M&F Worldwide: LBOs and Ron Perlman Not Enough Value for Investors

M&F Worldwide Corporation (MFW) is a conglomerate holding company with wholly owned subsidiaries operating in fields as far flung as licorice production, cheque products, direct marketing and testing products. This is an opportunity to buy a proprietary eponym (e.g. "Kleenex") in that MFW owns Scantron, the fill-in-the-bubble testing system used by seemingly every learning institution.

I found MFW while looking at companies that are trading at low PE10s. Rather than using TTM P/E (or worse, the dreaded Leading P/E), I used Shiller’s PE10 concept to hunt for companies trading inexpensively versus their long term earnings power. MFW is trading just over 2x PE10, though this is a highly misleading figure in MFW’s case (more evidence that no single indicator is perfect!), as the company has made several major acquisitions over the last five years that have materially changed the company’s profit margins. From 1999 to 2006, the company earned average profit margins of 21.2%. Since 2006, the company has managed just 3.7%. Free Cash Flow as a % of Revenues has also declined dramatically, from an average of 34% prior to 2006 to just 11% after.

The biggest problem with this company appears to be that it missed the lessons of the 1980s. Conglomerates have been shown to destroy value as synergies rarely materialize, and LBOs at high multiples are rarely a winning long-term strategy. MFW was quite aggressive in acquiring other companies just prior to the recession, putting together a motley group of unrelated businesses that were purchased at high premiums to tangible assets and paid for with debt. The result is that MFW has negative tangible book value per share, substantial debt (3.7x equity!) and earnings and free cash flow are substantially less relative to revenues than prior to these acquisitions.

The only thing going for this company appears to be the involvement of Ron Perelman, who owns 43.4% and sits on the Board of Directors. Unfortunately, this is not enough for value investors. In fact, it would appear this is not enough for many investors, as the company lost 45.26% of its market cap in 2010.

Disclosure: No Position.