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Tickers in this Article: WLT, WAC, MWA, AVTR
Sometimes story ideas develop in strange ways. Today's for instance, is about three public companies with a shared past and until recently they were all held by Keeley Asset Management, an investment manager specializing in finding value in corporate restructurings and spin-offs. I came upon JimWalterHomes while researching Florida homebuilder Avatar Holdings (Nasdaq:AVTR). JimWalterHomes' history dates back to 1946 and although the home division shut its doors in 2009, the other remnants of Walter Industries seem to be doing fine. Keeley has owned stock in Walter Industries and its successor companies since as far back as 1999. I'll try to explain the how and why. IN PICTURES: Top 10 Financial Blessings Of 2009

Follow the Bouncing Ball
According to Keeley's 13F holdings report for the first quarter 1999, it held 342,925 shares of Walter Industries worth $3.86 million . In June 2005, Walter Industries bought water and gas valve manufacturer Mueller Water Products for $1.91 billion in cash and assumed debt. It then combined its US Pipe business with Mueller to create a wholly owned subsidiary with $1.6 billion in annual revenue. One year later, it sold 25 million Class A shares at $16 each in its initial public offering. On December 14, 2006, the company gave all its Class B shares in Mueller Water Products (NYSE:MWA) to existing shareholders, who received 1.65 shares in the new company for every share held in the parent. At the end of 2006, Keeley owned 3.13 million Class A shares of Mueller and 1.87 million Class B shares.

On January 29, 2009, Mueller Water converted all outstanding Class B shares on a one-for-one basis into Class A shares. After the conversion, Keeley held 6.36 million shares of Mueller Water. In the second quarter of this year, it sold 3.1 million shares and currently holds 2.7 million worth $8.5 million. Without dwelling further into Keeley's holdings, my guess is they've broken even or made a small profit on this investment and are simply holding the remaining shares until revenues and earnings improve and with it the share price so they can sell what's left.

A Second Spin-Off
In April 2009, Walter Industries spun-off its mortgage business into a real estate investment trust (REIT) specializing in less-than-prime, non-conforming mortgage assets. Shareholders of Walter Industries received on a one-for-one basis, shares in a newly created holding company temporarily housing the assets of its finance business. Walter Industries then paid shareholders $68 million in taxable dividends. At that point, the holding company assets were merged into Hanover Capital Mortgage Holdings Inc. The merged businesses were renamed Walter Investment Management (AMEX:WAC).

Walter Industries shareholders ultimately received 0.299 shares in the new company for every share held. At this point, Walter Industries was renamed Walter Energy (NYSE:WLT) to acknowledge its transition into a "pure-play" energy company. What was once a single company is now three. Up until the latest quarter, Keeley owned all of them.

The Payday
As far as I can tell, Keeley's original investment in Walter Industries cost them approximately $2 million back in 1999. Those shares today are worth $26.5 million. Add to this the spin-off shares created for Mueller Water and Walter Investment Management and it's more like $30 million or a compound annual growth rate of 27.9%. In addition, when you consider that its total holdings in the three companies as of March 31 was $189 million, the profits both realized and unrealized are likely much higher.

Current Situation
Walter Energy's second quarter results were night and day compared to last year at the same time. Revenues jumped 142.7% to $410.6 million and earnings per share were $2.16, 25 cents better than analyst estimates. The results were due to higher coal prices and much greater volumes. Coal prices are up 30% this year so far and with the hottest summer in 15 years, expect them to continue to rise. This is good news for shareholders. It's a cyclical business for sure but when it goes, boy does it ever.

As for Walter Investment Management, second quarter earnings saw it producing steady, if not spectacular results. Of all the numbers mentioned in its lengthy press release, two jumped out at me. First, the company's consolidated delinquencies year-over-year dropped 80 basis points to 4.26% and second, its net interest margin remained constant at 5.1%. Its loan portfolio remains manageable and generating sufficient profits to pay its $2 annual distribution. Mueller's revenues and earnings from operations in the third quarter both increased although not enough to deliver a profit after taking into account interest expense. It's a work in progress.

Bottom Line
As I was finishing this article, Keeley's holdings report ending June 30 appeared on the SEC website. A couple of important changes occurred during the second quarter. First, it sold all 2.1 million shares it owned at the end of March in Walter Investment Management. Secondly, and more importantly, it appears to have added 645,000 shares in Walter Energy during the quarter, rolling the proceeds from Walter Investment Management into the coal business. It's a clear sign Keeley feels coal is a good place to be right now. (Learn how SEC was formed, and other important events that shaped financial regulation. Refer to The SEC: A Brief History Of Regulation.)

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