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Marc is a professional investor focused on special situations. He must decide whether to invest in Seacor Marine Holdings (SMHI), an offshore services company that was recently spun off from Seacor Holdings. Marc has compiled enough public information to perform a full fundamental analysis of the company. The case puts special emphasis in the understanding of the spin-off economics, the cyclical nature of the industry and the valuation of assets as a potential downside protection.
I teach this case as one of the first sessions in a Value Investing course for MBA students. The session is devoted to special situations and can also be used for the understanding and valuation of cyclical businesses. I list below several learning objectives that can be pursued depending on the length of the session. The case could be potentially extended to two sessions. Special situations: in the first part of the session I want students to understand the economics of the spin-off. I make them list the pros and cons from the investor point of view. Then I ask them to discern whether the motivations of the spin-off make economic sense, or the original company is just trying to unload a liability. Understanding of the business model and the cyclical nature of the industry. Valuation, with special emphasis on the valuation of assets. Specifically, this is a good case to illustrate the reproduction cost methodology and explain its meaning. It is also a great case to discuss the valuation of cyclical businesses. The case includes information to explore other dimensions of the fundamental analysis such as the management and the ownership structure. There is one dimension particularly important in a cyclical business: the debt structure of the company. We may value the company in the low part of the cycle hoping that there is a reversal to the mean, but always having in mind whether the company will survive given its capital structure.