Invest In Stubs, Spin-Offs And Liquidations For Alternative Returns

Invest In Stubs, Spin-Offs And Liquidations For Alternative Returns

In past articles, we have shown that there are more ways to earn a return than just buying a stock. We have discussed absolute returns, relative returns, even returns from announced mergers and acquisitions (risk arbitrage). In this article, we zero in on another approach: investing in stubs, spin-offs and liquidations.

Play Quizzes 4

Stubs are created through the leveraged buy-out process. As the name implies, leveraged buyouts (LBOs) are transactions in which the buyer uses debt to fund the acquisition of a company. Usually, the LBO group will buy all of the target company’s publicly traded equity. However, occasionally it will leave a small portion (usually 10 to 15% of the float) in the public market to avoid having to book “goodwill” (purchase price in excess of book value), which eventually must be written off against earnings. Shares of this small portion of equity remaining in public hands are called stubs.

13F Roundup: Top Hedge Fund Positions In Q1 2022

profitgraphHere is our quarterly 13F roundup for high-profile hedge funds. The data is based on filings covering the quarter to the end of March 2022. These statements only provide a snapshot of hedge fund holdings at the end of March. They do not contain any information about when the holdings were bought or sold or Read More

Because we analyze securities in much the same way as LBO specialists—looking for undervalued assets and focusing on how much free cash flow a company generates—many of our portfolio holdings have been targeted by LBO groups. We have our cake in the form of premiums paid by LBO groups to buy portfolio companies. Every now and then, we get to eat it too, by holding on to stubs that allow us to participate, along with the LBO group, in realizing a portfolio company’s full upside potential. Our risk arbitrage operations—buying deal stocks at a modest discount to the purchase price to earn respectable annualized returns when the deal closes—also give us the opportunity to take advantage of fundamentally attractive stubs.

The Power of the Stub

Let us give you an example from the Gabelli files. On January 23, 1997, Amphenol, a leading electrical equipment manufacturer, announced that the prominent LBO group Kohlberg Kravis Roberts & Co. (KKR) was purchasing 90% of its equity for $26 per share in cash. The remaining 10% would remain in public hands—a classic stub. We thought the deal price was a little skinny, valuing Amphenol at around 15 times earnings, when its competitors were trading at 17 to 18 times earnings in the market. Believing we might see a better bid from a competing suitor and/or KKR, we bought Amphenol stock at $25.50. At this price, we could earn a modest 6% annualized return on our investment even if no higher bid materialized. We also had the option of holding on to all or part of our Amphenol position via the stub. Either way, the downside risk was limited and the upside potential appeared attractive.

See Full PDF here mariostubs

Via: gabelli

Updated on

Sheeraz is our COO (Chief - Operations), his primary duty is curating and editing of ValueWalk. He is main reason behind the rapid growth of the business. Sheeraz previously ran a taxation firm. He is an expert in technology, he has over 5.5 years of design, development and roll-out experience for SEO and SEM. - Email: sraza(at)
Previous article Uber Loses Battle in Brussels, Opening Door to Fees
Next article Inflation Edges Up As Food, Housing Costs Rise

No posts to display