Picking From the Crab Fest

 | Nov 09, 2011 | 1:00 PM EST  | Comments
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Stock quotes in this article:

jakk

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frpt

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gd

When I put together my JIMS CRAB FEST  portfolio for cheapskates last December, given the valuations on these companies, I knew that one or more might be acquisition targets. While I didn't know which names might be in play, the reality is that a struggling company's issues are reflected in its stock price. Also, a company with a fairly clean balance sheet and a relatively large amount of cash could make it a big target.

This past September things became interesting when Oaktree Capital Management offered to take toy company Jakks Pacific (JAKK) private at $20 a share. At the time, the offer represented a 25% premium to JAKKS stock price. While Jakks has been profitable, its revenues and margins have been slipping over the years, and Oaktree has not been happy with the company's progress.

Regarding Oaktree's offer, it probably didn't hurt that Jakks has $232 million, or $8.77 per share, in cash on the books. This seemed like a low-ball offer, which ultimately was rejected by Jakks's board of directors in early October. I wouldn't be surprised to see Oaktree, which owned 4.9% of the company at the time of the offer, sweeten the deal at some point. Jakks's third-quarter revenue results of $332.4 million were well below the consensus estimate of $356.6 million, and earnings per share (EPS) of $1.11 came in below the $1.24 estimate. As of this writing, JAKK shares are trading fairly close to Oaktree's offer.

Another name in this portfolio for cheapskates is Force Protection (FRPT), an armored military vehicle maker. Earlier this week, the company announced that it was being acquired by the defense giant General Dynamics (GD) for $360 million, or $5.52 per share. That offer represented a 30% premium to the current price, which might have made some shareholders happy, but not me. Force is essentially being acquired for about 1.5x the net current asset value (NCAV), which is dirt cheap in my book. As of the latest quarter, the company had $122 million in cash, or $1.88 per share, and no debt. So, General Dynamics is getting the company at $3.64 per share net of cash.

The argument could be made that Force will be better off as part of a company that has much deeper pockets than its own, but that is of little consolation at this point. General Dynamics is getting a great deal here. Of course, the ink was not even dry on this deal before at least three law firms announced investigations into the deal, suggesting that the acquisition price is too low. Interestingly, the takeout price is very close to what Force's price was ($5.50) when I put together the JCF portfolio.

In the next few weeks, I'll spend some time looking for a replacement for Force Protection in the JCF portfolio, as well as trying to determine what name might be the next acquisition target.

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