Interview with Seth Klarman

Check this out people. A great read on Seth Klarman.

link


Better and better,
Lucas

Klarman is not afraid of spin offs

Klarman is not afraid to buy spin offs. In fact, he views such situations favorable for value investors who often look out for ignored and unloved assets.He purchased the shares of two subsidiaries of Tenneco Inc. One was Pactiv Corp which made branded food storage bags and trash bags. Also, the company was the market leader in a range of plastic packaging products. Due to market forces pushing the stock price down, the stock price dropped to about 10 times after tax earnings. The conditions to buy the stock were appealing. Management was loading up stock while earnings growth indicators were solid. There were plans to cut down costs and redeploy assets while price of raw materials was expected to drop. Here was a premium brand selling at a heavily discounted price.

Another spinoff of Tenneco was an automotive company which manufactured branded shock absorbers abd mufflers. Like Pactiv, it was a market leader in its respective product categories.Due to its small market cap, there was a heavy sell off by shareholders who felt that such small caps were ill-suited to their portfolios.This heavy sell off depressed the stock price, making it an attractive target for Klarman.

Seth Klarman case study 3

Seth Klarman Case study 3
- Columbia gas systems went into a contract that overpaid for gas
- Gas was selling at 1.20 per gallon while they paid for $5 per gallon through contractual arrangements
- Unnecessary and excessive liabilities
- All assets on the book could pay off liabilities

Seth Klarman Case Study on Federated Stores!

Seth Klarman case study 2
- Federated stores were going to miss payments and bonds sold off to a huge discount
- Face value of bonds was 2.4 billion
- 2.4 billion dollars of bonds could be bought with 1 billion dollars in the open market(40 cents on the dollar)
- Company had 500 million dollars in cash
- Positive cashflow and were still in the black
- Restructured debt would involve 75 cents in debt and 20 cents in equity given per senior bond held-->95 cents -->50% margin of safety

Why does Seth Klarman like Blank Check Companies?

Here enclosed is a link discussing Seth Klarman's reasons for choosing such companies

http://www.stockpickr.com/problog/11/


Written by Manpreet

Seth Klarman case study: Harcourt Brace Jovanovich

Dear friends,
here is a case study i did on the ever popular manager and head of Baupost Group, Seth Klarman. For those who have not heard of him, you just have to google him and find that he has been a wildly successful manger of funds and his portfolio includes both debt and equity. First up lets take a look at some of his guidelines for investing in distressed debt before we look at a company he invested in.

Seth Klarman guidelines
1) Sees opportunity mostly in junk bonds that are trading between 20cents and 40cents
2) Looks at tangible assets and ignores intangible assets

Seth Klarman case study 1
Company: Harcourt Brace Jovanovich
- Has 2 businesses, publishing and insurance
-Total market capitalization of debt and equity was 4.6 billion
- Theme park was sold for 1.1 billions dollars and proceeds were used to pay down bank debt
- This should have reduced debt by 1.1 billions and the market capitalization of debt would have been 3.5 billion
- But because of panic selling in junk bonds, market capitalization of debt and equity sold at 1 billion
- What was the true worth of the company? à company’s operations spurned off 180 million pretax earnings and at a multiple of 12 times, after tax valuation of the company was around 1.4 billion ignoring debt àequity was worth 1.4 billionà Company was at a discount to what it was worth

- Catalyst according to Klarman: ‘The pressure to pay off the debt tends to put a firecracker under management. Either the company will tender for the bonds at something less than par but above their unceremoniously low prices, or, if they cannot, bankruptcy will lead to the underlying values being realized through a court-ordered reorganization or liquidation.’

Written by:

Lucas Lim