Mueller Water Products "A" Shares and "B" Shares are Mispriced

Mueller Water Products "A" Shares and "B" Shares are Mispriced
Some smart investors see value in Mueller Water Products
(MWA). They're probably right; but, Mueller isn't the kind
of situation that jumps out at me as a clear bargain I can
understand. However, there is something peculiar about this
situation that makes it worth writing about.

A or B?

There are two shares of Mueller Water Products common stock
? Series A common stock and Series B common stock. There
are roughly three times as many B shares as A shares. The A
shares and B shares have identical economic rights. So,
ownership of all of the B shares would provide a roughly
75% economic interest while ownership of all of the A
shares would provide a roughly 25% economic interest.

Here's where things get interesting. "Shares of Series A
common stock and Series B common stock generally have
identical rights in all material respects except Series B
shares have eight votes and each Series A share has one
vote per share."

So, what's the premium on the B shares? There is none. The
last trade on Mueller A shares (MWA) was at $13.98; the
last trade on Mueller B shares (MWA.B) was at $13.64.
Buyers of the A shares are currently paying $0.34 a share
more to reduce their voting power by 87.5%.

You can't convert A shares into B shares or B shares into A
shares. If you could, there would be a profit in simply
buying, converting, and selling. Unfortunately, you can't
do that. So, there's no "manual" arbitrage opportunity
here. Obviously, you can bet that the discount on the B
shares will be eliminated ? but, the market has to close
the gap for you.

Regardless, there is a nonsensical discrepancy in price
between the A shares and the B shares.

Anyone looking to make a new investment in Mueller should
buy the B shares. There's no reason to even think about
touching the A shares until they are trading at a discount
to the B shares.

Owners of Mueller A shares who currently hold those shares
in a manner that would cost them less than $0.34 a share to
sell should immediately begin selling their A shares and
putting the proceeds into the B shares. Doing so would
slightly increase their economic interest in Mueller's
business (because they would end up with more shares),
greatly increase their voting power ? and, over the
long-term, possibly provide additional appreciation in the
share price, if and when the B shares consistently trade at
a premium to the A shares.

Do the B shares have to trade at a premium to the A shares?
Technically ? no. But, in the future, it's possible that
circumstances may make the B shares far more attractive to
certain investors. The A shares are extremely unattractive
to any large shareholder who isn't committed to complete
passivity as nearly 96% of the votes are tied to the B
shares ? the A shares are essentially non-voting shares.

Furthermore, there are fewer A shares, so it would be more
difficult for a large investor to acquire a meaningful
economic interest via the A shares without moving the price
of those shares.

While some investors might have very good reasons for
buying the B shares when they trade at a higher price than
the A shares ? no one has a good reason for buying the A
shares when they trade at a higher price than the B shares.

Right now, the choice seems simple ? dump the A shares; buy
the B shares.

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Geoff Gannon writes a daily value investing blog and
produces a value investing podcast at:
http://www.gannononinvesting.com