CONFIGURANDO LOS MONITORES

Pages 102-108 of the book, How You Can Be a Stock Market Genius:

In Sept. 1992 Sears announced its intention to sell a 20-percent stake in two of its subsidiaries to the public. In the case of Dean Witter, Sears also announced its intention to distribute its remaining 80-percent interest directly to shareholders at a later date, some time in 1993.

Sears was selling or distributing business it already owned. By taking Sears stock price and subtracting the market value of its remaining stakes in Dean Witter and Allstate, a value for the rest of Sears assets, primarily the department store, could be calculated.

In the beginning of June, Sears sold a 20% stake in Allstate for $27 per share. By the beginning of July, just before Sears distribution of it s remaining stake in DW, this is how things stood: DW’s stock was trading at approximately $37 per share; Allstate’s stock was trading around $29; Sears stock stood at about $54. Sears announced that it would distribute its remaining 80-percent stake in DW. This meant that for every 100 shares of Sears, a distribution of 40 shares of DW would be made. (Sears was distributing 136 million shares outstanding—so the distribution ratio was 136/340 or 0.4.) Therefore, in mid-July, each Sears shareholder

would receive shares in DW worth approximately 0.4 (the announced distribution ratio) multiplied by $37 (the trading price of DW’s stock), approximately $15 worth of DW stock for each share of Sears owned.

Since Sears was trading at $54 per share before the distribution, this translated to a net price of $39 for the remainder of Sears. What was that remainder? Primarily it was Sears remaining 80 percent stake in Allstate, its foreign and domestic department store business, and various real estate businesses (including Coldwell Banker).

Sears owned approximately 340 million shares of Allstate. Sears, itself, also happened to have approximately 340 million shares outstanding. This meant that if you owned a share of Sears you also indirectly owned a share of Allstate. With Allstate at about $29, or about $10 per share ($39 net stock price less $29 price of Allstate), you were getting the foreign and domestic Sears department-store business and its real-estate business. Was this a bargain?

Michael Price in Barron’s July 5, 1993 laid out the case: “That $54 a share includes one share of Allstate at $28, so hat leaves $26 ($54 - $28). Then you get 0.4 share of DW, which is $15. That leaves ($26 - $15) $11 or $10. About $2 or $3 of that is Sears Mexico and Sears Canada. That leaves about $8. Coldwell Banker is worth $2 or $3 a share. So that leaves $5 a share, or a market cap of about $1.5 billion of the retailer—with $27 billion in sales. The new mgt. seems very focused. It is an almost debt-free retailer with huge real-estate opportunities.

Sears had $79 per share in sales. If those sales could be purchased for $5 a share (debt free), then that worked out to a purchase price of just over 6 percent of sales (5 divided by 79). On the other hand, a look at J. C. Penny (a comparable “crummy” retailer) showed sales of about $78 per share and a market price of about $44 per share—that was over 56% of sales. Of course, there are many other measures of relative value (earnings, for instance), but all indications were that the domestic retail business of Sears could be created at an

incredibly cheap price.

Look for partial spin-off opportunities.

After the DW distribution, the $39 remaining investment in Sears was up 50% over the next several months. Allstate was only up from $29 to $33 during the period. Obviously, the market finally took notice of the inherent value of Sears other assets.

Yes, it was possible to simultaneously buy Sears stock and short Allstate stock, creating only the portion of Sears that was clearly a bargain. In some cases, this is a smart way to play, especially when the value of the cheap portion—a $5 per share department store purchase—is a small part of the purchase price: $39, post DW distribution. However, in this case, the disparity between the bargain purchases price of the department store segment and true value was so huge, no such fancy tactics were necessary. (End of book portion).

First announcement of Sears. Sept. 1992 announcement. Sears had two big subsidiaries—Allstate and Dean Witter (DW). They would sell off 20% to the public and spin off the remaining 80%. Why would they sell 20% to public rather than to spin-off. One answer is to establish a value? You can’t sell off more than 20% to have a tax-free spin-off.

Why would you sell 20%? To get the cash! The reason to spin-off stuff is to get money or because it didn’t work out or you are not getting the value from the stock market. Something is not going right. That is somewhat a painful thing to do—admit your mistake and spin it off.

First sell 20% of company to public then spin off the remainder. They would also sell 20% of Allstate to the public and keep 80%. Sears will not dispose of the remaining 80% of Allstate—but what they really mean is that they will dispose of that interest. Because there is no other logic to that move. What they are saying is that we will try to hold on to this company. No way is that going to happen.

Sears is a department store, Allstate is an insurance company and Dean Witter is a brokerage, so there is no strategic reason for the combination of these companies.

In those days, Sears was a euphemism for loser. Under pressure they do the spin-off. I assume I will eventually get the value. My horizon is three years. This came out Sept 92, so now we move to April 1993. They did a public offering of Dean Witter and now they are getting ready to spin off the remainder.

For every share of Sears you own, you get 24 shares of Dean Witter (DW). If DW is at $35, you get 0.4 you get $14 for every share of Sears that you own. Sears at the time was at $53. You could either short DW that was out there and create the rest of Sears for $39 ($53 Sears - $14 DW). Or you could wait for your

distribution and sell it off when you were done. Take the risk that DW moves in the interim.

If you own 1 share of Sears and Sears has 400 million shares outstanding. Sears owned 176 million of DW after the spin-off. If they say we are going to spin off the shares to investors. For every share of Sears, you own 0.4 shares of DW. If there are 440 mm shares outstanding and you will get 176 mm shares of DW--each 1 share of Sears will get 0.4 of DW. If Sears is trading at $53, then 0.4 x $35 = $14. So what is left of Sears, which includes the retailer and Allstate trades at $39.

Next page is when they fess up to the fact that (offering in June) they will sell 78 mm shares of Allstate (Insurance company) in the range of $24 to $27. Sears will own 82% of the outstanding common stock. So now Allstate, Sears will sell 78 mm shares at $24, that will leave them 303 mm shares. For each share of Allstate will equal the shares of Sears. For each share of Sears you get a share of Allstate.

Announcement June 18th_{. One page 8, Mike Price is interviewed in Barron’s—he points out the opportunity.} Sears has gone faster than expected in its sales of Allstate and DW.

So $54 for Sears which includes 1 share of Allstate so subtract the price of Allstate ($28) so the remainder is $26, then subtract DW ($15) so the remainder is $11, then subtract Sears Canada ($2 to $3) for a remainder of $8 to $9, then subtract the value of Coldwell Banker (real-estate firm) of $2 leaving $5 to $6 per share of Sears (retail operations). Sears has no debt. $1.5 billion market cap for $22 billion in sales or 6% for $1 of sales. Crappy retailers sell for more. J.C. Penny has $19 billion in sales with a $10 billion market cap—55% of sales. Sears is now 9 to 10 times cheaper than J.C. Penny (Relative Value). Sears is a debt-free retailer. The new management seems very focused. In this particular case, Sears had no debt.

This is when I finally wake-up. 6% of sales for Sears vs. 55% of sales for J.C. Penny—almost 1/10 as cheap!

Turn to page 10, I looked at the S&P tear sheet for J.C. Penny. Look at page 11, J.C. Penny –I categorized as a crummy retailer. I did a quick and dirty. Of course, you would have to compare earnings, but Sears is 1/10th the price of J.C. Penny.

Two weeks later, Sears spins off the other two companies. I was left with $5 for Sears and worth potentially $50. This went from $5 to $30 in two months or 6xs!

How the heck did that happen? The opportunity was announced for months. Mike Price lays out the opportunity in Barron’s for the entire world. How will you make money with Amex, Sara Lee, or HP on the front page on the Wall Street Journal. There is plenty of time for people to find it. How is the opportunity possible?

People said that when I wrote the book, I had ruined it for everybody. The first year after I wrote the book,

spin-offs did poorly, but now they have done well. Things don’t change. This guy wrote the book about spin offs, mergers and restructuring in 1956. This was a high profile opportunity—Mike Price is a high profile guy in a high profile magazine, Barron’s I am telling you that I am not worried about making money doing this stuff. It’s messy. Institutions don’t want to own it. I don’t know why these opportunities exist, and I don’t

I bought 3Com and shorted Palm. I was able to hold 3Com for a negative 33 dollars. That was really inexplicable. The bottom line this stuff happens. This is a particularly blatant one. There is a lot of money to be made. I tried to help you in the beginning.

If you as a money manager own 30 to 40, stocks you will not have the time to look at the messy situations. There are plenty of other hedge funds out there, but they are subject to all the same biases. It is that it is complicated or you have to think about it in a slightly different way. I am better at it than I was 20 years ago; I have seen a lot of things and experience is good. It is somewhat hiding in plain sight. It is that it is

complicated. Think in a different way.

This stuff is out there and in the last three days there is tons of fodder. There is plenty of time to get in. Sara Lee

AMEX-AGFA If I think $9 for AGFA is conservative, I may be able to play right now. HP (future potential divestiture)

In the Sears example, I shorted the Allstate because, I wanted to own a lot of just Sears.

I am on the extreme scale of concentration. When I see an opportunity this good---buy for $5 and have the

potential to make $30 to $50—I load up.