American Greetings Corporation (NYSE:AM), the second largest greeting cards company in America, is currently attempting to go private by the founding Weiss family, with a current offer of $17.50 per share. This offer is roughly a 6% premium over today’s price. I believe that the company is undervalued, and that there is a good chance of the going private offer being successful. In addition, looking through the company financials, the company appears to be undervalued even at the going private premium, with a 3.6% dividend to stabilize the stock’s price in the short term should something go wrong with the going private transaction.
A look at the risks: Overblown fear over restructuring Carlton Cards, and the threat of eCards:
The stock has been beaten down by fears of losing market share and margin to “eCards” sent through the internet. While I suspect that eCards will eat a small amount into American Greetings profits, I largely think the damage has already been done. As anyone who has given or received an eCard can tell you, the experience of getting an electronic card is very different and less personal than receiving a physical, paper card. While some companies are doing very interesting things in regards to personalizing gifts given over the internet (see, for example, internet startup delightfully.com) I don’t think giving someone a card can be replicated or replaced through the internet.
Adding another level of uncertainty to American Greetings is the recent acquisition of Carlton cards. Carlton cards was bleeding money before American greetings acquired it. American Greetings has been massively reorganizing Carlton, closing about half of Carlton’s 700 stores, and tightening up accounting and store best practices. Growing through acquisition should send off alarm bells in investors, as there is always the fear of Peter Gramm’s “De-worse-ification,” but the Carlton cards acquisition appears to be very synergistic. The storefronts of Carlton’s stores provide a sales space for American Greetings other products, and the Carlton business is very well within management’s core competencies. This acquisition has had American greetings showing a temporary loss for much of 2012, but management appears to have things under control and the company will again see profits for 2013.
On the downside, American Greetings much smaller than its main competitor, Hallmark. Hallmark pulls in a little over 4 billion in gross profits each year, dwarfing American Greetings 1.7 billion per year. The card business is largely Hallmark and American Greetings in America; the next largest competitor, CSS Industries, Inc. (NYSE:CSS), only pulls in a gross revenue of around 300 million per year.
Why I think this is a good opportunity for risk arbitrage:
Greeting cards are obviously not a growth industry. But the market is not rationally pricing the income the company can make. The company itself reports a book value of around $20.35 per share, which makes the current $17.50 per share buyout offer (raised from 17.18) a bit of a slap in the face to long term investors. But to folks looking for arbitrage opportunities, this is a good deal. Either the going private transaction is successful, and risk arbiters make a quick 6% on their money, or the going transaction fails, and investors have an undervalued stock buoyed by a dividend of 3.6%.
I think the going private deal will be successful. The Weiss family has over 51% of the controlling interest in the company through their class B shares, and the Weiss family appears to be making good steps in securing funding for this buyout from Bank of America, Macquarie Capital Inc., KeyBank, and PNC bank. Minority shareholders do appear to be mounting lawsuits in reaction to the low price that the Weiss’s are offering, but I expect that these efforts would only result in raising the go private offer closer to book value, rather than scuttling the deal all together.