Stub Trade:-Buy Industrias CH (ICHB MM) /Sell Grupo Simec SIM US

This is an example of a stub trade. A stub trade is a holding company that owns subsidiaries. In this case ICHB owns 87% of SIM, which is a publicly traded company listed in the US. This means that ICHB represents receives 87% of SIm’s consolidated revenues. The great thing about this stub trade is that SIM is a very liquid stock so one can calculate ICHB’s premium/discount easily. ICBH’s stake in SIM is worth 135% of ICHB’s own market cap. This translates into a 37% discount (developed in the past 3 month) BASED ON Nov 2006 prices which is when the analysis was made) and what is interesting is that ICHB was trading at a premium to what it owned in Simec.    

The following catalysts are what analysts are believing will narrow the discount.

Simec outperformed ICHB by 50% in Nov 2006 when calculating the spread going back a year. SIM made a new stock offering to take advantage of the out performance. Even if the equity deal fails it will succeed the stub trade because investors will see the unwarranted valuation. 

There have been rumors of a possible buyout for SIM in (Nov 2006). This is due to SIM’s healthy balance sheet and dominant market position. Given that ICHB owns the majority of SIM and has all economic controls, the likely target will be ICHB which will be a cheaper way to acquire SIM. This will inevitably cause ICHB’s price to rise.