Good morning my dear readers,

What a superb Semi final, on to the finals.

Cricket is coming home.

~~

Today, we will study a very simple, yet interesting double demerger from Sears, in 1993.

Sears was a conglomerate which owned a very popular department store chain.

But for many years, it's management was under pressure as the stock price wasn't performing despite having a very decent core business and some good non core assets.

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So naturally under pressure, the management decided to 'partially' sell their two non core assets,

1- Dean Witter.

2- Allstate insurance.

The plan was to sell 20% stake initially and 'demerge' the remaining 80% directly to shareholders at a later date.

(This idea was probably purely to showcase the true value of its non core assets, which the stock market refused to acknowledge under the previous 'conglomerate' structure).

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But they were merely just demerging assets what they already owned, what's the big deal?

Well, it was a very big deal, let's find out why...

1- Dean Witter was sold at $37/share

2- Allstate insurance was sold at $27/share

**Important to note that the Sears conglomerate stock was trading at $54/share.

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Now we will do some grade 1 math substraction...

(Well, maybe not grade 1 😅).

1- The distribution ratio of Dean Witter shares was 0.4/1.

So multiplying 0.4*$37 (the value of Dean Witter stock) = $15/share.

Therefore, since Sears was trading at $54, we do $54 - $15 = $39/share was the leftover value after deducting for Dean Witter demerger.

2- Allstate insurance demerger was going to be 1:1.

And Allstate insurance was trading at $29/share.

So now we substract $39 - $29 (value of Allstate) = $10/share.

Basically, the market was saying that post demerging Dean Witter and Allstate, Sears conglomerate was worth $10/share.

But it had loads and loads of other assets inside including international operations, other subsidiaries and real estate.

Sears was also a debt free business.

Assuming a $5/share value for other non core assets, the actual worth of the actual Sears conglomerate was just $5/share, as per the stock market!!

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Basically, at 1x revenue, Sears would have $79/share in sales.

So at $5, a debt free Sears conglomerate was effectively valued by the 'efficient stock market' at 6% of Sales 😅.

(We have companies in India which trade at 6x of sales).

** There was a peer called JC Penney, which traded at 0.6x Sales.

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There are many ways to value a business, but by all indications, the Sears conglomerate was available for a very attractive valuation post this value creation exercise called a partial spinoff.

There is no point in me telling how much the Sears stock returned post spin off, it was a large number.

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The point is that for many years, a stock can SLEEP 🥱🥱, despite having great assets inside. The market sometimes just doesn't care enough to effectively valued these good assets.

Special situations not some a fool proof way, far from it, there are losers as well. But sometimes, the market ends up giving great entry valuations.

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That's all from me today my friends.

A huge Sunday is coming up. Wish us all the very best!

Let's hope we meet next Friday, congratulating each other as World Champions 😎.

Have a great weekend.

My Best,

Neil Bahal

Founder

Negen Capital

Ps- We just recently invested in a housing finance startup from our Cat1 AIF, called Aham Housing Finance.

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