Enjoy the weekend morning coffee with a copy of Mr. Buffett’s wisdom:
– Berkshire’s Annual Shareholder Letter: A required reading. Will be out on Saturday the 27th.
– When CEOs have Warren Buffett in their Boardroom: By Alice Schroeder about the way Buffett works with CEOs of companies he has invested in.
– How a New Jobless Era Will Transform America: The impact on the high unemployment rate on the current and future generations.
– Sears Holdings’ Chairman’s Letter: The annual shareholder letter from Eddie Lampert, covering American policy, unemployment, and retail market.
Steel companies have been hit hard in 2008 and 2009. Most companies have put up negative cash flow numbers, with only a few that have successfully made it through the two years without burning cash. Our investment in Ternium was based on the analysis that the company is one of the best operating steel companies in South America and the world. The 2009 Q4 results again showed why we believe them to be one of the best. Some highlights from the report:
– Shipments increased by 7% compared to Q4 ’08. Compared to Q3 ’09, shipments were down 2%. A strong showing that demand for production has stablized
– EBITDA per tons increased 12%, compared to Q4 ’08. The company reported $177/ton EBITDA, extremely strong results compared to what the rest of the industry is showing.
– The company had EBITDA of $316 million. The company used the cash to pay off $121 million of debt in the quarter.
– In 2009 the company had cash flows of $953 million. Compared to the current EV of $7B, that is a little more than 7x of cash flow.
One of the metrics used in track steel companies’ performance is EBITDA per ton. The companies that are low-cost producers and have strong production volume usually show the top ratio. We can see a comparison of some of the major steel companies’ EBITDA/ton ratios at the Nerds of Steel earnings spreadsheet. Ternium has shown dominant and consistent performance on this ratio. It has ranked at the top with Posco, Buffett’s favorite steel company, and Gerdau. Ternium’s strong cash flow, low-cost producer, and located in one of the rapidly growing regions makes it an extremely compelling steel producer at current prices.
The GGP world is moving at a pace faster than the internet world speed. Since our update over the weekend, the following has happened in 3 days:
– BAM and GGP have come up with a counter-offer to the Simon offer. The proposal values GGP at $15 and proposes splitting GGP into two: one holding the top class assets (GGP) and another holding the remaining (GGO – General Growth Opportunities. In return BAM would get 30% of GGP. I think this is a good offer but it really just creates a floor for GGP share value. There will be more bidding in the coming days.
– Simon has signed a Non Disclosure Agreement with GGP. Simon had initially protested against the terms of the NDA. After the BAM/GGP plan was made public, Simon quickly signed the NDA. We have said it would be foolish to rule out Simon in this bidding war. Simon signing the NDA is a clear sign that this is far from over. I accept another offer from Simon in the coming days.
– Westfield has signed a NDA with GGP and is considering a bid. Another bidder will make it even more interesting for current share holders. This is a major positive for shareholders.
GGP owns some of the most prized retail shopping mall assets. An opportunity to purchase these assets at valuations based on the Simon and BAM proposals are a once in a lifetime chance. It is extremely hard to see Simon or BAM not increasing their offer as the bidding war progresses. I think the recent offer from BAM is not the final offer. I except an increased offer in the coming days.
I had initially thought about providing updates on GGP on a daily basis. Although with the way things are moving, what happens in the morning seems like old news by the end of the day. Here are the recent updates:
– Bruce Berkowitz, of Fairholme Capital, recently announced his interest in helping GGP come out of the Chp 11 as an independent company. Fairholme own over $500M of GGP debt and has mentioned that he is interested in helping GGP “emerge from bankruptcy as healthy as possible without a takeover and with the ultimate conversion of Fairholme’s stake into equity.” This will create a big dent in Simon’s takeover plans.
– Brookfield Asset Management has been rumored for a while to be interested in a JV with GGP. BAM recently amended its shelf offering, now offering $2B instead of $1B. Recently GGP mentioned they were looking to raise $1-2B to pay off the unsecured creditors. This is definitely an option for raising capital.
– Simon started the initial bidding war with its $10B offer. There has been lots of talk about David Simon’s public outcry over GGP rejecting Simon’s offer. It would be foolish to rule out David Simon in any takeover bid. Recently the rumor has it that Blackrock is joining Simon in Simon’s takeover bid. Even with the debt rating warning by S&P, Simon is not out of the running. It would be a mistake to rule them out.
The great news for equity holders is the bidding from these firms will only increase the equity value. GGP’s management has the right incentives to increase equity value and to get it done quickly. With the recent rumors and activities, equity holders will not have to wait too long to for this process to complete.
If last week was a sign, the coming week will be extremely interesting.
We bought a position in ATP Oil and Gas yesterday. More on our thinking in the coming days.
The bidding war for GGP officially got started today. Simon announced a $10B offer for all of GGP. The offer looks like Simon trying to low-ball GGP. To us, this offer has no chance of being accepted. We know there will be many more offers coming, with the price increasing substantially.
Let’s look at the Simon’s offer. The 10B offer is $7b for unsecured creditors and the remaining $3B is for equity.
Simon’s offer would provide a 100% cash recovery of par value plus accrued interest and dividends to all General Growth unsecured creditors, the holders of its trust preferred securities, the lenders under its credit facility, the holders of its Exchangeable Senior Notes and the holders of Rouse bonds, immediately upon the effectiveness of a definitive transaction agreement. This consideration to creditors totals approximately $7 billion.
General Growth shareholders would receive more than $9.00 per General Growth share, consisting of $6.00 per share in cash and a distribution of General Growth’s ownership interest in the Master Planned Community assets valued by General Growth at more than $3.00 per share.
Now, with unsecured creditors they will agree to any offer that provides them with 100% of their par value plus accrued interest and dividends. This is the most, in cash, that unsecured creditors can get anyways (unsecured could go for an offer where they convert to equity buy Simon’s offer didn’t mention this). So Simon saying that 100% of the unsecured agreed to the offer doesn’t really mean much.
The interesting thing about this offer is that now the market knows that unsecured will get 100% and equity is likely worth something. Interestingly, after the offer was made public the GGP equity was trading around $12/share for a market cap of over $3.75B. This means, the market was expecting another higher offer.
Later in the day, we got news that Bill Ackman believed that the value of GGP equity “is worth as much as 3 to 4 times what Simon is offering — on the order of $30 to $40 per share”. We agree with Ackman that GGP is worth much more than what Simon is offering. Although the range that Ackman mentions in at the high-end of the range.
We still have plenty of other interested players, including BAM, that will likely make some public statements in the coming days. The games have begin and we expect a few more rounds before all is said and done.
Watching the stock market in the last 6 months might make you believe that the good times are here. Although we still have a long way to go. For one, many of the states are struggling with their budgets and will struggle in balancing their ‘check books’. We expect taxes to increase in many states.
Nevada’s budget is so far out of balance that by one account the state could lay off every worker paid from the general fund and still be $300 million in the red. The economic downturn has hit so hard that prisons may be closed, entire colleges shuttered and thousands left without jobs.