American Greetings（AM) is the second largest gift card and party goods company in the United States. The CEO and members of the founding family offered to buy the company for approximately $532 million dollars or $17.18 per share. A further check on finance.yahoo.com revealed the offer price is below American Greetings' book value of $20.84, for a forward P/E of 7.
American Greetings' sales have been declining from $1.9 billion in 2002 to $1.7 billion in 2012. Gift cards are less relevant in people's lives and demand is down. American Greetings is a cash cow, it only earned $226 million from fiscal year 2010-2012, but generated $360 million in free cash flow. The rationale behind CEO Zev Weiss's intent to take the company private is twofold. American Greetings spent $31 million, $36 million and $106 million on dividends and share repurchases in fiscal 2010, 2011 and 2012 respectively. A buyout will eliminate these cash outlays. Secondly, the debt used to fund the buyout transaction will take advantage of the low interest rate environment.
A number of law offices announced claims against the board of directors for the proposed buyout. From valuation perspective, these law offices have good reasons to suspect possible breaches of fiduciary duties. American Greetings is making money, it has an average return on equity of 8.8% for the fiscal years 2007-2012, excluding fiscal 2009 (the year of the financial crisis). The earning power of the company is stable, and its capital expenditures are minimum. It is unreasonable to sell a company that has stable business and minimum capital expenditure below the book value, especially to the company's senior management. An alternative price to pay for American Greetings is the book value of the company, which represents 21% premium to the offer price of $17.18. In addition, a forward P/E of 10 may be a more reasonable price to pay for American Greetings, as companies that are not growing but earning money get a reasonable PE of 10 in the stock market, which represents 43% upside (estimated) to the offer price. So this is an interesting trade, 21% - 43% upside gain vs. 20% downside risk if we purchase the stock at $17.
The stock market seems to believe there is upside to the offer. The stock closed at $17.05 on 12 October 2012, the difference to the offer price is less than 1%. A word of caution though, the financing for the deal is not secured at the date of the buyout announcement.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AM-OLD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: This article is a trading idea. Obviously one will not hold the stock a long time, as it will get a buyout.