Rethinking Holding Companies

Water Cooler Investing
#1

I’ve been thinking about these for a while as there are a few companies that fit these paramters

-Have been around for a long time

-Have 80%+ of asset value in one holding that’s a public company

-Trade at a 20-30% discount to supposed SOTP value

-Very few people at actual HoldCo level (2 - 10)

So lets pretend you are the CEO of the HoldCo. What incentive do you actually have to close that valuation gap?

A) If you sell that one company that is most of your value, what do you do next? Distribute it all to shareholders? Chances are that the HoldCo is a large shareholder of that one company and they cannot get out of the position in a timely manner. This position most likely have a cost basis of near zero, so you would only be able to get the proceeds net of tax out which may kill your SOTP discount altogether. Lastly, why should they even do this? If you are the “CEO” of this HoldCo, why bother making your company that much smaller so you don’t get an annual comp on top of the said value? If you don’t distribute it you are basically sitting on a mound of cash earning zero and will most likely look somewhat similar to RENN in profile. Basically a company that doesn’t have a real business but is sitting on a huge pile of cash with no visibility on how it will be used.

  1. Sell the other investments / monetize private investments. While this sounds good you are only doing marginal things so it doesn’t seem like it really matters unless you try to hit the next home run.

  2. Other options?

So basically the idea is that even though there’s a valuation gap that exists, the HoldCo itself doesn’t seem to have any incentive to really close it since it won’t be efficient nor will it be beneficial to themselves. Other movements along the margin don’t really move the needle, so is there really a way to benefit off this kind of situation besides playing the extremes of the discount/premium?

#2

Good point, I think it applies primarily to holdco’s have you’ve described with nearly all of their assets in one firm. Holdco’s with a larger portfolio are likely prone to more active management like a PE firm.

#3

Right. I’m not discounting all HoldCos at all. I’m basically discounting the ones where despite what anyone says the only logical argument they seem to make is that they’re buying X stock for cheaper which is true but isn’t true because there most likely won’t be a reason for that relationship to break… at least during that fund’s lifetime.

I was thinking about this when evaluating AUSS NO but it also applies to a lesser extent to NPN SJ.