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VULC - Vulcan International


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Nice writeup.

 

Although you probably should not have disclosed the source of the info publicly. Sources are to be treasured. 8) I'd suggest to edit it out, but it's your blog and your call.  8)

 

I called it out on purpose. The Chairman is very litigious, and he needs to know his siblings have broken rank.

 

In some ways the post was written to him. Maybe I will edit and say family member.

 

 

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Nate on your blog, you rhetorically asked...

It's also worth considering why Vulcan isn't considered an investment company, and regulated as such considering the majority of their value is public stock investments. 

 

I'm sure you know this, but, Vulcan wouldn't likely be considered an investment company for the same reason that Munger's Daily Journal isn't.  Vulcan is probably shielded by the same case that protects Munger -- National Presto Industries vs the SEC.  This case, in turn, relied on a long-past precedent from the 30's based on Tonopah Mining (a Ben Graham investment, IIRC...) that used five criteria to identify operating companies vs investment companies. 

 

The key factor is that as long as the CEO and Board can prove that most of their time is spent running an operating company (even if it loses money), then the Company is not an investment company from a regulatory standpoint.

 

Here's Munger's response to the SEC when the SEC came sniffing around DJCO for exactly the same question in 2013.

https://www.sec.gov/Archives/edgar/data/783412/000143774913003140/filename1.htm

 

Cheers,

wabuffo

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is the value only in their stock market holdings? That value can quickly decline though... And mgmgt seem extremely unfriendly towards minority shareholders. And if these investments were to ever become real value to an investor, i.e. paid out, a big tax bill would be the result?

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I own a decent position in this name, thanks to the excellent work of Nate Tobik and Jan Svenda. As stated above, the company is liquidating. There's a bit of guesswork involved. The majority of their net worth is in their stock portfolio. What is the composition of the stock portfolio? Have they liquidated it already or not? No one knows. If one takes the holdings from Nate's assessment and plugs in recent stock prices the portfolio should be worth around $150m now. And, to quote Jan Svenda quoting Nate Tobik:

 

According to Nate, other VULC’s shareholders have confirmed that this is a relatively accurate assessment. One can support this assertion by looking at the income statement or cash flow which did not show any realization of the positions in either 2016 or 2015. Thus, management is unlikely to trade frequently.

 

So I think it's a reasonable assumption that the portfolio is still more or less the same. There's a capital gains tax liability. If I understand the 2017 tax changes correctly that liability should now be smaller, around $30m - $40m. So the net value of the old stock portfolio is ~$125 per share. On top of that you have a significant real estate portfolio for free (worth ~$25 / share - again I'd refer you to the Jan Svenda article. I'm a bit more conservative about the value of their forest acreage). Even if you assume that distributions would be tax-inefficient dividends (over which I have to pay 15% withholding taxes) and that they liquidated their portfolio during the december panic it seems hard to lose a lot of money here.

 

So, what do we have here? A super dark company with an unknown stock portfolio that will liquidate in an unknown time frame and will distribute proceeds to shareholders in an unknown way while paying an unknown amount of taxes. Usually the market dislikes uncertainty. In this case that's reflected in a last price of $123 while the company could easily be worth $150. The company states in the press release that they have to liquidate within three years but that they intend to liquidate all corporate assets, and distribute all available proceeds to the stockholders, as far in advance of the expiration of the three-year winding-up period as possible. With the majority of their assets being to very liquid stocks I wouldn't be surprised if they pay out a significant distribution this year.

 

Though again, this is a dark stock - no proxy, no estimates, no investor relations: anything can happen. Maybe they are fully invested in bitcoins and pot stocks now. A negative surprise is certainly possible but at current prices I like the odds.

 

I'm lazy and I like situations like this. Not much to calculate, no filings to follow, no future to predict. Nate and Jan have done the hard work. Look at the one financial statement, read a blog post or two. Decide whether you think the assumptions about the stock portfolio are reasonable or not and whether you can live with the uncertainty. Have a quick glance at the real estate and forest land. That's about it.

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writser - have you checked if they have any outstanding lawsuits via PACER or State Courts in OH, TN and MI?  I may be wrong, but I feel like they've had to deal with environmental liabilities in their operating history, too.   

 

In order to liquidate, they have to convince the Chancery Court of Delaware that they have settled any and all claims before they would be allowed to distribute funds to shareholders.

 

Do you have a sense for any of this risk?  Its the one area I'd be concerned about if this was a litigious management team and has manufacturing plants with a long operating history that may have environmental issues associated with its past operations.

 

wabuffo

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Edit: never mind my previous post

 

I would have to think through how this would be taxed as a foreigner. Like i said in my previous post i i got hit on my tax slip with a dividend for tax purposes on a tax free spin which should have been a ROC.  Even though this was wrong the i had to back it out manually and hope i didn't get audited. 

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I agree that one of the main risks is a tax-inefficient distribution for minority shareholders. The good thing is that the company is at least aware of the tax issue and thought it was important enough to mention in the press release. I’m not an expert on handicapping the tax risk but if you can buy at 125 and get 127.5 in the full-taxation scenario then that’s a risk I can live with. Also I can use the withheld taxes as tax credits where I live. That reduces the risk a bit but is not true for most of you.

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Yeah if you are able use the full withheld amount as a tax credit, it makes a lot more sense and you should get a solid return if they return most of the cash this year, which doesn't seem to be an issue considering the liquidity of most of their assets..

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What is the source of this potential environmental liability? I didn’t see this mentioned in 2016 annaul report.

 

I don't know if there is any and I am not saying that there is.  I'm just highlighting one kind of risk that can sometimes pop up with old manufacturing facilities that are being shut down.  And when you are dealing with a company that no longer provides 10-Ks, you have to use your google-fu skills to dig through public databases.

 

Vulcan did have to deal with some environmental liabilities at a former site in Massachussets in the late 90s.  It settled with the US Federal Govt/EPA and paid ~$4m for its share of clean-up and remediation activities at a Superfund site.

 

Back when it used to file 10-Ks before going dark, it used to include this comment as part of its legal risk language (could just be boilerplate):

"There may be other potential clean-up liability at other sites of which the Company has no specific knowledge."

 

The Clarksville, TN plant was a Goodrich Tire Co. plant before Vulcan bought it in 1972 - but the facility dates back to the 30s.

 

FWIW, here's some EPA reporting for the Vulcan Clarksville, TN plant that highlight some of the chemicals used at the plant and quantities disposed of:

https://iaspub.epa.gov/triexplorer/release_fac_profile?TRI=37041VLCNC1151E&year=2007&trilib=TRIQ1&FLD=&FLD=&FLD=&OFFDISPD=&OTHDISPD=&ONDISPD=&OTHOFFD=

 

wabuffo

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Re their real estate holdings. Note that I've tried to be conservative with these #s:

 

1) 14K acres of forestland in MI (@ $500 per acre = $7M)

 

2) Per their last 10-K: "majority interest in the upper seven floors of the ten-story Cincinnati Club Building....approximately 56,000 square feet of finished office space and approximately 32,000 square feet of unfinished and common area space." I am giving this the same per sqf value ($50) as the office building directly below (@ $50 per sqf of leasable space = $2.8M)

 

3) Per their last 10-K: 68,612 sq foot "four-story office building in downtown Cincinnati" that they purchased in 1/2015. I believe this building to be 630 Main Street. I also believe that it is mostly vacant, and probably has been since they purchased it. (@ $3.4M cost)

 

4) 33 acre Clarksville facility, which is now vacant. I think the building is a tear down + possible environmental clean up issues. (@ $100K per acre = $3.3M)

 

5) Florida property that was held for sale @ YE 2016 (@ $2.5M balance sheet value)

 

6) Shopping center that they purchased in 2017 (@ $3.8M purchase price). In my model I'm not giving them any credit for any post YE 2016 cash flow despite factoring in the 2017 and 2018 dividends paid to VULC shareholders, so I feel OK about including this.

 

Total: $22.8 million

 

Any thoughts?

 

 

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My uneducated guess would be that KEWL is buying mostly high quality stuff so I'd be inclined to be a bit more conservative for the Vulcan forestland. I.e. if you have some random shitty plots of land the $900/acre is probably on the high side (if I look around on the internet in that area) and I don't know what kind of land Vulcan owns. But $500 / acre is probably quite pessimistic and if you are lucky they can fetch double (or even triple) that.

 

In total I agree that somewhere around $20 - $30 for the whole real estate package seems about correct, so ~$25 / share.

 

That's enough precision for me. At this point we don't even know if they sold PNC and USB for ~$105m during the panic last December or whether they are still holding (current market value would be $125m). Nor are we 100% sure these stocks were in their portfolio to begin with :P .

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Yeah, no point trying to be super precise when there are so many unknowns.

 

But one last remark w.r.t. the land values. KEWL bought 14,000 acres in 2017 for $12.8 million. With such a large plot you probably have some sort of averaging effect already. Some of these acres will be poor while some of these acres will be very good. Just like the 14K acres VULC owns. Of course, it is not impossible that these are way worse or better than what KEWL bought, but the bigger the plot, the more likely the quality will be sort of "average".

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Yeah. Not sure if it's super relevant but I posted a link to some plots of Ontonagon land for sale somewhere in this thread (link). Maybe some of these are from Vulcan? Seems highly unlikely, I'd assume they go for a block sale. Anyway, if you look at the largest properties they seem to be priced at ~$350 - $1200 / acre, with a median of ~$700 / acre.

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