Is This Situation Special Enough?

In his book You Can Be a Stock Market Genius, author and investor Joel Greenblatt highlighted the opportunity hidden in mergers and acquisitions, spinoffs, and restructurings. Some deals are so complex that the true value of a stock won't be unlocked until well after the fact, giving savvy investors a chance to get in early and grab hold of shares at a discount. Huge profits are possible, and he achieved 50% annualized returns for a decade investing in them.

We'll look at some announcements presenting an opportunity for profit and pair that with the views of the 180,000 members of Motley Fool CAPS to see what they think of the businesses involved. If the best and brightest in the investment community like these stocks, it may be worth your time to dive in further.

But not every deal is worth your money. It takes diving into the filings to understand the nuances, so don't use the stocks below as a buy list -- more due diligence is needed on your part.

Company

CAPS Rating (out of 5)

Type of Situation

Terms

ConocoPhillips (NYSE: COP  ) ***** Spinoff Refining and marketing operations in Phillips 66
Loral Space & Communications (Nasdaq: LORL  ) ** Spinoff Satellite and space systems manufacturer in Space Systems/Loral

Again, this is just a starting point for further research. Do your homework before committing real money to these special situations.

No thievery necessary
It's a nice throwback that oil giant ConocoPhillips will be spinning off its refining and marketing assets into a unit that will be christened Phillips 66, though I haven't seen if it will use the original orange and black or the updated red and white logos.

The split is similar to the one Marathon Oil went through last year when it maintained its upstream assets and spun off the lower margin refining business to Marathon Petroleum. Each of Conoco's separate entities will now be the largest in their respective fields.

Conoco anticipates that Phillips will pay shareholders a dividend of around $0.80 per share, which as a percentage of its cash flows, will exceed those paid by HollyFrontier, Valero Energy (NYSE: VLO  ) , or Tesoro. Current shareholders will receive one share of Phillips for every two they own of Conoco. Conoco will also receive $6 billion in cash from the transaction while $8 billion in debt will be transferred to Phillips.

In general, the spinoff has been favorably received by the markets and the CAPS community, too. While much of the positive sentiment is based on the prospects for oil in general, particularly in light of rising tensions in the Middle East, morowulf says the surviving Conoco entity looks like the better bet, at least for the short term:

Based upon historical earnings growth, I think this stock should be valued near $124.83 using discounted cash flows over the next 5 years. This produces a safety margin of 41%. Besides good earnings growth, the stock is due for a spin-off the middle of next year which I believe will produce value for the share-holders over the long-term. From what I read, Phillips 66 may have a bit of a sell-off over the course of the first year since I get the impression that it is seen as the more undesirable entity. But, I believe that overall there is money to be made here.

Keep an eye on the deal's developments by adding Conoco to your watchlist and let us know in the comments section below or on the ConocoPhillips CAPS page whether you think the refining business will make an equally attractive play.

Reaching cruising altitude
After failing to find a buyer for its Telesat and Space System/Loral units, Loral Space & Communications has settled on shedding the SS/L satellite manufacturing division, so long as it can work out the kinks with a major shareholder. A private investment firm holds a large nonvoting stake in Loral, but after the spinoff, would own nearly two-thirds of the new company's voting shares and the SEC apparently has problems with shareowners maintaining a controlling interest in a company.

SS/L manufactures satellites for a variety of industries, and customers include Intelsat, which provides fixed satellite services for information and entertainment-related businesses, as well as Sirius XM Radio and ViaSat, a satellite and wireless communications provider (though the latter has filed a patent infringement lawsuit against Loral that caused its CEO to step down from ViaSat's board and sell the shares he owned of the satellite operator).

The strategic review process for either selling or spinning off the assets has now entered its second year, and though there doesn't appear to be much investor fatigue yet -- Loral's shares are up 50% over the past six months, though essentially flat with where they were a year ago -- getting to the goal has been a long process, and the company is not seeing a conclusion before 2013.

U.S. satellite makers such as Loral, Boeing, and Orbital Sciences have been steadily losing market share to foreign rivals, falling from having three-quarters of the market in 1995 to anywhere between 35% and 50% today. That makes for a more difficult landscape for SS/L when it finally is free from Loral.

CAPS All-Star TMFDeej says a sum of the parts valuation finds Loral undervalued at the moment, but the broader CAPS community has assigned a relatively low two-star rating to the satellite specialist, suggesting they think there are better places for your money.

Add Loral to your watchlist to see if it will reach the correct orbit and let us know on the Loral Space & communications CAPS page if you think the spinoff will end up as just another piece of space debris.

Checking the mercury
Digging into these deals is exactly what the analysts at Motley Fool Special Ops do every day, finding the best situations to invest in. It's a special opportunity worth taking a 30-day risk-free trial in.

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Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Orbital Sciences. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (2)

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  • Report this Comment On March 30, 2012, at 12:03 PM, paddlinfaster wrote:

    I have some questions about the COP spinoff & apologize for their simplistic nature but I started buying stocks in Nov 2008 & while I've experienced a reverse split & a merger, this will be my 1st spinoff.

    Will Conoco's ticker change from COP? Will the COP stock price decrease substantially (or at all) on the day of the spinoff?

    As for the Phillips spinoff - what do you count as your cost basis for these shares? And is this a taxable event for this year (like a dividend) or not unless/until you sell those shares?

    Thanks for any info.

  • Report this Comment On April 01, 2012, at 8:13 AM, TMFCop wrote:

    paddlinfaster,

    Conoco will retain the COP ticker while it's anticipated the new Phillips will trade as PSX. Typically in situations like this, the value of COP falls equal to the value of the new PSX that you receive so there shouldn't be much of an account difference.

    I'd recommend checking out the COP investor relations website for cost basis information; they usually post that data for investors. And these events are also usually structured as tax-free events. This one should follow that route too.

    Rich

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