In Monday's column, I discussed the merits of investing in small-cap stocks and why they can often offer more intrigue than larger businesses. Small companies, by Wall Street mandate, simply have fewer analyst eyeballs gazing at them, which often causes them to trade well below intrinsic value. After all, more people want to see research on Chipotle (CMG) than they would on Ark Restaurant (ARKR).
So it is with Tecumseh Products (TECUA), a leading manufacturer of commercial and residential compressors, essential cooling components that go into refrigerators, freezers, and HVAC units. Tecumseh is a $130 million company that is worth between $200 million and $300 million. This value stems from the high quality assets that Tecumseh owns along with approximately $400 million in tax net operating losses (NOLs). Tecumseh's management is actively engaged in maximizing shareholder value which is inclusive of any and all asset monetization opportunities. Best of all, Tecumseh has a 30% shareholder, who is working diligently to ensure that Tecumseh will unlock its vast value potential.
Given recent events, it's highly probable that one of several value-creating catalysts occurs in 2013 leading to gain of 50%, if not more. At the beginning of this year, I included Tecumseh as part of the Gad Winning Value Portfolio for 2013 when shares were trading at $5. Today shares trade for $7 but, as you will read later, market asset value is probably worth closer to $12 and $10 a share is the established floor for an acquisition of the company.
The last few weeks have been quite intriguing for Tecumseh. Tecumseh owns a plant in Brazil that was estimated to be worth $40 million to $60 million and was a great asset to monetize. Per a company 13D filing, Brazilians have approached Tecumseh with a serious interest in buying the company's Brazilian assets and have indicated an initial market value of $50 million to $125 million. Tecumseh also owns 55 acres in Hyderabad, India, an area that is slowly becoming another hotbed of innovation. Both Google (GOOG) and Facebook (FB) chose to locate their Indian headquarters in Hyderabad. This is a valuable piece of property that Tecumseh does not need to own and I would argue could be readily sold for perhaps $40 million to $50 million.
A company filing reported that a private equity buyer approached Tecumseh was with an initial offer to take the come private for $8 a share. Tecumseh's largest shareholder has unequivocally stated that they would not support any offer at $8 a share as that transfers the shareholder value from shareholders to the private equity group. An offer of no less than $10 a share would be required to get approval from this shareholder, representing an upside of 50% from today's value. If a private equity buyer is indeed interest, $10 a share is a very doable price for Tecumseh.
In addition to getting the high quality assets above that could be later sold, Tecumseh's commercial refrigeration business is a high quality business in a growing segment of that market. Tecumseh's brand is highly recognized and regarded. Furthermore, an appropriately structured deal that preserves the $400 million in NOLs means that Tecumseh will not be paying taxes on income for many, many years.
When you add up the parts, this opportunity is worth vastly more than $130 million. Private buyers have already suggested that the company is worth more than today's $7 share price -- and $10 a share is minimum number to get a deal done. From whatever angle you examine Tecumseh, this is a rare opportunity to own a quality small-cap that will likely unlock enormous value in 2013.