Friday, November 25, 2005

Zapata Corp
Ticker: ZAP
Market Cap:$116 million
Avg Volume: 7500

When we last reported on Zapata Corp, the company had announced the sale of its interest in Safety Components (Ticker:SAFY) for $51.2 million, or $12.30 per share. While we were disappointed with the sale price (SAFY trades in the $15.00 range), we understood the reasons for the lower sale price: SAFY does not have much liquidity, and Zapata's large stake in the company necessitates a discount.

In any event, we now have more details about the sale, and specifically of tax consequences to Zapata. The original purchase price of the Safety shares was $47.8 million. According to Zapata, after adjusting for transaction costs and tax basis changes, this will result in a taxable gain of just $292,000. Good news for Zapata shareholders (not that there has been much good news lately, as reflected by the sliding stock price).

Current Analysis
As of 9/30/05, and not reflecting the Safety Components sale, Zapata had $38.1 million in cash, and $14.7 million in long term debt. After recognizing the sale, Zapata should have approximately $85.4 million in cash.

Current cash (9/30/05): $38.1
Safety Sale: $47.8
Taxes on sale: $ .3

Approximate Cash: $85.4

If you have followed the Zapata story, you'll recall that their major asset is a 58 percent stake in Omega protein (ticker:OME), the leading provider of fish oil. Omega, currently trading at $6.00 per share (mkt cap $150 million), has been sliding as a result of damage to their processing facilities in the Gulf region, due to hurricane Katrina. Omega reported poor results for the third quarter (a 6.1 million loss, versus $1.8 million in income for the same period last year), and faces disruption to its operations well into this year. The company claims that insurance will cover damages to their facilities, but it is unclear how long this will eat into their top and bottom line.

Sum of the parts valuation
The following is a sum of the parts valuation for Zapata, considering Zapata's net cash (cash minus debt, and its stake in Omega.) We completely discount any remaining Zapata assets in this valuation. First, since Omega Protein is consolidated into Zapata's financials, we need to back out Omega's cash, represented on Zapata's balance sheet:

Zapata's Cash: $85.4
less Omega's cash: $10.5
less Zapata LT debt: $14.7

Net Cash: $60.2 million, or $3.15/share

Stake in Omega: $87 (150*58%) or $4.55/share

Total: $7.70/share

Of course, a discount might also apply in the Omega stake. Applying a 20 percent discount, for instance, reduces the valuation to $6.79/share.

Your editor has been disappointed in Zapata. While still holding shares, and believing it is worth more than the current price, problems at Omega are having an effect on the stock. If Omega were to emerge from recent issues, and traded at $10 per share, for example, the effect on Zapata's value is considerable. Wishful thinking? You bet. We value investors employ a lot of that....sometimes to our detriment.

*The author has a position in Zapata. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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