Steel Partners LP (SPLP) 3rd Quarter Update

If this isn’t an opaque security! And you know what? That’s just what I like! Very little information trickles out of the Lichtenstein machine, just the essentials, or maybe just the required.

Management continues to make slow but steady progress towards simplifying the partnership structure, merging entities under partial control or selling off investments that are non-core. Remember that the partnership is basically an investment partnership, not an operating partnership. As such, it holds investments in a number of public and private companies. But because some investments are controlling investments, i.e. greater than 50% ownership, it consolidates these from an accounting perspective, while the rest are accounted for using either the fair market value or the equity method. This makes the financials a giant hodge-podge and relatively useless in valuing the partnership units, especially over time since changing ownership interests lead to changes in accounting treatment (from equity investment to consolidated, for example). To get a cleaner picture of the partnership value one needs to tote up the value of the various holdings. For interests in public companies this is relatively straight forward. It is the interests in private companies that make valuation more problematic.

Before I lay out my valuation let’s go over some of the major events at the partnership this year. [For a history of this strange entity please read my earlier two posts on SPLP, here and here.] SPLP was finally listed on the NYSE in early April providing improved liquidity to unitholders. Then, at the end of April, BNS was folded into Steel Excel through a transaction that cashed out minority shareholders and exchanged Steel Excel shares for those BNS shares held by SPLP. This resulted in SPLP’s interest in Steel Excel increasing to over 50% which meant a change in accounting treatment; with a majority interest in Steel Excel, SPLP now needed to consolidate Steel Excel financial results into its P&L. In August, SPLP increased its ownership DGT Corp. from 51% to 57%. Then in early October the company sold its interest in Barbican for £21 million (approx. $33.8 million), about twice the value, I believe, at which it was carried it on the books.

All of these events reflect slow and steady progress toward simplifying the partnership structure, and, I believe, making the value of the underlieing assets more visible. I have taken a stab below at an estimate of net asset value for SPLP as of 9/30/12 , though I have taken the liberty of reflecting the subsequent sale of Barbican equity.

$ in millions (except per share amounts)

Company	Ownership	Accounting treatment	Holding Value
Publicly traded
Steel Excel	51%	Consolidated	$167
Handy & Harman	54%	Consolidated	$107
Gencorp	7%	Fair value	$39
DGT Corp.	58%	Consolidated	$29
JPS Industries	41%	Fair value	$28
API		Fair value	$23
SL Industries	24%	Equity method	$15
Nathan’s Famous	10%	Fair value	$15
Cosine Comm.	47%	Equity method	$9
Subtotal			$432
Private/Other
Fox & Hound	44%	Equity method	$30
WebBank	100%	Consolidated	$22
Liq. Trusts			$15
Other			$21
Subtotal			$88
Cash			$72
Total NAV			$592
NAV per share			$18.40

Based on this anything-but-exhaustive analysis, the units (at around $12.00 today) are trading at about a 35% discount to NAV. To get a better picture of the real discount one has to consider not the market price of the underlying securities owned, but the actual value, perhaps even the private market value. For example, there was a recent write-up on DGTC at the VIC website, that concluded the value of DGTC was somewhat north of $19 per share rather than the $12.50 it is currently trading at.

I have a full position in SPLP now but would consider increasing it if year-end selling were to depress the unit price to the $11 or under territory.

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