That I had to be educated as to who Coats Inc are is a shameful disgrace… But then I’m used to being ashamed and disgraced, I like tomato and peanut butter sandwiches, and THAT my lovely wife tells me is shameful, AND a disgrace.
So who is Coats Inc.? A recently closed CPAN deal of ours involved a small, rapidly-growing company with a leading edge proprietary technology. This company recently signed an exclusive multi-year research and development agreement to create a new range of products. The agreement was signed with – you guessed it – none other than Coats Inc. Thus began my introduction to the company.
Founded in Scotland in 1755, Coats today must be one of the oldest continuously operating companies in the world, if not the oldest. Coats is the world’s leading industrial and textile craft business, and rank second in global zips. In fact 1 in 5 garments around the world contain Coats threads. They are the undisputed market leader supplying threads to companies such as Adidas, Marks and Spencer, and Abercrombie and Fitch. Today with Revenues of £1.12B annually it is a cash-generating machine.
Coats itself is wholly-owned by a New Zealand conglomerate investment firm called Guinness Peat Group Plc (GPG:AX). GPG keep a listing in Australia, NZ and the UK. Now this is where the story gets interesting, as GPG has been trying to figure out how best to release value to its shareholders, and to that end the decision to wind down and sell off its assets was made over a year ago. There has been a bit of internal hostility as well, but that isn’t the topic of this missive and really par for the course in internal shake-ups of this nature.
By the end of 2013 the one remaining asset which GPG plan to retain, is that of Coats, the thread maker mentioned above.
I’ve always maintained that conglomerates rarely get priced correctly by the market. It is often to difficult for investors to accurately value their many businesses and when they are publicly-traded shareholders often do not get rewarded for the companies value. In short, what can at times happen is much like government accounting…
1 + 1 DOESN’T equal 2
I believe that that is the case with GPG right now. Let’s start with looking at GPG’s assets. Currently GPG still owns stakes in the following: Tower Insurance; Ridley Corporation (agri-producer); CIC (Australian property developer); Prime Ag (Agri-investor); and, Tandou (Agri-business). These businesses together are valued conservatively at £216 million. GPG also has a cash position of £275 million.
GPG trades at £0.32p, or a market cap of £486 million. This makes sense, except that Coats is wholly-owned by GPG. Coats is therefore being valued at ZERO.
Lets take a look at Coats then. It is an extremely large business in its own right with over 70 factories around the world and 20,000 staff.
It is the largest holding of GPG, with a book value of £150m, £46m in profit, and £97m in cash from operations.
Looking further I see that Waldemar Szlezak has recently been appointed as a non-executive director. Now Waldemar, some of you may recognize the name, is managing director of private equity at Soros Fund Management. Looking through filings which I corroborated with news releases, I find that Quantum Strategic Partners Fund has recently taken an 8% stake in the company.
Rob Cambell, GPG’s chairman this month alone purchased 323,298 shares.
On the obligation side GPG has to deal with a £125 million pension scheme obligation at Coats. This is non-recourse to GPG, however they certainly have sufficient capital to deal with this regardless.
The question investors needs to ask themselves is if the pile of cash which is on the GPG balance sheet, plus that which will come in from the subsequent asset sales planned, combined with Coats is worth more than the current share price? Clearly Quantum and Rob Cambell believe it is.
One other notably interesting little titbit is that GPG has a £1.9 billion unused tax loss sitting on its balance sheet. That is HUGE. In essence GPG could sell Coats for less than its true value, use the tax right-off and simply return that cash to shareholders. Who knows what they will do, but it certainly looks intriguing to me, as well as being undervalued based on book value alone.
In full disclosure (not that it matters since this is a free blog and hey you get what you pay for), I have a bid out now to pick up some shares in GPG.
“I contend that financial markets never reflect the underlying reality accurately; they always distort it in some way or another and the distortions find expression in market prices. Those distortions can, occasionally, find ways to affect the fundamentals that market prices are supposed to reflect.” – George Soros