M&F Worldwide Corp: Perelman Makes Opportunistic Buyout Offer

| About: M & (MFW)

I wrote about M&F Worldwide Corp (MFW) back in February, noting:

The only thing going for this company appears to be the involvement of Ron Perelman, who owns 43.4% and sits on the board of directors. Unfortunately, this is not enough for value investors. In fact, it would appear this is not enough for many investors, as the company lost 45.26% of its market cap in 2010.

At the time, the company did not appear to present a sufficient margin of safety. However, since I wrote that, the company’s shares fell to a low of $16.96 (on June 10) -- the lowest the company has traded since May 2009. At least one investor saw an opening. Famed investor Ron Perelman made an offer to buy the portion of the company he does not already own. Here’s his offer in part (emphasis added):

MacAndrews & Forbes Holdings Inc. (“M&F”) today announced that it has proposed a transaction pursuant to which M & F Worldwide Corp. (NYSE: MFW) (“MFW” or the “Company”) would be merged with a subsidiary of M&F and all outstanding shares of common stock of MFW not owned by M&F would be converted into the right to receive $24.00 in cash per share. The proposed cash consideration represents a greater than 41% premium to the Company’s closing share price on June 10, 2011.

The full proposal letter can be read here.

Perelman’s offer, while a 41% premium to the prior closing price (the $16.96 noted above), makes for a nice headline but ignores the fact that the company was trading at a premium to the offer price ($24/share cash) as recently as May 5, and the 41% premium is to a price that is the lowest the company has traded at since 2009. If this goes through, Perelman will effectively be buying the company around the price I was looking at it, without any control premium.

Kudos to Mr. Perelman. A ballsy move, and I like it. Unfortunately, not everyone is a fan. The law firms are circling with their “investigations,” and investors appear to be betting Perelman will have to increase his offer price, as shares closed at (slight) premium to Perelman’s offer price.

Barron’s published a piece on the situation recently:

Perelman’s offer values the company at just four times 2010 profits of $6.22 a share and at about five times 2010 pre-tax cash flow. M&F has significant debt of more than $2 billion, but nearly all that debt is at the company’s Harland Clarke unit that owns the check and testing businesses and isn’t guaranteed by M&F.

M&F owns its licorice business separate from Harland Clarke and has about $100 million of net cash. The value of the licorice business and cash could be $300 million, or about $15 per share, meaning Perelman effectively is offering to pay little for the equity in the debt-heavy Harland Clarke.

The talk on the Street is that Perelman may have to increase his offer to $30 a share or more in order to gain shareholder approval. Perelman is offering about $265 million for the 57% of M&F that he doesn’t now own. That’s not a big outlay for the billionaire considering that the company generated about $200 million in free cash last year.

Other than Perelman, the big winners are recent investors (i.e. the last six weeks), who have just made a killer annualized return.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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