Iron Mountain: Elliott Goes Where Buffett Fled (IRM, BRK-A)

It was rather surprising when we saw that Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A, BRK-B) had suddenly sold all of the Iron Mountain Inc. (NYSE: IRM) holdings back in mid-November.  After all, Buffett had been increasing his position in the company and Buffett rarely makes such moves where he increases his holdings and then decides that his “forever” outlook has run its course.

This morning came an SEC filing from Elliott Management Corporation for the funds that it manages that the fund has submitted a letter to the Iron Mountain Incorporated (NYSE: IRM) board of directors.

Elliott is the beneficial owner of just under 5% of Iron Mountain’s common stock and it has called for a strategic review of Iron Mountain’s capital allocation and operational efficiency. The group has also submitted a minority slate of four independent nominees to join the Iron Mountain board of directors as follows:

• Ted Antenucci of ProLogis,
• Robert Levenson of Lenox Capital,
• Allen Loren as former Chairman of D&B,
• Harvey Schulweis of Niantic Partners.

What is so interesting is that Elliott wants to see a conversion here to a REIT as one possibility.  The firm’s SEC filing shows a full review of its plans and possibilities, but the chart here with the expected and potential values is considerably higher if you look at their math only.

Elliot’s full SEC filing is here. Iron Mountain issued a statement this morning after the open that it previously disclosed that its board will evaluate the firm’s proposal and “make a recommendation in due course.”  The company also noted that it grew revenue by 4% to $3.1 billion in 2010 with growth in international markets.  It also noted how it grew the dividend by 200% and that is where the near-3% yield came from while it continued to buy back shares.

If you look at the table above, the projected values are impressive even if you consider that shares hit a 52-week high.  The lowest projected value is $34.20 per share and the highest value is $76.92 per share.  It is up to you whether you believe the projections, but those are still impressive.

We took a look at expectations to see what a 90% REIT payout of income would look like.  While there is a difference of GAAP and non-GAAP, Thomson Reuters has estimates of $1.26 EPS for 2011 and $1.44 EPS for 2012.  The dividend yield based upon today’s prices would be north of 4% if you base-line all of the conversion costs and assume straight math.  Admittedly, that is something that may have ‘one-time charges’ that have to be considered before the calculations can be made.

Iron Mountain shares are trading up about 6.5% at $28.00 and shares did hit a 52-week high of $30.57 today.  The current yield is about 2.95% and shares were above $35.00 back in late-2007.  Maybe Buffett should have stuck around longer than he did.

JON C. OGG