1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Geoff Gannon
Geoff Gannon

On the Mueller Mispricing: "A" Shares vs. "B" Shares

April 07, 2007 | About:

Some smart investors see value in Mueller Water Products (MWA). They're probably right; but, Mueller isn't the kind of situation that jumps out at me as a clear bargain I can understand. However, there is something peculiar about this situation that makes it worth writing about.

A or B?

There are two shares of Mueller Water Products common stock – Series A common stock and Series B common stock. There are roughly three times as many B shares as A shares. The A shares and B shares have identical economic rights. So, ownership of all of the B shares would provide a roughly 75% economic interest while ownership of all of the A shares would provide a roughly 25% economic interest.

Here's where things get interesting. "Shares of Series A common stock and Series B common stock generally have identical rights in all material respects except Series B shares have eight votes and each Series A share has one vote per share."

So, what's the premium on the B shares? There is none. The last trade on Mueller A shares (MWA) was at $13.98; the last trade on Mueller B shares (MWA.B) was at $13.64. Buyers of the A shares are currently paying $0.34 a share more to reduce their voting power by 87.5%.

You can't convert A shares into B shares or B shares into A shares. If you could, there would be a profit in simply buying, converting, and selling. Unfortunately, you can't do that. So, there's no "manual" arbitrage opportunity here. Obviously, you can bet that the discount on the B shares will be eliminated – but, the market has to close the gap for you.

Regardless, there is a nonsensical discrepancy in price between the A shares and the B shares.

Anyone looking to make a new investment in Mueller should buy the B shares. There's no reason to even think about touching the A shares until they are trading at a discount to the B shares.

Owners of Mueller A shares who currently hold those shares in a manner that would cost them less than $0.34 a share to sell should immediately begin selling their A shares and putting the proceeds into the B shares. Doing so would slightly increase their economic interest in Mueller's business (because they would end up with more shares), greatly increase their voting power – and, over the long-term, possibly provide additional appreciation in the share price, if and when the B shares consistently trade at a premium to the A shares.

Do the B shares have to trade at a premium to the A shares? Technically – no. But, in the future, it's possible that circumstances may make the B shares far more attractive to certain investors. The A shares are extremely unattractive to any large shareholder who isn't committed to complete passivity as nearly 96% of the votes are tied to the B shares – the A shares are essentially non-voting shares.

Furthermore, there are fewer A shares, so it would be more difficult for a large investor to acquire a meaningful economic interest via the A shares without moving the price of those shares.

While some investors might have very good reasons for buying the B shares when they trade at a higher price than the A shares – no one has a good reason for buying the A shares when they trade at a higher price than the B shares.

Right now, the choice seems simple – dump the A shares; buy the B shares.

About the author:

Geoff Gannon
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 5.0/5 (1 vote)


Please leave your comment:

GuruFocus has detected 1 Warning Sign with Mueller Water Products, Inc. $mwa.
More than 500,000 people have already joined GuruFocus to track the stocks they follow and exchange investment ideas.

Performances of the stocks mentioned by Geoff Gannon

User Generated Screeners

kennyorrgrowth rate screen
rsanford39RATINGS Extract
sandstrsgrowth x div
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)