The Business of Value Investing.pdf

More Than One Way to Find Value 215

As a result of the spin - off from Walter Industries, Mueller Water

Products created two classes of common stock. Prior to the spin - off,

Mueller ’ s Class A shares were already trading in the market via an

initial public offering. Subsequent to the spin - off, Mueller issued

Class B shares to the existing shareholders of Walter Industries. The

share structure was that 25 million A shares were fl oated and 85

million B shares were spun off. According to the initial corporate

fi lings, both classes of stock had identical economic value. The only

difference was that the B shares came with eight votes per share

versus only one vote for each A share. The superior voting rights

suggested that the B shares should command a premium to the

A shares.

Historically, the A shares tended to trade at a premium to

the B shares, typically at a level of 5 to 10 percent. There was no

identifi able reason as to why the Class A common stock was trad-

ing at a premium to the Class B common stock, considering the

superior voting structure of the Class B common. One plausi-

ble reason that explained this mismatch was the greater supply

of B shares and the fact that there was greater selling pressure on

the B shares from Walter Industries shareholders who wanted to

monetize their Mueller stake. Additionally, unlike a Berkshire

Hathaway, where conversion rights exist between the A and B shares

whereby one Class A share of Berkshire is convertible into 30 com-

mon shares of Class B stock, Mueller has no such conversion rights,

so there was no specifi c catalyst that would have prevented the

shares from trading one to one.

Also, it is common for businesses that are spun off to initially

experience share price declines due to selling pressure in the

market by existing shareholders. Investors in Walter Industries

are making a bet on Walter and not Mueller, so when the busi-

ness is spun off, many investors sell the spun - off company to con-

tinue their desire to hold only the original investment. Indeed,

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