Conseco Shares Undervalued (CNO)

Conseco, Inc. (NYSE: CNO) shares have been halved during the past 52 weeks and at least one large investor insists that the stock is substantially undervalued in a Schedule 13D/A filing with the SEC. The insurance holding company’s shares dropped after it fell under scrutiny for improperly reporting benefits and liabilities for insurance products. In fact, it will have to restate nearly three years of financial results that it says may have overstated shareholder equity by $15 million to $35 million.

Steel Partners, which owns an 8% stake, believes that Conseco is trading well below its intrinsic value. As a result, it announced the nomination of two candidates to the Conseco’s board of directors to unlock this value by pushing the company to explore strategic alternatives. These measures could include spinning off or selling business units, executing major stock buybacks, or finding a merger partner.

Normally when companies hear shareholders mutter the words “strategic alternatives” they quickly install poison pills and resist as much as possible. However, Conseco surprisingly agreed to consider the voluntary nomination of Steel Partners representatives for election to the board of directors. This voluntary nomination would greatly speed up the entire process and allow shareholders to realize significant appreciation over the short-term.

Situations like these are very common for Steel Partners, who prefers to find stocks depressed from (relatively) non-material regulatory issues and restore them to intrinsic value. The most likely of the strategic alternatives is a leveraged share buyback that would allow Conseco to increase its EPS, which (at the same multiple) should increase its share price. Other alternatives like a spin-off or buyout are also possibilities that force investors to reprice shares accurately.

In the end, this is all good news for Conseco shareholders. A strong activist investor and a willing board of directors creates a great opportunity to unlock shareholder value for everyone involved. It will be interesting to see just how quickly the company can act, but this is definitely one worth watching closely over the next few months!

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