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Friday, 01/11/2013 10:00:58 AM

Friday, January 11, 2013 10:00:58 AM

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Fun With Acquisitions for the Value Investor

Jonathan Heller

01/11/13 - 08:25 AM EST

NEW YORK (TheStreet) -- Part of value investing involves buying companies that few others are interested in at a given time; companies that may have run through a rough patch whose true worth is underestimated. Sometimes these situations come to an end via a takeover, which, as a shareholder, you might be hoping for, at least if the price is right. Sometimes the takeout prices are not quite what you'd been expecting.
In the past year and a half, I've owned a few smaller names that were acquired, or are in the process. In all three cases, while the positions were profitable, the takeout prices were (or are) somewhat disappointing. Last March, Sumitomo's tire supply unit TBC Corp. acquired real estate- rich auto repair chain Midas for $11.50 per share, which represented a 27% premium to the previous closing price.

I'd hoped for more, and believe that the acquirer got a great deal here. While Midas had been struggling, in the right hands, this appeared to be a great business, and the company owned more than 200 properties.

Just months prior, in November 2011, General Dynamics (GD) acquired armored vehicle manufacturer Force Protection for $5.52 per share, which represented a 30% premium. At one point, the relatively small, but cash rich name had traded very near to its net current asset value. General Dynamics made a very good deal here, in my opinion.

The latest is nuclear decommissioning and disposal name Energy Solutions (ES), which agreed to be taken private on Monday by Energy Capital Partners for $3.75 per share, a 9% premium to Friday's closing price. If you took a position in Energy Solutions over the summer, when it traded in the $1.50 to $1.75 range, as I did, you may be happy with the 100%-plus upside you've enjoyed. But the company, in my opinion is worth more.

That's what Indian Creek Investors, LP, which owns a 4.3% stake, believes. On Wednesday, Indian Creek's Managing Member Gary Siegler fired off a letter to Energy Solution's board of directors, suggesting that the company is worth "considerably more than $3.75 per share."

Siegler went on to request that the board consider modifying the deal, so that current shareholders who wish to stay invested in Energy Solutions, may do so, while those that want to sell for $3.75 can cash out. We'll see where that goes.

Interestingly, Energy Solutions closed yesterday's trading at about 2% above the takeover price, indicating that some investors believe that the acquisition is not a done deal. This is supported by the fact that the company is actually able to seek new offers through Feb. 6.

ES data by YCharts

In 2008, Energy Solutions was a $27 stock that had fallen all the way to $1.50 this past June. Frankly, one of the company's major issues, and perhaps, one of the reasons the board is willing to accept $3.75 is the company's debt load, which stood at $815 million at the end of the latest quarter. There's significant cash and short-term investments on the books too, $232 million, or $2.58 per share. We'll see if any other potential acquirers believe that the equity is worth more than $3.75 per share. This could get interesting.

ES Cash and ST Investments data by YCharts

Give me ambiguity or give me something else.

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