Thursday, May 18, 2006

MWA Mueller Water Products IPO, a possible stub?

Water has become the hottest investment since Texas tea, that is, Oil, black gold!

Tiny water treatment company Basin Water (BWTR) initially planned for 5.0 million share IPO at $8-$10 a share. Demand for shares was so great, that the company upped the IPO by 20% to 6.0 million shares and raised the price $12 a share. Shares are currently trading on the NASDAQ for $16.

Next up on the water IPO calendar is Mueller Water Products [link to SEC Form s-1], which makes, fire hydrants, water pipes, and valves. Mueller is currently part of Walter Industries, (WLT) which is a classic diversified smokestack conglomerate. Walter Industries’ core business are mining coal, building single family homes, and making things from iron and steel.

The consensus view is that Walter's component businesses would have greater valuations if they were independent of the company. So to create shareholder value, WLT will spin off Mueller via an IPO and then later on declare dividends of MWA stock to current shareholders.

The planned IPO of Mueller Water Products is for 23.5 million shares at a range of $16 to $18. This would give Mueller a market cap of 400 Million (for the publicly traded shares) and 1.4 Billion (for the 87.3 Million shares trapped in Walter) if we assume that the shares go for $17 each, compared to Walter Industries Market Cap of 2.7 Billion. However given the results of the Basin Water IPO, should the shares go for more $17 a share, then it becomes increasing likely that Walter Industries will become a stub.

IPO stub phenomenon occurs when a spinoff company is worth more than the parent company. The classic example is the Palm Inc (PALM) spinoff from 3Com (COMS) during the dot.com boom. In the months after the Palm IPO, the relative valuation of Palm and 3Com (which owned 80% of Palm) assigned the value of all of 3Com's non-palm businesses to be -$63 a share. Usually IPO stubbing is not so extreme, but it often represents a chance to buy shares in the parent company's business very cheaply.

Given how cheap WLT shares are relative to this years expected earnings of 5.80 a share, I think it is likely that the sum of "New Walter" and Mueller Water Products together will be worth more than "Old Walter" at the current price.

The initial prospectus for Mueller Water Products is very complex, because of the convoluted history of the company. Basically Walter Industries took on a lot of debt to buy "Old Mueller" and then merged it with the existing U.S Pipe and Foundry Company owned by Walter. The newly public company, does intend to pay a dividend of $0.28 yearly, and so based on that we can conjecture than EPS is expected to be greater than $0.30/share. The roadshow for retail investors is now online. Walter has posted the most recent 10-Q and S-1 forms for Mueller on its website

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