Friday was an excellent day for shareholders of two unrelated companies, Torstar (TSX:TS.B) and SNC Lavalin (TSX: SNC)(NYSE: SNC). Both companies’ shares soared for very similar reasons: asset sales.
SNC Lavalin gets a massive price
Engineering firm SNC Lavalin generated plenty of buzz on Friday morning by selling Alberta-based electricity provider Altalink to Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) for $3.2 billion. The price tag was well above what every analyst thought Altalink was worth, and SNC’s shares reacted accordingly, up 5% on the day.
The move was likely beneficial to both sides. SNC Lavalin has been trying to move on from a corruption scandal that plagued the company two years ago, and part of that process is realizing the value it has from its non-core assets. Meanwhile Berkshire Hathaway has a very low cost of capital, which it can use in its purchase of Altalink. And given Berkshire Hathaway’s track record, it’s not going to pay $3.2 billion for any asset unless the asset is worth significantly more.
Torstar chooses money over love
Torstar’s shares surged over 20% after announcing a sale of Harlequin, a publisher of romance novels, to HarperCollins, a division of News Corp. The total purchase price was $455 million, representing a little over 8.7 times operating earnings.
As the share surge implies, Torstar got a very good price. Harlequin has been declining, with 2013 revenue down 7% and operating earnings down 29%. So a multiple like that on a declining business is great news for Torstar. The sale price is equal to $5.70 per Torstar share, not bad considering the company’s closing price the previous day of $6.68.
Interestingly, Torstar wasn’t even actively looking to sell Harlequin; HarperCollins made the first move, resulting in the end of Torstar’s 39-year relationship with Harlequin. While there certainly was a lot of history, HarperCollins’ offer was too good to pass up, and Torstar’s shareholders don’t seem to mind.
So who’s next?
That’s often the question when these types of deals attract attention. One possibility is Thomson Reuters (TSX: TRI)(NYSE: TRI). Like SNC, Thomson has various business units that aren’t necessarily related to each other, but generate stable cash flow. Like Torstar, some of these business units are in decline. And Thomson has shown willingness in the past to sell off business units, as it did with its healthcare segment in 2012.
Another candidate is SNC Lavalin – again. The company still has lots of other noncore assets that it may be looking to sell, such as stakes in the Malta airport or the 407 Express Toll Route near Toronto.
Investors love asset sales like these because not only does value get unlocked, but it all happens right away, causing the share price to soar. Other CEOs should take notice.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article. The Motley Fool owns shares of Berkshire Hathaway.