A long report this month (even longer than my annual report last September) but I hope you have time to read it. I'm advocating that we sell this stock -- something we've never done before.
Name: Thermo Instrument Systems
Thermo Instrument Systems (THI) has had a nice run-up in the last few months, mostly due to the huge speculation in subsidiary Spectra Physics (SPLI). Spectra has made a couple big deals in dense wavelength division mulitplexing (DWDM), an optical fiber technology, and that industry sector has been hit by takeover fever. SPLI has gone from single digits last fall to a high of 98 1/2, and closed at 70 on Friday.
THI is in the process of "spinning in" or selling off its other publicly traded subsidiaries, and will itself be reabsorbed by parent company Thermo Electron Corp. (TMO). The stock market has been reacting favorably to this reorganization, but we should realize that this is a very different company than what we bought three years ago. This may be a good opportunity to sell.
Both THI and TMO have released annual reports and SEC 10-K filings in the last month, but only the TMO 10-K is available online. Press releases state that THI's EPS was .67 for 1999, down 15% from 1998. However, by excluding the third annual round of "one-time" restructuring costs, Earl R. Lewis, THI President and CEO, claims that profits are up. Revenues were $2.09 billion, up 25%, primarily due to the acquisition of Spectra-Physics AB.
If we include the ongoing restructuring costs, parent TMO had a substantial loss in 1999. I've uploaded a revised Stock Analyzer file for TMO, but the numbers are a mix of official 10-K results and Value Line's estimates. This was necessary because TMO has "restated for discontinued operations" its 1997 and 1998 filings, so none of the sales and earnings numbers match anything they previously reported, and they did not provide enough information to adjust prior years' results. I'm filing this under "smoke and mirrors" accounting (see http://www.woodland.org/hpd/archive/1999/msg00178.html and http://www.woodland.org/hpd/archive/1998/msg00111.html).
Stock Analyzer still rates TMO a buy, with a forecast high of almost 134. Personally, I don't believe it.
Spin-Ins and Sell-Offs
TMO currently holds 88% of THI stock, and has set an exchange ratio of 0.85 shares of TMO per share of THI for the remaining shares. The market seems to think THI is worth more like 0.93 shares of TMO, based on current prices. THI's is unlikely to insist on a higher ratio, since their board is controlled by TMO. We would end up with 39 shares of TMO after the merger, which is expected to close in Q2.
THI is making cash offers for its subsidiaries, rather than a stock swap. They've proposed $28.00 per share of Thermo BioAnalysis, and $9 per share of Onix Systems. In all of the spin-in transactions, the parent company is seeking to acquire 90% of the subsidiary through a tender offer. Once this is accomplished, the transaction can be completed as a "short-form" merger at the same price as the tender offer, without the approval of the subsidiary's board or shareholders.
THI's spin-in of Onix has hit a snag, as Advance Capital Partners LP has refused THI's tender offer for its 12% stake, calling the offer of $9 per share "inadequate and unfair." Onix's sole board member who isn't affiliated with THI or TMO has formed a "special committee," which stated that he/it was "neutral" on the $9 offer.
On Friday, THI sold Nicolet Imaging Systems and Sierra Research and Technology, Inc. to GenRad, Inc. for $40 million. Nicolet Imaging Systems and SRT make imaging systems used in assembling complex printed circuit boards and in airbag manufacturing.
Spectra Physics (SPLI) will apparently remain a public company, majority owned by TMO. It is now 79% owned by THI, and has a market cap $1.1 billion. Compared with THI's market cap of $2.4 billion, it's a substantial asset at current prices, and many investors don't think TMO is giving THI shareholders enough value for SPLI in its tender offer.
We bought this stock on the basis of the Thermo companies' management by John Hastopoulos, and his business strategies, which I'd call financial engineering. Thermo would buy companies to acquire their market share, while at the same time spinning off publicly traded subsidiaries in which Thermo would retaining controlling interests of around 80%. For a while, this seemed to increase shareholder value. But in the three years we've held THI, the market has soared while the Thermo companies have tanked. Since the parent company has such a controlling interest, minority investors (like us) have often felt screwed by the various restructuring deals, which generally benefitted the parent company. (See SPLI, above.)
Hatsopoulous was removed from power last year, and his consulting agreement was terminated this year with a pay-off of $2 million to go away forever. Richard Syron, TMO's current chairman, president, and CEO has reversed Hatsopoulous's strategy, bringing subsidiaries back into the parent company, and getting rid of companies outside of Thermo's core business. This may be a good thing, and certainly Wall Street has liked it. It's not what we signed up for in 1997, however.
In the last few months, THI has been as low as 8 1/8. It closed today at 20 5/16. It's now trading at 93% of TMO value, when the tender offer will only give us 85% of TMO shares -- a decent premium. I'd like to cut our losses now, and invest the $1,000 in something else. (We may also need the cash to pay out to Mike Hughes, whose stake is over $5,000. More on this in the Treasurer's Report.)
The Company's View
From THI's annual report press release:
Consolidated Statement of Income
A summary of the endless restructuring, from TMO's annual report: