When I tapped cash-in-transit and security monitoring firm Brink's (NYSE:BCO) as my upset pick in a recent installment of my Upset City series, I mentioned the pressure being applied by activist hedge fund Pirate Capital. It turns out that Pirate isn't the only one seeking buried treasure here.
On Monday, MMI Investments announced that it has increased its stake in the company to 8.3%. The fund reiterated its call from December for a breakup of Brink's two operating subsidiaries, and narrowed its proposal of four possible strategic alternatives to one: a tax-free spinoff to shareholders. MMI even went so far as to include a nice presentation with its SEC filing.
The presentation outlines five possible justifications for the spinoff. The primary motivation, however, is quite straightforward: The two subsidiaries would almost certainly be awarded higher valuations by the market as "pure play" entities.
Mr. Market often frowns upon companies that operate in multiple, non-complementary businesses, awarding them a value substantially lower than the sum of the parts. Conversely, he tends to throw a party when these businesses split up. Recent successful spinoffs that come to mind include Walter Industries (NYSE:WLT) and Mueller Water (NYSE:MWA), First Data (NYSE:FDC) and Western Union (NYSE:WU), and Alberto-Culver (NYSE:ACV) and Sally Beauty (NYSE:SBH).
The lovely thing about this situation is that the company is not in a rut -- it is performing quite well on both fronts. Therefore, if you're opportunistically considering an investment here on the possibility of a spinoff, you are not dependent on such an outcome to realize potential gains. Many special situations involve more heightened dependence on one particular outcome. In the case of Brink's, I view the activist pressure to split up the company as icing on the cake.
Do you consider yourself a special situations investor, or are you interested in learning more about these opportunities? Try this Foolish article: Spice Up Your Portfolio.
Walter Industries and Mueller Water are Motley Fool Hidden Gems recommendations. First Data and Western Union are Motley Fool Inside Value recommendations.
Fool contributor Toby Shute would argue that out of all investment vehicles, the Roth IRA is most like an armored truck. He doesn't own shares in any of the companies mentioned. The Fool has a secure disclosure policy.
