs the audit.
The 2012 audit was performed by LarsonAllen LLP, a firm that vaulted into the top 10 firms nationally thanks to a merger.
The orchestra’s financial statements are the responsibility of management, and what an auditor does is test the validity of those statements, looking for errors and misstatements.
The orchestra financially really isn’t that complex. LarsonAllen’s rawest auditing intern would certainly catch anything that involved moving money inappropriately between endowment and operating accounts, which is about the only thing I can think of that anyone would question.
And if the Minnesota Orchestra is like nonprofits I have served, LarsonAllen would also be heavily involved in reviewing the Form 990, a kind of federal tax return that is also publicly available.
There’s a better chance of winning the Powerball jackpot than there is of someday finding out the orchestra’s 2012 financial statements were materially incorrect.
It’s unclear how suggesting otherwise can possibly help the musicians union, once talks resume with management or in the public relations battle now underway.
ADVERTISEMENT
recent posts
- Philosophically Inclined to Buy Back Stock
- The Return of the P/E Ratio
- Good reports from the Middle Market
- US Steel's subtle message on its frustrations with regulators
- Seeing value in the real estate
- Audit as Partisan Act?
- HP Debacle May Teach Wrong Lesson
- MentorMate, eager for a mobile tech conference, invented its own
- Is it still bad judgment in retirement planning if millions do it?
- "One Throat to Grab": the PeopleNet Strategy
Post By Category
| On the road (1) |
ADVERTISEMENT
ADVERTISEMENT
inside the StarTribune
-
425 Portland Av. S.
Minneapolis, MN 55488
(612) 673-4000
- Company
- Subscriber Services
- Website
- Buy Ads
- Store
- Connect with Us
© 2013 StarTribune. All rights reserved.
StarTribune.com is powered by Limelight Networks
Newspaper Subscriptions
eEdition
RSS
Newsletters