Profit From These Special Situations

In his book You Can Be a Stock Market Genius, author and investor Joel Greenblatt highlighted the opportunity hidden in mergers and acquisitions, spinoffs, and restructurings. Some deals are so complex that the true value of a stock won't be unlocked until well after the fact, giving savvy investors a chance to get in early and grab hold of shares at a discount. Huge profits are possible, and he achieved 50% annualized returns for a decade investing in them.

We'll look at the latest announcements presenting an opportunity for profit and pair that with the views of the 180,000 members of Motley Fool CAPS to see what they think of the businesses involved. If the best and brightest in the investment community like these stocks, it may be worth your time to dive in further.

But not every deal is worth your money. It takes diving into the filings to understand the nuances, so don't use the stocks below as a buy list -- more due diligence is needed on your part.


CAPS Rating (out of 5)

Type of Situation


Covidien (NYS: COV)



Pharmaceuticals division within 18 months.

General Growth Properties (NYS: GGP)



Stockholders to receive about 0.0375 shares of new Rouse Properties.

Winn-Dixie (NAS: WINN)


Going private

Bi-Lo to pay $9.50 per share cash.

Source: Motley Fool CAPS.

Again, this is just a starting point for further research. Do your homework before committing real money to these special situations.

Isn't that special?
With one of the largest acetaminophen production operations in the world, medical device maker Covidien sees its pharmaceuticals business as a means of allowing it to pursue a more flexible growth strategy, since both segments have separate business models, sales channels, customer bases, and capital requirements. The new pharma company would have some $2 billion in sales, including those of pain medication Exalgo, which it markets for Zalicus (NAS: ZLCS) .

Investors would receive shares of the new company in a tax-free distribution. This follows Abbott Labs' decision in October to spin off its own pharmaceuticals business and Pfizer's (NYS: PFE) wanting to rid itself of its animal health and nutrition division.

While analysts generally liked the move for Covidien, itself a spinoff from Tyco (NYS: TYC) , as it frees it from a lower-margin business, there are questions about how well that operation will be received. Covidien tried to sell the division earlier this year and didn't find a buyer, meaning such disdain may create opportunity.

The new company would have Exalgo and Pennsaid, a topical anti-inflammatory medication, and is already among the top 10 generic pharmaceuticals manufacturers in the U.S. It also supplies generators used to produce technetium-99m, a medical isotope widely used to diagnose diseases.

Highly rated CAPS All-Star TMFDeej also likes the move for Covidien, which he's now rated to outperform the market on CAPS. Let us know in the comments section below or on the Covidien CAPS page whether you'd consider buying into the spinoff too, and then add it to your watchlist to see how successful it is.

At the REIT moment
Out of bankruptcy for little more than a year, General Growth Properties is spinning off 30 shopping malls with its decision to calve Rouse Properties from its operations and have it list as a REIT on the NYSE under the ticker RSE. Shareholders will receive about 0.0375 shares of Rouse Properties common stock -- a distribution ratio of 1:26.66 -- as part of a taxable dividend to help satisfy its taxable distribution requirements for being a REIT.

The General, second in size to Simon Property Group, owns some 167 malls. Its purchase of Rouse back in 2004 and the heavy debt load it brought on likely played a big role in ultimately leading the mall operator to declare bankruptcy. Though it expects to close the transaction by Jan. 12, if the deal's not done by then, it will pay a special cash dividend.

Rouse is expected to have a fairly significant $1.16 billion debt load when it's spun off. With existing shareholders ending up with exceedingly small ownership stakes in the new company, they may just sell them off to get rid of them, depressing its price. After the distribution, though, Brookfield Asset Management, which is providing a $100 million revolving credit facility to Rouse, has agreed to buy up any remaining shares not exercised at the $15 offering price of a subsequent offering.

Nearly three quarters of the CAPS members weighing in on the mall operator rate it to outperform the market. Add the stock to the Fool's free portfolio tracker to keep track of whether it will be a spinoff or special dividend.

You ain't just whistling Dixie
Grocery retailer Winn-Dixie agreed to be bought for $560 million by Bi-Lo, a privately held chain of over 200 stores in North and South Carolina, Georgia, and Tennessee. Together they'll have some 690 stores across eight Southeastern states. The $9.50 buyout price represented a 75% premium to where Winn-Dixie's shares traded before the announcement was made. It will end up operating as a private subsidiary of Bi-Lo.

Some investors already considered the grocer a turnaround special situation ever since it emerged from bankruptcy protection itself a few years ago. It was never able to generate much momentum, as Wal-Mart ate away at its business. Bi-Lo was also recently in bankruptcy.

Shares of Winn-Dixie are trading slightly below the buyout price, suggesting there may be some minor concern about whether the deal will actually get consummated. But with little overlap in their markets and no significant market share, the worst that seemingly could happen is that Kroger (NYS: KR) or someone else steps up to make a higher competing offer.

With the deal expected to close within the next two to four months, I've rated it on CAPS to outperform the market, believing I can win some arbitrage points with the deal going through. Give us your opinion on the Winn-Dixie CAPS page while adding the stock to your watchlist to see if the deal goes through.

Checking the mercury
Digging into these deals is exactly what the analysts at Motley Fool Special Ops do every day, finding the best situations to invest in. It's a special opportunity worth taking a 30-day risk-free trial in.

If you want instant access to three special under-the-radar companies quietly cashing in on the booming smartphone and tablet PC markets, check out The Motley Fool's latest special free report: "3 Hidden Winners of the iPhone, iPad, and Android Revolution." The report is yours today, absolutely free.

At the time thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Abbott Labs and Wal-Mart.Motley Fool newsletter serviceshave recommended buying shares of Covidien, Brookfield Asset Management, Pfizer, Abbott Labs, and Wal-Mart, as well as creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.