VISHAY INTERTECHNOLOGY INC VSH
June 11, 2010 - 4:57pm EST by
rskfrarb210
2010 2011
Price: 8.75 EPS $0.00 $0.00
Shares Out. (in M): 187 P/E 0.0x 0.0x
Market Cap (in $M): 1,633 P/FCF 5.0x 0.0x
Net Debt (in $M): 278 EBIT 114 0
TEV ($): 1,355 TEV/EBIT 10.4x 0.0x

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Description

Summary 

Spinoff / special situation with a near term catalyst in 3Q10 ("mid-year"). 

A simple way of looking at the situation is: VSH is trading for $8.75 with $1.50 in net cash.  It will likely earn $150mm to $165mm in after-tax free cash flow in 2010 and end the year with ~$2.30 in cash.  This implies trading at ~5x EBITDA-CAPEX.  VSH is spinning off Vishay Precision Group (VPG), which currently represents ~7.1% of its market cap.  Based on current VSH prices, VPG will trade at 2.5x EBITDA-CAPEX and represents $0.63/share of VSH's current price.

Please see the linked writeup for more detail on pro forma income statement, trading comps, valuation, and returns sensitivity.  Please don't forward this link around.
https://docs.google.com/fileview?id=0B-TilrnRSVamMzg0M2E1MmEtMzJkMy00NjdlLThmMzItNzQ0NmIxOGFjNmM3&hl=en

Everything to Hate about this Idea (i.e., Shooting for the VIC Best Idea Award)

  • Parentco has (and Spinco will have) an A/B structure with the controlled B class maintaining 10x voting power.
  • A majority of A&B constitute a majority vote.  Currently class B represents ~45% of all votes.
  • RPTs all over the place:
    • "Yitzhak Shoshani is the brother of director Ruta Zandman and the uncle of director and executive officer Ziv Shoshani. Mr. Yitzhak Shoshani is Vice President and General Manager of, and owns 33.3% of, Ecomal Israel, a non-exclusive distributor of our products mainly in the Israeli market. Mr. Yitzhak Shoshani earned $127,468 in salary, and $300,000 in the form of dividend due to the performance of Ecomal Israel for 2009.
    • Dubi Zandman is a cousin of Executive Chairman Dr. Felix Zandman and a Vice President of the Vishay Measurements Group. For 2009, Mr. Dubi Zandman received salary and bonus of $187,496.
    • Steven C. Klausner is the son-in-law of Dr. Felix Zandman and Ruta Zandman and the brother-in-law of Vice Chairman Marc Zandman. Mr. Klausner is a Vice President and Treasurer of Vishay. For 2009, Mr. Klausner received salary, bonus, and benefits totaling $177,619.
    • Roy Shoshani is the brother of Ziv Shoshani and the nephew of Ruta Zandman and Dr. Felix Zandman. He is currently Senior Director Division at Siliconix. For 2009, Mr. Roy Shoshani received salary and benefits totaling $269,242. His benefits include $61,283 for a housing allowance (which is customary for any Vishay employees on international assignments).
    • Eli Goddard is the son-in-law of Dr. Felix Zandman and Ruta Zandman and the brother-in-law of Marc Zandman and has performed legal services for Vishay Israel Limited. For 2009, Mr. Goddard received a consulting fee of $77,194.
    • Alon Shagir is the brother-in-law of Marc Zandman. Mr. Shagir is employed by Vishay Israel Limited as a process engineer. For 2009, Mr. Shagir received salary and benefits totaling $35,863.
    • Ron Shoshani is a nephew of Ruta Zandman and Dr. Felix Zandman and a cousin of Ziv Shoshani. Mr. Ron Shoshani is employed as a sales engineer by Vishay Israel Limited. For 2009, Mr. Ron Shoshani received salary and benefits totaling approximately $60,563.
    • Shay Shoshani is a nephew of Ruta Zandman and Dr. Felix Zandman and a cousin of Ziv Shoshani. Mr. Shay Shoshani is employed as a bookkeeper by Ecomal Israel. For 2009, Mr. Shay Shoshani received salary and benefits totaling approximately $56,326."
  • Spinco has a 'growth and acquisition strategy focused on vertical product integration, using its foil resistance strain gages in its load cell products and incorporating its load cells, electronic measurement instrumentation (containing foil resistors) and software into its modules and measurement systems.'

Thesis (i.e., Why is it on VIC)

VSH is spinning off VPG.  At $8.75 per share, you can grab the underfollowed VSH at 4.3x EBITDA-CAPEX and the resulting overcapitalized, tiny VPG at 2.5x EBITDA-CAPEX.  Neither company looks terrific, but based on trading comps, the spinoff may free up $2 to $9 of value.

Why are we posting this on VIC?  VPG's implied price is simply cheap compared to comps.  Pre-spin, VPG only represents ~7.1% of pre-spin VSH value.  Post-spin, is going to be very small on a relative basis.  With VSH's current market cap at $1.6bn, VPG seems ripe for noneconomic selling with a post-spin $114mm market cap.  VSH looks like it's flown under most analyst's radars, and given its business, we imagine many on VIC likely dismissed this spinoff.  We were first tempted to throw it out given our collective lack of competency regarding the business.  With the 'why might it be mispriced?' question answered and a catalyst lined up, we decided to actually find out whether VPG was cheap.  Both VPG and VSH are cheap.  Since it looks like this isn't another hedge fund hotel, some VIC members may found it particularly appealing.

Spinoff Details (i.e., Ok, I'm Listening...)

  • VSH shareholders receive 0.07143 VPG per VSH
  • VPG share count will be 13.3mm
  • VPG implied market cap to be $114.3mm
  • VPG implied TEV at $55.8mm (depending on conservatism on foreign cash holdings, this would be $74mm)

Overview of VPG

VPG is the cheap spinco and is a designer, manufacturer and marketer of Foil Technology Products (strain gages, ultra-precision foil resistors, and current sensors) and Weighing Modules and Control Systems (transducers/load cells, instruments, weigh modules, and control systems) for a wide variety of applications.

  • VPG has produced EBITDA of $46.2mm (2007), $38.0mm (2008), $22.1mm (2009), and $25.4mm (LTM)
  • VPG is currently trading at
    • 2.2x EBITDA
    • 6.5x EBIT
    • 2.5x EBITDA-CAPEX
  • Comps trade from roughly
    • 4.8x to 7.4x EBTIDA
    • 9.4x to 15.2x EBIT
    • 6.5x to 10.6x EBITDA-CAPEX
Overview of VSH

VSH is a leading international manufacturer and supplier of semiconductors and passive electronic components. Semiconductors include rectifiers; diodes; transistors; integrated circuits ("ICs") such as power ICs, and analog switches; modules that contain several different types of semiconductors in a single package; and optoelectronic products such as infrared ("IR") emitters and detectors, IR receiver modules, optocouplers, optical sensors, light-emitting diodes ("LEDs"), and IR data transceiver modules.

  • VSH (post-spin basis) has produced EBITDA of ~$426.3mm (2007), ~$343.7mm (2008), ~$236.6mm (2009), and ~$313.7mm (LTM)
  • VSH is currently trading at
    • 3.6x EBITDA
    • 10.7x EBIT
    • 4.3x EBITDA-CAPEX
  • Comps trade from roughly
    • 4.8x to 9.2x (and up to 11.3x and 11.9x) EBTIDA
    • 9.7x to 12.2x (and up to 15.2x, 16.3x and 17.4x) EBIT
    • 6.5x to 9.9x (and up to 13.2x, 13.3x and 14.3x) EBITDA-CAPEX

Risks

  • We don't anticipate large drawdowns post-spin, if you purchase VSH pre-spin, given how small VPG is on a relative % basis. 
  • The insider control and RPT issues could continue to weigh on the price of VSH/VPG post-spin or cause permanent losses of capital if there are sector/market decreases.  Given the relative value here, permanent losses of capital could likely be offset by a short/put basket of the higher multiple (or maybe even all) comps. 
  • The insider control and RPT issues could make VSH/VPG traditional value traps.  With the defined but undated catalyst, you don't have to fall in love with the business as a general holding waiting for the value gap to close.  If the spinoff doesn't realize underlying value, then you can leave the trap.
 
 

Catalyst

Spinoff of VPG
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