Connoisseur of the untold stories on Wall Street, skewed toward activist hedge funds

Biglari Holdings and Groveland Capital, No End In Sight

Added on by Gordon Gekko .
The ever sly looking Sardar Biglari

The ever sly looking Sardar Biglari

It’s been a saga of sorts. Groveland Capital wants to up-end Biglari Holdings CEO Sardar Biglari and replace the entire board. One of the more interesting aspects is that Groveland is putting up a heck of a battle with just a 0.167% stake.

There’s been a myriad of letters and presentations. The latest presentation being here, which is a puff piece to convince shareholders to keep Sardar in the top spot, with a focus on how Sardar saved Steak n Shake from bankruptcy. This week has included more letters from both sides.

No surprise, as we're getting ever closer to the Apr. 9 shareholder meeting. And Groveland recently took a hit. Yesterday, the ISS recommended shareholders vote to reject Groveland Capital’s attempt to gain control of the Biglari board. The fund has released a letter countering the ISS decision. 

The report from the ISS is nearly 35-pages, where it actually takes to task the current Biglari board over its poor corporate governance, but it ultimately notes that Groveland’s nominees lack public board experience and the fund's plan for managing a transition to a new CEO and new board is insufficient.  

This activist versus activist battle is something we highlighted last month, noting,

“Sardar has likened himself to Warren Buffett, calling Biglari Holdings a mini Berkshire Hathaway. But unlike Sardar, Buffett has nearly all his wealth tied up in his company, Berkshire, and gets less than half a million dollars a year in total compensation”

The biggest issue is Sardar’s corporate governance, compensation and related-party deals. Sardar owns  2% of the company, yet has voting power equal to 20% . Part of the issue is that Sardar has a licensing deal for the name, Biglari, where he’ll collect 2.5% of the company’s sales for five years if he’s ousted as CEO. But as long as he’s running the company he doesn’t receive any royalties -- this licensing deal last through 2023.

For Groveland, things get a little harder without the ISS support. The largest Biglari shareholders are the likes of Vanguard, Dimensional and Blackrock. Has Groveland made a fairly convincing case? Seems so; but will the big mutual funds finally stand up and be counted? Or will they continue to sit quietly, remaining paid shills for the corporate coffer raiders?

Starboard Value At Insperity ($NSP): 2 Board Seats, Bye Bye Corporate Jets

Added on by Gordon Gekko .

Insperity Inc. ($NSP) waved the white flag earlier this week in the proxy battle against Starboard Value. The personnel outsourcing company will back Starboard’s two candidates for the board and increase its board count from eight to ten.

Jeff Smith’s activist fund owns about 13% of Insperity and has been urging the company to sell itself, noting that its underperformance has been related to poor capital allocation and cost management.

As part of the Starboard Value win, Insperity will be selling its private jets and form an advisory committee. Recall when we noted,

“...Two extremely large corporate jets that NSP owns. Starboard estimates the total variable costs and capital costs of maintaining these aircraft to be approximately $10.5 million per year, or more than 15% of LTM EBITDA. At Insperity’s current 8.8x EV/EBITDA multiple, this implies that management could improve the value of the Company by over $92 million, or approximately $3.65 per share, by simply discontinuing the use of these jets and eliminating this seemingly egregious expense. In addition, we estimate that, if sold, the sale proceeds from these jets would exceed $35 million, or an additional $1.38 per share of value.”

The new committee will make recommendations how can Insperity can improve capital allocation and cut expenses -- sitting on the committee will be the two Starboard board nominees and two independent directors.

Prior Starboard—$NSP coverage:

Jan. 26, Activist Investor Tees Up Insperity ($NSP) For A Buyout

Jan. 21, Starboard Value's Letter To Insperity

$NSP makes up 4% of the Starboard portfolio, with shares up 50% since it went active.

$NSP makes up 4% of the Starboard portfolio, with shares up 50% since it went active.

Stewart Information Services ($STC): Activists Push To Change Outdated Corpgov

Added on by Gordon Gekko .
  • This title insurer now has three activist funds complaining about its dual class structure.
  • There’s even talk of a buyout.
  • But if it doesn’t come, how likely is it for activists to shake up one of the most unfriendly shareholder structures in the market?.

With just a $1bn market cap, the title insurance company, Stewart Information Services (NYSE: STC), is being facing a myriad of activist pressure. The latest includes Bulldog Investors, which owns just over 5% of the company and has nominated five directors for the broad.

Note that last year Engine Capital and Foundation Asset Management got involved with Stewart as activist investors. They ended up settling with Stewart Information and getting the company to put two of its nominees on the board. Engine and Foundation own right at 8.5% of the company.

Part of the reason for all the activist upheaval is the dual class structure of Stewart. Activists want this abolished. But Bulldog also wants a sale of the company.

Foundation sent a letter to the board last week agreeing with Bulldog that the board needs to be held accountable and the dual-class structure removed.

In addition to Bulldog, Foundation has also been calling for a Stewart buyout for some time, noting that there are various companies willing to buy the company at what it calls a significant premium to the current stock price.

Shares are at 52-week highs, and it's been a heck of a ride over the last decade.  Read the full piece here.

Activist FrontFour Capital Books A Win At OM Group ($OMG)

Added on by Gordon Gekko .

After a fairly heated battle, albeit a relatively short one, FrontFour Capital prevailed against OM Group (NYSE: OMG) this week. The small activist fund managed to get two of its three candidates on OM’s board.

It’ll be adding FrontFour founder David Lorber and the A. Schulman Inc chair, Joe Gingo. What’s more is that after the annual meeting, OM Group will also add the FrontFour's other board candidate as a director, Allen Spizzo.

FrontFour went active back in January and shares are flat since then. One of FrontFour’s theses was that OM Group should put itself up for sale. The other thesis is that OM Group can cut over $50mm from its cost structure -- and for a company generating $98mm in EBITDA, that’s pretty significant. These cost cuts could come from executive compensation and corporate overhead.

Previous FrontFour-OM Group coverage:

Feb. 11, OM Group ($OMG): Activist Investor FrontFour Comes A Calling

OMG is FrontFour's 2nd largest holding after a SPY Call. 

OMG is FrontFour's 2nd largest holding after a SPY Call. 

The Long Case For Computer Sciences, Starring Jana Partners

Added on by Gordon Gekko .
  • CSC has traded down since Jana Partners went active.
  • But Jana Partners has a history of getting buyouts done.
  • Plus, there’s a few ways to unlock value, including a spinoff if a buyout doesn’t come to fruition.

Computer Sciences Corp. (NYSE: CSC) is off nearly 10% from its 52-week highs earlier this year. Not a big deal, but when there's a potential buyout on the table, we think shares should be higher. Toward the end of last month we covered CSC, noting that Jana Partners was involved and looking to get a buyout done.

Jana still made CSC one of its top 10 holdings with the February purchase. But shares are down 6.5% since its filing with the SEC.

CSC is a consulting and systems integration player with a near $10 billion market cap. It has many large corporations as its customers. It has a government business that generates a large part of its revenues, but at the same time, could be holding back the company back - at least from a valuation perspective. Its government business, even with the overhang of budget cuts, is still trading at a hefty discount to peers. Read the full piece here.

CSC makes up about 5% of Jana's pro forma portfolio

CSC makes up about 5% of Jana's pro forma portfolio

The H Partners And Tempur Sealy Saga Continues

Added on by Gordon Gekko .
  • H Partners is ramping up activist efforts at Tempur Sealy.
  • The mattress maker has another activist involved as well.
  • Yet it’s still unclear what the activist plan is.

H Partners has been a long-term shareholder of Tempur Sealy (NYSE: TPX), but recently went active after a number of years of underperformance. Back in February, we noted that the valuation is still a bit expensive. And H Partners hasn't laid out its plans to turn around performance.

But now H Partners has sent another letter to Tempur, requesting access to the company's records. Basically, it wants to know the top shareholders so it can start working them over in an effort to gain support for its proxy fight.

H Partners wants a board seat and a new CEO put in place, along with the ousting of a couple directors. The endgame is to get a vote of no confidence in the Tempur board members, leading to a CEO replacement. Tempur has already come out and defended itself, its CEO and its track record. But Chieftain Capital has thrown its support behind H Partners and went active on the stock as well. It owns 5.8% of the company and supports ousting the CEO and replacing the board. Read the full piece here.

H Partners has 25% of its portfolio invested in TPX

H Partners has 25% of its portfolio invested in TPX

This Week In Activism: March 21st, Vol. 8

Added on by Gordon Gekko .
Nelson Peltz, Trian Partners founder

Nelson Peltz, Trian Partners founder

This Week In Activism Vol. 8 below:

News

>> Land & Buildings has nominated 3 directors for the Associated Estates Realty (AEC) board. It owns right at 2.9% of AEC. L&B also recently waged a battle over at MGM. Something we just covered here, but it’s worth noting that MGM has rebutted L&B’s call to form a REIT and spinoff its casino operations.

>> Marcato Capital called out Sotheby’s again in an interview last week, taking to task its “financial strategy.” Recall that Marcato founder Mick Mcguire put out a letter earlier this month calling for Sotheby’s to buy back $500mm in shares -- here’s our chopped & screwed version of the letter and our more detailed analysis.

>> Corvex has noted that it wants an entirely new board installed at American Realty (ARCP). The founder and CEO that was in place when the accounting scandal took place is gone, but the entire board is still there. But Corvex’s thoughts are nothing new continues to iterate as such and hasn’t put forth any names -- we covered Corvex-ARCP after the latest letter here. Corvex founder Keith Meister also personally wants a board seat. His fund owns 7.8% of the troubled REIT.

>> The Clinton Group has put out a fairly lengthy presentation on Campus Crest (CCG). Recall that it Clinton wants Campus Crest to buy a smaller private real estate company and let that management team take over at CCG -- our more detailed analysis here.

>> Marcato Capital was also active at Bank of New York Mellon (BK) last week. The activist owns 1.6% of the bank but has put out a website with a 150-page presentation, abetterbankofnewyork.com. Note that Nelson Peltz (owning 2.6% of BNY with a board seat) has come out against Marcato’s call to fire the BNY CEO.

>> Starboard sent a letter to Yahoo (YHOO) calling for various engineerings, including buybacks, cost cuts, a spinoff of Yahoo! Japan and monetization of its IP / real estate -- here’s our chopped and screwed version of the letter and more detailed analysis.

>> Blue Clay Capital has nominated two directors for the Select Comfort (SCSS) board. Mattress companies can’t catch a break, recall that Tempur Sealy (TPX) is battling H Partner -- more on TPX and H Partners here.

>> Engaged Capital sent a letter to Rovi (ROVI) taking task the company over management issues and nominating four candidates for the board -- a closer look from our perspective here.

>> Orange Capital sent a letter to Pinnacle Entertainment (PNK) asking the casino operator to engage with Gaming & Leisure Properties over a real estate buyout, but does not the offer is too low. Recall that Orange wanted PNK to spin off its real estate into a REIT in 2014. Orange owns right under 5% of PNK with a $25 a share cost basis -- the stock is right around $35 a share today.

>> Nelson Peltz’s Trian Partners puts out a short presentation on DuPont (DD). Again, Peltz owns 2.7% and wants two board seats at DD and two at the pending specialty chemicals spinoff. DD has rejected that offer.

>> Barington Capital sent another letter to Eastern Co. (EML). There’s been a lot of back and forth here, with several letters, and even Mario Gabelli and GAMCO has gotten involved. Owning 5.2% of the company, the fund wants the company to narrow its focus and work on corporate governance. Here was our condensed version of the last letter.

>> Guidance Software (GUID) put Max Carnecchia on its board, thanks to RGM Capital’s active stake. RGM owns 13.9% of GUID. Max and RGM were both involved in Accelrys in 2013. Shares are trading at $5.30, but RGM’s cost basis is around $7.70 a share.

>> Joseph Stilwell has sent a sweet and short letter to Harvard Illinois Bancorp (HARI) about its board nominee. Stilwell has been involved with the $11mm market cap bank since 2011. Shares are trading at just $11 a share, while Stilwell’s cost basis is right at $10 a share. Remember that Stilwell snapped a photo of the HARI board chair sleeping on the job at the annual shareholder meeting.

New campaigns

** Red Oak partners has gone active on Tecnoglass (TGLS), taking a 6.9% stake.

Ownership changes

++ Discovery Capital upped its Agilysys (AGYS) stake from 7.8% to 8.8%. The fund went active in September and owns just under 2mm shares at a $12 cost basis. The stock trades just under $10 a share.

++ DHR International has upped its stake in CTPartners (CTP) to 7.5% and nominated six directors for the board. The fund went active in February after a failed attempt to buy CTP for $7 a share. The stock now trades around $6.20, while DHR’s cost basis is $6.70 a share.

++ AVI Partners upped its stake in YuMe (YUME) to 9.1% and nominated two directors for the board. The fund went active in January with a 5.5% stake. Shares are trading just over $5.50 a share, while AVI’s cost basis is around $5.30.

Interesting activist reads around the web—

  • Taking sides on activist investors, WSJ

  • SEC chair wants activist fights to be nicer, BloombergView

  • Activist stocks: Shareholder activism goes mainstream, GM falls prey, ValueWalk

  • Dear Mr Activist - What Have You Wrought?, Cassandra Does Tokyo

  • If Only G.E. Had an Activist Investor Who Cared, DealBook

  • Sachem Head Capital Earns "Emerging Manager of the Year" Award, FINalternatives

Most read posts from stockpucker this week—

In case you missed our last activist update, here it is.

Chopped & Screwed: Barington Capital Letter To Children’s Place

Added on by Gordon Gekko .
James Mitarotonda, Barington Capital founder

James Mitarotonda, Barington Capital founder

Barington Capital has taken a liking to the children’s apparel retailer The Children’s Place (NASDAQ: PLCE). They forwarded a lengthy 3,200-word letter to the company. In it, Barington lays out the case that PLCE trades at a hefty discount to its peers given the lackluster performance under current CEO Jane Elfers. But Barington also notes that there are various ways to improve performance, including boosting margins, improved inventory management and capital allocation. But Barington also believes there’s a number of buyers that could snatch up PLCE.

Below is our chopped & screwed version:

Barington Capital and Macellum Advisors owns two percent of The Children’s Place. It’s an attractive investment opportunity given its valuation and leading market share in the children's apparel, large store base and a direct sourcing infrastructure.

It trades at a modest valuation of 6.0x enterprise value to EBITDA. We believe this discounted valuation is due to investors' concern over the Company's deteriorating operating performance since 2010 under the leadership of the current CEO, Ms. Jane Elfers.  

We believe it can more than double its earnings per share (EPS) within the next three years compared to the consensus estimate for fiscal 2014 of $3.04 per share. The Company has lacked the effective Board oversight that is required to address its deteriorating operating and financial performance. These issues need fixing:

  1. Deteriorating Operating Performance

  2. Merchandising mistakes have led to a deterioration in same-store sales and profitability

  3. Inefficient Inventory Management

  4. Poor Capital Allocation on Expansion of Domestic Store Footprint

  5. High Management Turnover

  6. CEO has been richly compensated despite poor operating performance

We believe that the Company's operating margins can improve as e-commerce grows and as the Company takes advantage of numerous upcoming lease expirations to close underperforming stores.

The Children's Place is a relatively mature retailer in North America and, in our view, needs to allocate capital resources accordingly.Accordingly, we would expect that capital expenditures should be less than depreciation and amortization in the future.  We believe these share repurchases would be highly accretive and would help the Company to achieve our target of more than doubling its earnings per share.

Finally, the buyout. We believe the Board should also use this opportunity to explore opportunities for a sale of the Company. With its market leading position in the children's apparel space and its direct sourcing infrastructure, larger companies could benefit from its low-cost sourcing opportunities.  Private equity buyers would also likely be interested given its stable operating cash flow.

MGM ($MGM): Land & Buildings Decides To Go Big

Added on by Gordon Gekko .
Jon Litt, L&B Founder

Jon Litt, L&B Founder

  • L&B is taking on one of the best-known casino operators, despite being relatively unknown itself.
  • L&B thinks in the base case there’s upside to $33 a share, and in the bull case, $55 a share.
  • It appears that MGM’s stock has been pressured of late due to Macau concerns, perhaps, justifiably.

Land & Buildings ("L&B") has been quietly waging battles in the real estate space for some time. Its specialty is REITs and real estate companies. During October of last year, we noted that L&B was working on unlocking value in Pennsylvania REIT ($PEI). It's the fund's second-largest holding.

It's now taking on the $10 billion market cap casino operator, MGM ($MGM). L&B has put together a 50-page presentation on MGM.

It's also nominated four directors for the 11-person board. Its four nominees include the former Hilton CFO - Matt Hart; former Equity Office CEO - Richard Kincaid; former PE firm and law firm partner - Marc Weisman; and L&B founder - Jonathan Litt.  Read the full piece here

Chopped & Screwed: Stadium Capital Proxy Battle Letter With Big 5 ($BGFV)

Added on by Gordon Gekko .
Stadium Capital founder, Alex Seaver

Stadium Capital founder, Alex Seaver

Stadium Capital delivered a letter to Big 5 Sporting Goods this week, the latest in a saga of letters. In it, the activist fund notes that it will be nominating 3 candidates for the board. Note that the fund owns 11% of the retailer and has been a shareholder since 2011 -- it also has a seat on the board. But the fund recently went active after the company formed a special committee to box out Stadium (its largest shareholder) when it comes to board decisions.

The chopped & screwed letter:  Stadium has been a significant stockholder of the Company for nearly a decade. Mr. DeMarco, a Managing Director of Stadium, joined the Board in October, 2011.

DeMarco’s work has helped create substantial value for stockholders. His short tenure on the Board encapsulates one of the few periods that the Company has generated acceptable stockholder returns. We have delivered formal notice of our nomination of two additional candidates for the Board.

Stadium’s candidates are independent of both Stadium and the Company. Existing directors have served for many years on the Board, despite both conflicts of interest and minimal stock ownership. Big 5’s current independent directors have an average tenure of greater than 9 years on the Board yet collectively own less than 1% of the Company’s stock.

The Company’s ISS “Quickscore” fell from 6 to 9 from 2013 to 2014 (with 1 indicating a lower risk and 10 being the highest risk). These changes need to be made: (i) repeal the classified board (ii) amend bylaws so directors are elected with a majority vote of outstanding shares (iii) eliminate provisions for “supermajority” votes.

Previous coverage:

Jan. 2, Stadium Capital’s Letter To Big 5 Sporting Goods ($BGFV)

Jan. 29, Big 5 Sporting Goods ($BGFV): Activist Investor Stadium Capital Is Fed Up

Feb. 8, Big Five Sporting Goods ($BGFV) Fires Back At Stadium Capital

Yahoo ($YHOO): Playing Wait-And-See

Added on by Gordon Gekko .
  • The Alibaba spinoff was warmly welcomed, but weakness at the Chinese ecommerce company is pressuring Yahoo’s stock.
  • The valuation is still compelling at YHOO but there’s a number of risks that need to be put into context.
  • All in all, it's a game of wait-and-see with Starboard as an underrated catalyst.

We've covered Yahoo ($YHOO) in the past, starting just under a year ago when we called Yahoo a turnaround. This all led up to our latest piece in January, where we decided to add some color to the Alibaba ($BABA) spinoff. The spinoff announcement was, in part, Marissa Mayer caving into shareholder (read: Starboard Value) pressure to unlock value.

In any case, since the start of 2015, shares of Yahoo are off 12%. The market took an initial liking to the Alibaba spinoff, but as Alibaba goes, so goes Yahoo. Alibaba has fallen on hard times, with the stock down 25% over the last three months - helping drag Yahoo down with it. Read the full piece here

Starboard Value has $YHOO as its 6th largest holding

Starboard Value has $YHOO as its 6th largest holding


American Realty Capital Properties ($ARCP): Playing Hardball With Corvex

Added on by Gordon Gekko .
  • Corvex has changed its tone on how to help ARCP.
  • But there’s also Twin Capital that’s putting pressure on the board.
  • The restatement of financials and new CEO didn’t lead to a hugejump in the stock and there’s limited catalysts going forward.

As we noted the other day, Corvex backed off of American Realty Capital Properties ($ARCP) in a filing that said it would concede being a part of the CEO search for a chance to have input after a new CEO was found.

Recall that in Corvex's February letter, the fund wanted the entire board wiped out with an installment of all independent directors, noting that all the members of the board were there when the accounting scandal took place. Corvex's Keith Meister also wanted a board seat.

Per a recent SEC filing, Crovex still wants a board seat. But he's now offering to help guide the new CEO, whereas he wanted a say in who the new CEO would be. But the REIT has already announced a new CEO.

Part of Meister's condition for being the new CEO's mentor was that he get put on the board before a new CEO was hired. But as mentioned, a new CEO was named just this week. So we're kind of in no man's land. Read the full piece here.

PREVIOUS $ARCP-CORVEX COVERAGE:

Jan. 14, Corvex Management Takes Activist Aim At American Realty Capital Properties ($ARCP)

Mar. 1, Corvex Still Banging It Out With American Realty ($ARCP), Latest Letter

Marc. 10, Activist Investor Backs Down At American Realty ($ARCP)

$ARCP is still one of Corvex's top 3 holdings

$ARCP is still one of Corvex's top 3 holdings


Comments On Nelson Peltz And DuPont ($DD), Featuring Jeff Ubben

Added on by Gordon Gekko .

Jeff Ubben runs the quiet and successful activist hedge fund ValueAct Capital. At a recent conference, ValueAct Capital’s founder, Jeff Ubben, noted that big companies are vulnerable to proxy battles, but unless investor discontent is high, the activist is unlikely to win -- alluding to Trian Partners fight with DuPont ($DD).

Ubben went as far as to say that DuPont shareholders aren’t at that level of content. As a defense against Trian, DuPont management has been touting its own success in managing the company over the last five years, calling its management style activist like.

As noted, DuPont is already planning to spin off a specialty chemicals unit. DuPont has said, “When you consider that over a three-year period we will soon have divested of our two largest legacy businesses representing over $11 billion in total sales, you’ll begin to understand the magnitude of change we’re driving.”

Recall that Peltz has recently tried to settle, offering to take two board seats at DuPont and two on the board of its upcoming chemical spinoff. DuPont rejected. The biggest risk for Trian right now is failing to find enough support for its proxy battle. And it appears that DuPont knows it has the upperhand.

Previous $DD and Peltz coverage: Jan. 14, Activist Investor Nelson Peltz Takes His DuPont ($DD) Battle To The Board Room

Notice $DD is Trian's largest holding

Notice $DD is Trian's largest holding

Chopped & Screwed: Kerrisdale Capital Letter To Webster Financial ($WBS)

Added on by Gordon Gekko .
Left, Sahm Adrangi, Kerrisdale founder

Left, Sahm Adrangi, Kerrisdale founder

Kerrisdale Capital, founded in 2009 and led by Sahm Adrangi, is a social media superstar in the hedge fund space that focuses on the short side. As we mentioned in our This Week In Activism installment, the small fund owns less than 2% of its latest target, the $3.3 billion regional bank, Webster Financial ($WBS). This, however, is a long position. In case you missed it, Kerrisdale sent a letter to Webster earlier this month. Here’s our chopped & screwed version of Kerrisdale’s letter:  

We greatly respect what you and your team have achieved building a regional bank and health savings account (HSA) provider. But the market has failed to recognize just how valuable the company is.

It has yet to appreciate the multi-billion-dollar value of the HSA Bank unit, especially now that it has acquired JPMorgan Chase's HSA business and partnered with Cigna.

We believe that Webster is now trading at an over $1 billion discount to its fair value [that’s over 20% undervalued]. We believe a spin-off is the most natural approach. HSA Bank is strong enough to stand on its own.

Several issues to investigate, first, should HSA Bank serve as a standalone depository or as a custodian of deposits that remain with Webster. Then, pursue a full spin-off at the outset or begin with an initial public offering of a minority stake. HSA Bank has achieved critical mass, the capital markets have embraced similar firms.

Nelson Peltz Fires Back At Mick And Marcato Over BNY Mellon ($BK)

Added on by Gordon Gekko .

This is an addendum to our recent Bank of New York Mellon ($BK) work...Marcato takes BNY Mellon to task, calls for CEO firing. Last Friday the other activist at BNY Mellon, Nelson Peltz and Trian Partners, came out and villainized (to some extent) Mick Mcguire and Marcato Capitals call to fire the CEO. 

Peltzs Trian has a board seat at BNY Mellon and has been working constructively with the company. Its unlike Peltz to push for management change regardless. But what he could be doing is setting himself up to push BNY Mellon to spit its custodial bank from its asset management business. That, we think, would have more upside than Marcatos CEO firing.

Its worth noting that Peltz has a history inbanks / asset managers,” having run campaigns at State Street, Lazard and Legg Mason.

Note that BNY Mellon was $23 trillion under custody, making it the largest custody bank, topping JPMorgan. Then it has a $1.5 trillion in AUM, making it one of the largest asset managers too. The idea is to dump the custody business, selling it to someone like State Street, while keeping the more profitable asset management business. This too would allow the company to streamline its overhead and technology infrastructure, something Mick was pushing for in his 150-page presentation last week.

While $BK is Marcato's largest holding, it's Trian's 4th largest

While $BK is Marcato's largest holding, it's Trian's 4th largest

Activist Starboard Value Planning Another Proxy At LSB Industries ($LXU)

Added on by Gordon Gekko .
  • Starboard had a proxy battle with LSB last year, getting two nominees elected.
  • But the company has continued to be a lackluster performer.
  • Starboard thinks more needs to be done and it is nominating 5 board members this time around.

Starboard Value sent a letter to LSB Industries ($LXU) yesterday, outlining five nominees for the chemical/climate company's board. Starboard owns 7.6% of LSB and has been involved for close to a year now.

Shares of LSB are already up 20% YTD and the stock trades at less than 10x forward earnings. Note that Starboard officially went active around Thanksgiving of last year, with shares up just 12% since then. What's more is that the stock is still below Starboard's $39/share cost basis.  Read the full piece here.

LXU is a small part of the Starboard portfolio however

LXU is a small part of the Starboard portfolio however


General Motors ($GM) Caves On Buyback, But No Real Surprise There

Added on by Gordon Gekko .
Harry Wilson

Harry Wilson

  • GM gave Wilson a $5bn buyback, not the $8bn he and his hedge fund backers wanted.
  • But most of the market already expected this.
  • Yet, the newfound transparency is a positive for shareholders of this cheap automaker.

The news is well-told by now that GM ($GM) has settled with Harry Wilson and his consortium of hedge fund backers. He got a $5bn buyback (expected to be completed by 2016-end), although he was pushing for a $8bn one. Even still, it's a big positive for GM shareholders.

Per this agreement announced on Monday, Wilson will withdraw its board nomination. As part of all this, GM put out a 20-page presentation. In it, the car company outlines its goals and the disciplined capital allocation plan it hopes to put in place.

All of that anchored by a 20% targeted return on invested capital for reinvesting in its business, versus its current 15% ROIC. The new company compensation plan put in place last year is also tied to ROIC.

Driving the ability to boost its ROIC will be various exits from markets and restructurings -- including an exit of Chevrolet Europe, exit of Australia and Indonesia manufacturing, restructuring of Thailand, and reviewing its Russian operations. Read the full piece here.

Marcato Capital Takes Bank Of New York Mellon ($BK) CEO To Task

Added on by Gordon Gekko .
  • Marcato Capital, which owns just 1.6% of BK, has put together a 150-page presentation with plans to double the bank's stock price.
  • However, notably absent is how (and if) the fund will work with fellow activist Trian Partners.
  • Right now, the bank is not attractive from a valuation perspective, and there's a lot that has to go right for Marcato.

Marcato Capital has taken its activist battle with Bank of New York Mellon ($BK) up a level. The activist fund has put up a website, abetterbankofnewyork.com, with a letter to Bank of New York Mellon and a 150-page presentation.

But the big headline grabber is that Marcato wants BNY Mellon CEO Gerald Hassell ousted. Mick McGuire, Marcato founder, cites the failure to hit earnings targets, among other things, as the reason that Hassell has to go.

The answer, beyond a CEO change, is a massive headcount reduction (of about 20%), growing assets under custody and getting a handle on other expenses like technology spending. Read the full piece here.

BNY Mellon is Marcato Capital's largest holding

BNY Mellon is Marcato Capital's largest holding


Starboard’s Recent Letter To Yahoo ($YHOO) Chopped & Screwed

Added on by Gordon Gekko .
Yahoo CEO, Marissa Mayer

Yahoo CEO, Marissa Mayer

Starboard Value’s recent letter to Marissa and Yahoo ($YHOO) is something like 4,300 words. It’s a long convoluted piece, something Jeff Smith can be good at. In any case, here’s what stood out to us via a chopped & screwed version.

Still tl;dr (still too long; don’t want to read).

  • The tax-free spin of Alibaba (BABA) is a positive per Starboard

  • Yahoo still trades at a discount to its SOTP due to a lack of faith in the company’s ability to turnaround its core search and display ad businesses

  • Starboard values Yahoo post-BABA spin at $22.3bn, 50% premium to current stock price of the stub

  • Value Yahoo’s core business at 5.5x EBITDA and believes it can get core EBITDA up from $580mm to $1bn with cost cuts -- which would get Yahoo back in line with profitability levels from a couple years ago

  • Even with major ($5bn worth) acquisitions over the last couple years, core revenues and EBITDA is falling

  • Yahoo! Japan needs to be spun off tax-free like Alibaba and it needs to license its IP portfolio and monetize real estate

Chopped & screwed letter.

Since Yahoo announced its intention to spin-off its stake in Alibaba, there has been substantial discussion and speculation in the investment community as to why Yahoo's stock continues to trade at such a deep discount to the sum-of-its-parts valuation.  

We strongly believe this discount has little to do with the probable success of the Alibaba spin-off and instead is directly related to substantial skepticism about management's and the Board's willingness to take aggressive action to improve the Core Search and Display Advertising Business and and unlock value from Yahoo's remaining non-core assets.

Yahoo's current share price implies that Yahoo pro forma for the Alibaba stake spin-off is currently valued at approximately $11.2 billion – a discount of 50% to our estimate of fair value.

Over the last two and a half years, since the current management team was hired, Yahoo has spent approximately $4.8 billion in acquisitions and product development costs. But Yahoo's consolidated revenue and Adjusted EBITDA excluding Yahoo! Japan revenues and other non-cash revenues ("EBITDA"), declined by 3% and 27% in 2014, respectively.

We believe Yahoo's Core Business should be highly profitable, but unfortunately it is currently saddled with an enormously bloated cost structure.  

We believe that the growth in Yahoo’s social, video and mobile platforms is a product of industry change and not indicative of the company’s turnaround success.

We believe Yahoo can cut $330 and up to $570 million of excess costs per year. This action would merely offset the $490 million increase in operating expense that occurred over the last two years, and bring the Core Business' profitability back to levels achieved prior to the current management team's hiring.

Then there’s licensing its IP portfolio and monetizing real estate assets. Worth $1.80 per share in excess capital.

When it comes to Yahoo! Japan, the potential value to be unlocked is $2.6bn or $2.70 a share in value. The best way to do that is a spin-off of the Yahoo! Japan. Something similar to the Alibaba spinoff, with a separately listed entity comprising the Yahoo! Japan stake

It doesn’t need to hold $5bn in cash. But it has a poor track record of acquisitions and cash flow reinvestment. Thus, return $3.5bn to $4.0bn of cash via buybacks.  

All in all, we believe that there’s up to $11.1bn or $11.70 a share in value to be unlocked with various financial engineerings. That would increase the value of Yahoo by nearly 30% and increase of the value of Yahoo post Alibaba-spin by 100%.

Commentary on all this to come soon.

 

Activist Investor Now In The Student Housing Business

Added on by Gordon Gekko .
  • The Clinton Group is taking on a REIT in the student housing business.
  • Recall that Clinton Group was involved with the now bankrupt WetSeal.
  • But this looks to a lower risk venture for Clinton and investors.

The Clinton Group is not a typical activist in that it runs a fairly diversified portfolio with some 500 stocks. It has been an underrated activist for years, but it's also been one of misfortune. Back in 2011 it got involved with Overland Storage, with shares around $12 when the fund got involved, but the stock traded at $6 two years later.

Then there's the most recent blunder. Clinton Group went active on WetSeal in 2012, with the stock around $3 a share at the time it disclosed its stake. Now, Wet Seal trades for 2 cents a share over the counter. It's hard to blame Clinton Group, but pushing the company to burn through cash with a buy back in a competitive and hostile apparel retail environment was a blunder in hindsight.

Its latest campaign is a foray into student housing. It's threatening a proxy battle at Campus Crest Communities (NYSE: CCG). Campus Crest owns just over 80 student housing properties. Read the full piece here.

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