Superior Plus Propane

October 31st, 2008 by Potato

Superior Plus Propane is a bit of a weird company, with 5 seemingly unrelated businesses all running under the one banner. They have just announced a new deal that is just as complicated as they are.

SPF will be taking over the Ballard corporate structure, including its $800 million in tax losses, while Ballard creates a new corporate umbrella, New Ballard, that will take everything else from Ballard (the fuel cell stuff, the assets and liabilities, and $41 million of SPF’s cash for their trouble). SPF has, in the same breath, announced that they will convert to a dividend-paying corporation at the end of the year. This means that they are going to give up 2 years of the tax holiday on income trusts, and the wording of the release suggests to me it’s because they have something they want to take over, and the growth limitations are holding them back.

It seems to be a great deal for everyone involved: SPF just got $800 million in tax losses they can claim in future years (which should be worth something like $160-$240 million in future cash/tax savings: they won’t pay tax for ~7 years thanks to that) for the low, low price of $40 million. Ballard got some (presumably much-needed) cash in a very tight credit market, and they gave up something they aren’t likely to need any time soon to do it. Investors in SPF who pay taxes (i.e.: not me) will benefit, as they are going to keep the distributions the same (the current payout ratio is about 80%, so they need some income growth going forward to get it down to the 70% range when they eventually start paying taxes), but now they will be eligible for the dividend tax credit for the investors.

As crazy as this deal sounds, it might become more commonplace as long as there are trusts to convert with cash, and companies afraid of trying a debt issue that have tax liabilities they can sell, so this could mark the first of many such deals to come.

So this deal makes SPF start to look attractive to me at it’s current $10 price and 16% yield. I am concerned about certain parts of its business: the propane part should be fairly steady, and makes up about a quarter of their business. Half comes from the ERCO sodium chlorate part, which is a chemical used in the bleaching process for the pulp & paper industry. I honestly don’t have a very good handle on what might be coming down the pipe there, which scares me a bit, but I think an assumption of zero growth/zero decline is probably fair. Another quarter comes from dry wall and natural gas/electricity reselling, which is not something I want to own right now, what with all the drop-offs in new home construction. Of course, the question is how much of the negative news in a third of their business is already priced in? At a 16% yield, with a distribution classed as a dividend, and a 7-year tax holiday, I think I’m happy with it. I will have to see what the morning brings though, as I don’t think I would still be buying at much above $10.

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