Hi Michael....
The number of shares that SMU could spin off to shareholders would almost certainly be a reflection of the limitations placed on the company by the indentures on the debt outstanding.
There is no point of the company spinning off the entire piece of the subsidiary. It is enough that the company does the spinoff in such a way that the market will capitalize that "sub" on its own. Even if that means each shareholder gets one share of the "sub" for every five Simula common he already owns, though there will be exactly the same number of shares outstanding in the "sub" as Simula, there will only be 20% of that number in the hands of the public.
The obvious advantage aside from the reasons I have earlier posted? Scarcity. In order to get the shares in the high growth portion of Simula's business, investors would either have to buy Simula common, purchase the rights once available, or wait until the spinoff is accomplished and purchase the "sub" in the open market. Whatever way is chosen, it is pretty clear that the "sub" would trade at a *huge* premium to the valuation placed on Simula, and rightly so.
After all, whatever else happens to the parent company, the "sub" will be evaluated on the basis of its own fundamentals, including return on equity and growth prospects. Moreover, financing the growth of the business would be *much* less expensive to Simula holders if it were done by the sale of a high P/E ratio company instead of Simula, Inc. Moreover, why should the holders of Simula give up a portion of government products or the airline seat business in order to finance a portion of the growth of the Auto business?
It makes too much sense not to do it. My own view is that the Auto business would earn about forty cents a share in 1999 (perhaps even slightly more if we are lucky enough to get another 2000 model year platform from either TRW or Delphi!) on the same share count as the parent company. Considering that this business will almost certainly grow at 50%-100% for the foreseeable future, my own guess is that the shares will trade at a *minimum* of 40 times earnings. Accordingly, it is my view that the Auto business *on its own* will be worth at least the equivalent to shareholders of the *entire* company (at today's prices) by 1999.
And, in addition to the value therein, the 16G seating business should have about $60 million in sales, roughly 12%-15% pretax earnings (and provide after-tax income of $4.25-$5.4 million), and most probably be worth about 20 times earnings. That is an incremental value of $85 -$110 million, or about $7 - $10 bucks per share fully diluted.
The balance of the transportation, military and government, testing, sensor, and parachute businesses have to be worth at least another $5 per share or so. Debt would be eliminated, as all the debenture holders would long before have converted (saving perhaps $2 million after taxes in interest, or about 15 cents per share fully diluted), and...
...voila!!! The company is worth *at least* $ 30 per share.
Frankly, the shareholders have been immensely patient, and I would love to tell my clients that the company is doing precisely what Mr. Townsend foretold in his letter to shareholders in the most recent annual report:
Building shareholder value!
As I said, I can envision no reason to avoid doing it. The balance of Simula's business beyond a highly profitable Auto Division will be easily self-sustaining following the profitability that will be achieved in 16G after the San Diego plant consolidation. And, the auto division will be analytically comprehensible by its natural constituency...the airbag and/or auto supply experts that inhabit the "Street."
It is too good an opportunity to wait more than necessary. |
