more on USEC: you asked what is the management incentive? This was the clincher for me, when I met management.
[And I know this is getting long winded. Some on the thread say they appreciate hearing an argument between two value investors about what is going to be a high profile stock. Others may be bored out of their minds. If you think Mike and I should do this privately, post such thoughts to me privately and we will stop.]
Let's get perspective on management. USEC is the government's uranium enrichment business. In 1993, the Clinton administration decided to go ahead with privatization, and hired the best and brightest of the private sector to make the company a real business. The CEO is the former president of General Dynamics. The head of manufacturing was with ABB. The head of sales was with Otis Elevator (Allied Signal). These are top-notch executives who had other alternatives. Why in God's name are they working for USEC? Public service? I don't think so - these guys are not bureaucrats.
They are in it for the money. They have set themselves up perfectly to get stock options and make a fortune on an undervalued business. But they made one crucial error. The government at the last minute said they would not grant stock options at the offering price, which would make it look like a sweetheart deal and create a political issue. So, unlike other IPOs, the executives have to wait six months to get their options priced. So these guys have every incentive to make this company look like an ugly duckling at the offering, and for the next six months. Then they announce a huge share buyback, announce cost reductions and new contracts. That is how I think this plays out.
But understand this. I grilled two executives for an hour and a half last week, and the strength of the management team is apparent in the prospectus. These guys are good. Just understand the unusual nature of their incentives.
ONE MORE BIG THING ABOUT USEC
A consortium of three companies, including Lockheed Martin, begged the government not to do the IPO because they wanted the chance to pay more than the offering price to acquire the company. This was clearly not their highest offer, and there were multiple bidders. The government decided to offer it to the public to avoid the risk of a "Sixty Minutes" story about a government giveaway to a defense contractor. No political risk in giving it away to the public and letting small investors make a lot of money. Understand this - Lockheed Martin understands this business better than anybody - USEC contracts their labor from Lockheed. So if Lockheed was begging to pay $17-18 this deal, that should tell you that it is probably worth much more. That said, the company is now effectively takeover-proof.
I will respond to questions, but this is the last long post.
Jim |
