Special Edition
"Special" can mean a few different things.
If we're talking breakfast cereal, it can mean an ultra-processed flake that's somehow both sweet and bland.
If we're talking about the military, "special" operations can mean the stripe of clandestine activities that sends small groups of brave women and men to do daring things like disposing of Osama bin Laden in 2011.
If we're talking investing, "special" means something different again. Investors often pair "special" with "situations" and use the term as a catch-all for investments that involve some tedious, sometimes boring, corporate action involving a lot of legal paperwork. These are things like mergers, acquisitions, spin-offs, sales and other shuffling. The thing that binds different special situations investments together is a question of "who values what, most?"
A different war story
At the end of World War II, after the Nazi's had surrendered, two intelligence officers in the British Navy were interviewing Nazi scientists in Germany. Olga Taussky-Todd and Jack Todd were mathematicians, not soldiers, but this was their mission. Through one of these chats, Olga uncovered a trove of research in a nearby library that could be valuable to the Allies and mathematics more widely.
She sent Jack out to protect the library. He put a note on the door to tell everyone how important it was and to “keep out.”
Perhaps they didn't see Jack's official-looking note or perhaps they didn't care, but, the next morning, he found a band of ransacking Moroccan soldiers—also Allies—about to burn down the Navy's new stuff.
Jack was used to solving problems, not fighting battles. He solved this one.
Jumping into his reluctantly-used Navy uniform and bringing a gun to complete the "soldier look", he went down to the Moroccan troops and, in broken French, managed to convince them not to burn the thing down.
Special situation
This "special" operation is closer to the meaning of "special" in investing.
The Moroccan troops had no idea what the library had in it or that it would be valuable to the Allies or that it would become the Oberwolfach Research Institute for Mathematics and continue to advance mathematics nearly 80 years later. Why would they know that?
Maybe the Moroccan soldiers were very good at fighting. They just weren't in the best position to judge the value of the thing that they were intent on burning down.
So it goes in investing. One group of investors might, under certain circumstances, value something differently than another.
Other European adventures
Fast forward 75 years and a short drive south from the Oberwolfach Institute to Zurich. The Swiss central bank recently lowered its benchmark interest rate. It was already lower than most of its peers. Now, it’s 1.5%.
This has encouraged Swiss investors to keep the price of other things in Switzerland, like stocks, high.
Take Swisscom, for example, a Swiss broadband company. The Swiss have been happy to purchase this steady, cash-generating business for about 20 times its cash flow, or the equivalent of a 5% yield. Not traditionally cheap, but not wildly out-of-line either when the benchmark interest rate sits at 1.5%.
Sunrise is Swisscom’s closest local peer. Liberty Global, a US company, owns Sunrise. Liberty Global also owns a hodgepodge of other European broadband companies and loosely-related investments. It trades in the US. Interest rates are higher there and in most of the other places where Liberty Global operates. There's a mismatch between what it owns, who covers the company—mostly London-based analysts—and who owns it—mostly US investors. None of these groups really seem to be on the same page.
Early in 2024, Liberty Global announced it would spin-off Sunrise to list on its own in Zurich. All this means is that Sunrise will trade as a separate company with its own ticker on the main Swiss exchange rather than wrapped up as a piece of Liberty Global.
This would make it easier for Swiss investors—happy to own Swisscomm at a 5% yield—to hopefully express a similar fondness for Sunrise. If Swiss investors oblige—a big "if"—Sunrise would represent about 90% of Liberty Global's value today. It only represents about a third of Liberty Global's cash flow. That, anyway, is the idea behind swapping ownership of a thing from one group to another.
There's no economic theory of why one group might value an asset different from another. In theory, an investment's value is just the present value of the asset's future cash flow. IRL, differences of opinion pop up. Sometimes this means that investments get stuck undervalued. Where the prize is big enough, capable management will hustle to close that gap. When that means shifting ownership, these special situations can be a fruitful mission for investors to take on.
Author’s note: I never met Olga Taussky-Todd or Jack Todd, but they were previous residents of the house where I now live.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.