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Insights: Finance—Deals, Deals, Deals

As the sale of General Cigar shows, there are still plenty of bargains to be found in "old economy" stocks

Mario J. Gabelli
From the Print Edition:
Bo Derek, Jul/Aug 00

Investors, began following (and slowly accumulating shares in) Culbro Corp., then the parent company of General Cigar. The catalyst that sparked our interest was the sale of its Ex-Lax business to Sandoz and the use of the proceeds to buy back stock.  

When we analyzed the company, we saw a portfolio of strong, free cash flow­generating businesses and a lot of raw Connecticut land on the books at a cost well below its current value. By our calculations, the raw land alone was worth Culbro's total market capitalization. So, we figured we were getting the businesses for free.  

Over the next 15 years, the Cullman family, who were majority owners of Culbro, did many things to enhance shareholder value, including selling its Metropolitan Distributors to management, its snack food business to Bordens, and its smokeless tobacco unit to Swisher International Group Inc., and spinning off its Doral Financial division (the largest mortgage originator and servicer in Puerto Rico) to Culbro shareholders. In 1994, Spain's Tabacalera made a premium bid for Culbro's cigar business at a price that confirmed our appraisal of the company's value. The marriage was never consummated, partly because the deal was not structured in a tax-efficient manner for shareholders.  

This set the stage for the 1996 recapitalization and restructuring of Culbro. The Connecticut land was spun off to shareholders in the form of Griffin Land Resources. The premium cigar business (Macanudo, Partagas, Punch, Hoyo de Monterrey and the potentially valuable U.S. rights to the Cohiba brand) and the nonpremium cigar business were packaged in a newly public company called General Cigar. Culbro shareholders, including the Cullman family, received super voting B shares, while A shares were sold to the public. The Cullmans retained control of the company via their ownership of the B shares. In March 1999, General Cigar sold its nonpremium cigar business to Swedish Match, turning itself into a "pure play" on premium cigars.  

Since its birth as an independent company, General Cigar has had its ups and downs. When the cigar faddists stopped lighting up in late 1998 and 1999--leaving the market to us true aficionados--the stock weakened, and by last December it was trading around $8 per share. Still liking the company's dominant position in the premium cigar market and its strong balance sheet, we bought a lot more stock. On January 20, 2000, General Cigar agreed to sell 64 percent of the company to Swedish Match for $15.25 in cash per share for the Class A shares--a solid profit for our clients.  

After the deal was announced, General Cigar stock traded at $14.50 per share, leaving $0.75 per share on the table for arbitrage investors. This worked out to a gross return of 5.2 percent, or an annualized gain of 17.25 percent from the time of the announcement to the expected mid-May closing date. With no market risk in this all-cash transaction, no apparent regulatory or antitrust hurdles, a motivated seller and a financially strong buyer, we were happy to take advantage of the back end of the deal as well.  

You may be thinking, "Great, Mario, but this is a done deal. Give us a few names that might help us make a big score." Fair enough. Mark IV Industries (NYSE, IV, trading at 22 at press time), Wynn's International (NYSE, WN, 13 3/8) and Sybron Chemical (AMEX, SYC, 20 1/4) are all trading at deep discounts to our Private Market Value appraisals, and there are catalysts in place that lead us to believe that these companies might receive some interest from a corporate acquirer or LBO group. I'm not suggesting a profitable "event" is just around the corner. But these stocks are fairly compelling based on their own merits as independent companies.    

Mario J. Gabelli is the founder and chairman of Gabelli Funds. Inc., a Rye, New York-based financial services company. He appears regularly on CNN and CNBC.

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