The sizzle in retail stocks earlier in the year has died down, as retail sales have slackened. So it isn't surprising that shares of The Limited (LTD) have drifted south--and are not far above their 52-week low of 15 1/4. But Chairman Leslie Wexner has a plan to jack them up. So say pros who are accumulating stock, now at 17 3/4.

They figure the stock will hit 25 in the short run and 35 in a year or so. Why this sudden burst of confidence in a stock that has seesawed between 15 and 22 since early 1994? Here's what they're betting will happen:

Sometime soon, perhaps in a matter of days, Limited will act on its previously announced plan to sell to the public 7 million shares, or 14%, of its Abercrombie & Fitch division--at 14 to 16 a share, to raise $112 million. Last year, Limited sold 14% to the public of its Intimate Brands unit, including Victoria's Secret. Limited will control more than 80% of the two units.

Abercrombie's valuation as a public company and the market value of Intimate Brands indicate that ``each Limited share represents some $17 in value of the shares in Abercrombie and Intimate Brands,'' says Robert Willens, managing director at Lehman Brothers. Thus, the rest of Limited, a leading specialty retailer, is in effect selling for just $1 a share, says Willens. But that's not the real come-on for the stock.

Similar disparities have occurred in other companies that have resorted to such ``equity carve-outs'' of their subsidiaries. But in the case of Limited, there is a difference. Willens believes that after the Abercrombie deal has settled, Wexner will spin off to Limited shareholders the rest of the shares it owns in Abercrombie and Intimate.

Why? This spin-off will be a tax-free deal, explains Willens, which is possible because Limited controls more than 80% of the voting power in the two companies. ``The rule states that a tax-free spin-off of only a controlled subsidiary may be undertaken,'' says Willens, who specializes in opportunities created by valuation disparities.

An investor in The Limited has an ``excellent chance,'' he says, of realizing the values of these units through the spin-off. ``The high likelihood of a spin-off makes the price of the rest of Limited's businesses seem ridiculously cheap,'' he says. Wexner owns 21% of Limited.



Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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