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

Why Yum Brands ($YUM) Needs An Activist Investor

Added on by Gordon Gekko .
KFC China

KFC China

There’s a quiet debate going on over whether Yum Brands (NYSE: YUM) should spin off its domestic business (mainly Taco Bell and Pizza Hut) off its global business (mainly KFC China). Recall that Yum Brands is a spinoff  was spun off from PepsiCo (NYSE: PEP) way back in the late 90s.

Taco Bell is the U.S. profit driver for Yum, with KFC being the international powerhouse, and to some extent Pizza Hut. Taco Bell brings in 20% Yum Brands’ operating profit and now could be the time to separate it from the China business that’s seeing increased issues with growth and quality. The idea is that China has become a time suck for management.

One possible answer is a partial spinoff of its China operations, which would trade on the Chinese exchange. China is also a bit of a different market, where Yum owns a large part of its stores there. It could open franchising there, but with all the other problems it has, that’s likely not the solution. However, after spinning off the China business and having a dedicated management team focused on China, it could look to franchising there to spur growth.

Next up: Now that it’s apparent the best growth years are behind Qualcomm (NASDAQ: QCOM), it’s time of an activist investor to step in and push for more shareholder returns.

Gannett Co: Carl Icahn Books Another Win For #Corpgov

Added on by Gordon Gekko .
Carl Icahn

Carl Icahn

The news is well told that Gannett Co. (NYSE: GCO) will split itself into two companies later this year. Carl Icahn had threatened to wage a proxy fight in order to loosen the corporate governance laws of the soon to be two separate companies -- which would make it easier for each to be bought.  

Well, now Icahn has settled with Gannett, withdrawing its nominees for the board. In return, Gannett is giving Icahn a pro-shareholder corporate governance for the soon to spin off publishing company. 

So, the new company will give shareholders the ability to call a special meeting with 20% of the shareholder vote, do away with super majority voting and hold annual board elections. 

Previous Icahn and Gannett coverage: 

Activist Hedge Funds Actually Improving Company Performance

Added on by Gordon Gekko .
Carl Icahn (left) and Bill Ackman (right)

Carl Icahn (left) and Bill Ackman (right)

Activist hedge funds appear to be driving improvements, not only in stock prices, but fundamentals. As well as corporate governance. This from a recent paper by AIMA.

In their paper, “Unlocking Value: The Positive Role of Activist Hedge Funds”, they find (emphasis ours):

Among its findings:

  • Activist engagement by hedge funds is positively correlated to improvements in the share price and operating performance of targeted companies
  • Activist hedge funds seek higher standards of corporate governance from the companies in which they invest, which improves alignment of interest between management, shareholders and other stakeholders
  • Activist hedge funds leave a positive and lasting legacy, with a 25% improvement on average in the share price of targeted companies two years after an exit
  • Activist hedge funds are long-term shareholders, with an average holding period of about two years, compared to the equities market average of just three months
  • Contrary to popular belief, most engagement by activist hedge funds is collaborative and constructive
  • The activist hedge fund sector worldwide comprises around 165 firms and manages approximately $120 billion in assets – a six-fold increase in the last 10 years
  • The sector’s compound returns from 2012-2014 were over 50%

Jack Inglis, AIMA CEO, said: “An assessment of the value of activist hedge funds to the broader economy is long overdue. We regard activist hedge funds as the keys that are unlocking value in public and private enterprises, delivering gains to their investors, the companies in which they invest, and ultimately, the broader economy.

By taking significant but non-controlling stakes in companies, and holding those positions often for years at a time, activist hedge funds are supporting improvements in the performance of thousands of firms around the world. Struggling businesses are being turned around, well-run businesses improved, capital more efficiently allocated and the interests of managers, shareholders and other stakeholders better aligned.

What this means, more broadly, is that activist hedge funds are bringing improvements to the efficient allocation of capital and resources in the economy overall, which is one of the key benefits of capital markets financing as opposed to bank financing.

The full paper as well as a four-page summary are available on the AIMA website.

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

Added on by Gordon Gekko .
Corvex founder, Keith Meister

Corvex founder, Keith Meister

  • Corvex, which is an activist investor in ARCP, calls for an ousting of the entire board.
  • There appears to be several conflicts between the board and ARCP.
  • And Corvex is familiar with long battles at REITs.
  • Keith Meister doesn't appear to be in it for a short-term profit, rather he’s looking to get the accounting scandal in the rear view mirror to focus on bigger issues.

Per a SEC filing this week, Keith Meister and his Corvex Management hedge fund is back at it with American Realty Capital Partners (NASDAQ: ARCP). We covered ARCP back in January, noting that the easy money had been made from the overreaction. The key being that, "sure ARCP could go higher, but we think it'll be a melt-up and not the rocket back to $12 that some might be hoping for." There's also an overhang with trying to figure out what to do with Cole Capital.

In any case, Corvex has bought some more call options, now having a claim on 70.6 million shares, or 7.8% of ARCP. This is up from the 64.7 million shares last month. On a pro forma basis, ARCP is one of Corvex's top three positions. Read the full piece here.

Manitowoc $(MTW): Carl Icahn's Battle For #Corpgov Change At Spinoffs

Added on by Gordon Gekko .
Carl Icahn

Carl Icahn

  • Icahn effectively took over for another activist, Relational Investors, and got the Manitowoc spinoff done.
  • This week Icahn got another win with respect to corporate governance.
  • This could mean Icahn is trying to set the companies up to get bought out.
  • He’s trying to work a similar move with Gannett Co.

Earlier this month we discussed the proverbial win that Icahn notched with the announced split of Manitowoc ($MTW), but there's another win that shouldn't be overlooked. This week, Manitowoc and Icahn entered into an agreement where the activist investor will be given a board seat on both the crane and foodservice companies' boards.

But Icahn also got Manitowoc to agree to lax corporate governance laws for the foodservice spinoff. This includes no staggered board, the ability to call a special meeting by a major shareholder and no supermajority provisions. Read the full piece here.

Novatel ($MIFI) Hasn An Official Activist Investor

Added on by Gordon Gekko .
  • The hedge fund, Maguire Asset, announced an activist stake in January.
  • But The Street Sweeper put a hit piece out this week that’s pressuring the stock.
  • Even still, the stock is holding up better than I'd expected, despite robust competition and a questionable valuation.

Back in January, Maguire Asset Management went active on Novatel (NASDAQ: MIFI) and sent a letter to the board. Things have been volatile of late, to say the least, but Novatel shares are up 160% over the last six months.

Per its January SEC filing, Maguire owns 5.2% of the company - with roughly 1.75mm in outright shares and another 600k via options. Shares are still up 17% since its filing; this despite the fact The Street Sweeper put out a piece earlier this week that called Novatel a short.

The piece notes the vast competition in mobile hotspots, its cash burn and the potential for up to 4 million shares hitting the market next month are all reasons to sell the stock. Shares took an initial hit due to the iece, but are now up 10% from the lows of the week. Read the full piece here.

General Motors And The 'Activist' Talk

Added on by Gordon Gekko .
The Incomparable Harry Wilson

The Incomparable Harry Wilson

  • Harry Wilson has the backing of Kyle Bass and David Tepper and wants a board seat at GM and an $8bn buyback.
  • On the surface, GM appears to be flush with cash, but there are several reasons it won’t do the $8bn buyback.
  • Much of the market is expecting some sort of a buyback, which we think the company can handle.

We profiled General Motors (NYSE: GM) back in 2014, noting that it was just too cheap to ignore. Shares have been a lackluster performer since then, but the news of an activist investor has naturally rekindled our interest.

The news is well told: The leader of the auto task force that worked with the government to bailout GM, Harry Wilson, cornered GM CEO Mary Barra at an investor conference and told her he needs a board seat and the company needs to buy back $8bn worth of shares. Wilson has the backing of four major hedge funds. Collectively, these funds own 1.9% of GM. Wilson wants the $8 billion share buyback to be completed by the first anniversary of the 2015 annual meeting. Read the full piece here

Chieftain Capital Joins H Partners As An Activist At Tempur Sealy ($TPX)

Added on by Gordon Gekko .

Recall that H Partners went active at Tempur Sealy ($TPX) last week. It sent a letter calling for an ousting of the CEO and certain board members. H Partners has owned TPX for several years, being involved from back in the days when Tempur-Pedic bought Sealy to form the modern day TPX. But it's just now choosing to go active after several years of stock underperformance.  H Partners owns just under 10% of the company. It's also a highly concentrated fund, with 60% of its portfolio in Six Flags (#1 holding) and 25% in TPX (#2 holding).

Note that H Partners founder, Rehan Jaffer, worked with Dan Loeb's Third Point while at DLJ, and later was convinced to join Third Point. Later working at River Run Partners before founding H Partners.  

Well, now, fellow TPX shareholder Chieftain Capital has gone active, filing a 13D on Mon. and revealing it owned 5.8% of the company (or 3.52mm shares), which is actually a slight decrease from the 3.9mm that it owned at the end of 2014. In any case, Chieftain forwarded a letter to TPX supporting H Partners, here's the highlights (emphasis ours):

The current management team has consistently missed its quarterly, annual and long-term goals..They have made missteps in operations, product development and introductions, marketing, and the formulation of strategy...it is now clear to us that management has lost all credibility. It is time for a new CEO who can meet promises and realize the significant profit potential inherent in TPX's businesses.

Chieftain thus supports H Partners' call for an immediate change in the CEO and Board. We also support a role for H Partners on the Board. 

Previous coverage-

H Partners Takes Tempur Sealy ($TPX) To Task, Feb. 2014

LionEye Capital Adds 100k Shares To Its Famous Dave's ($DAVE) Stake

Added on by Gordon Gekko .

LionEye Capital now owns 11.2% of Famous Dave's ($DAVE), per a 13D/A filing on Monday. The fund added about 100k shares to its stake -- a 14% increase. Buying at prices between $30 and $32 a share. 

Recall that LionEye went active at DAVE last month. At the time we noted, "But unlike a lot of casual dining companies, DAVE has a reasonable balance sheet, double-digit return on invested capital, and some of the est expected earnings growth in the industry over the next half decade."

Previous coverage-

Famous Dave's: Just The Latest Restaurant To Attract An Activist Investor, Jan. 2015

H Partners Takes Tempur Sealy ($TPX) To Task

Added on by Gordon Gekko .

H Partners Management has finally decided to take a more definitive stance at Tempur Sealy ($TPX), going active earlier this week. Per a letter sent to the TPX board, H Partners calls for the ousting of TPX CEO, citing the missed earnings expectations as cause. It also wants an overhaul of the board. The fund owns 9.8% of the company (making it the largest shareholder) and it runs a very concentrated portfolio.

H Partners has been at it with TPX for several years with little success. It also won't be able to nominate any directors for the board this year -- after missing the nomination window. At 11x forward EV/EBITDA, TPX isn't cheap either. SCSS trades at 10x. TPX lowered its 2015 forecast earlier this month, due to a strong dollar. We think there's little H Partners can do to help in that respect. We'd play wait-and-see with TPX. Read the full piece here.


Eastern Co ($EML): Let The Proxy Fight Begin

Added on by Gordon Gekko .

Earlier today, Barington Capital filed a 13D/A that announced it was launching a proxy battle at Eastern Co. (NYSE: EML). The activist fund is nominating two directors for the 5-person board.

Recall that Barington has been battling Eastern Co. for a few months now. The company has an acquisition offer from Synalloy Corp., but Barington thinks the company has long-term value creation opportunities. It’s nominated James Mitarotonda and Michael McManus. James is the founder of Barington Capital and Michael is the CEO of Misonix. Here’s the full letter.

Previous coverage: 

Activist Barington Capital Takes Eastern Co. ($EML) To Task, Feb. 2015

Mario Gabelli Joins Barington Capital At Eastern Company ($EML), Feb. 2015

Synalloy ($SYNL) Makes Another Offer For Activist Targeted Eastern Co. ($EML), Feb. 2015

Chopped & Screwed: Marcato Capital’s Letter To Sotheby’s ($BID)

Added on by Gordon Gekko .

Last Friday, Mercato's Capital’s Mick Mcguire sent a letter to Sotheby’s (NYSE: BID), outlining the highlights of a $500mm buyback that it wanted done immediately.

Recall that both Third Point and Marcato Capital are activists at Sotheby’s. Per a 13D/A filing last week, Mick’s Marcato has also been upping its stake in Sotheby’s. 

The activist hedge fund went from owning 5mm shares to 6.57mm. It now owns 9.5% of the company, versus its previous 7.4% stake. Meanwhile, Third Point owns 9.6%.

Below is our chopped and screwed interpretation of Mick’s letter.

Basically, Mick isn’t a fan of the current corporate governance and wants Sotheby’s to return excess capital to shareholders. The company is currently looking for a new CEO and has suspended any capital returns for the time being.

There’s also the idea that analysts simply misvalue the company by applying P/E multiples to earnings estimates. The problem is that earnings valuation doesn’t take into account its cash balance, art inventory and excess equity in its loan portfolio, not to mention its real estate assets.

Mick lays out the roadmap to unlock $12+ a share of value. This includes the $500mm share buyback.

Marcato lays out the future: The fund puts together what the company should do to unlock this $12 a share in value, including getting the company to truly understand how much financial flexibility it has.

This includes a quick calculation on how much liquidity Sotheby’s actually needs: 1. $300mm in standby liquidity for worst-case scenario; 2. $100mm to fund deals in the case that it offers buyers payment terms; 3. $95mm working capital. That’s $495mm in needed liquidity.

Here’s how much liquidity Sotheby’s actually has: 1. $490mm in cash; 2. $190mm in FCF generated during 4Q14; 3. $300mm credit facility. That’s $980mm in actual liquidity.

Then it can create liquidity by doing this: 1. Mortgage its London real estate and appraise its assets used for collateral on its credit facility, unlocking $162.5mm; 2. borrow $112mm against its auction segment; 3. increase its SFS loan by $54mm; 4. re-appraise the NY real estate to unlock $41mm. That’s close to $370mm in potential liquidity.

So, Sotheby’s could have $1350mm in liquidity, versus it’s needed liquidity of just $495mm. That means there’s $850mm in excess capital that Sotheby’s could return to shareholders.

Consider the fact that Sotheby’s market cap is just $3.1bn. Now, will the company do all these things to unlock that liquidity, doubtful, but at least the pressure is on to unlock value for shareholders -- an 18 month battle that’s part of a longer-term story, making Sotheby’s a long-term holding for us. 

Marcato upped its stake by 30% last week -- now owing 9.5% of $BID

Marcato upped its stake by 30% last week -- now owing 9.5% of $BID

Thoughts On Sandell Asset's Brookdale Senior Living ($BKD) Stake

Added on by Gordon Gekko .

Brookdale Senior Living (NYSE: BKD) has Sandell Asset Management as a vocal activist now. Tom Sandell wants the company to spin off its real estate into a REIT. Sandell sent a letter to the board last week and also put together a white paper.

Sandell Asset Management is no stranger to spinoffs. But he's also working on a couple other spinoffs. One at TransCanada (NYSE: TRP), where he hopes to split the pipelines from the power generation businesses. And another at Bob Evans (NASDAQ: BOBE), which involves getting the real estate and packaged foods business separated from the restaurant segment.

Sandell didn't own any shares at the end of the third quarter, but now (on pro forma basis) Brookdale makes up around 7% of Sandell's portfolio. Read the full piece here.

$BKD is Sandell's 4th largest holding

$BKD is Sandell's 4th largest holding

Jana Partners Blows Out Of McDonald’s ($MCD), Crushing Hopes For Activism

Added on by Gordon Gekko .

Per the latest round of filings, Jana Partners no longer owns McDonald's (NYSE: MCD). As well, you also had Bill Gates and his Foundation dumping its $MCD stake. Jana owned a small stake of $MCD after revealing its 3Q holdings -- specifically, 840k shares and options for another 200k. Gates owned 10.9mm shares previously. It looks like the company is getting out in front of activist investors by replacing CEO Don Thompson.

Previous November coverage of Jana and $MCD:

"Operationally, McDonald's (NYSE: MCD) could use a lot of work, from simplifying its menu to giving local franchisees more control over tailoring service/menu/marketing to local markets. Then, of course, there's the real estate value thesis and forming a REIT. Conversely, MCD could get active on the acquisition front to help diversify its business and spur growth. But it's tough to see how any of these things are fixes for a company that's struggled with staying relevant in the current fast food market.

Overall, MCD doesn't fit the mold for our large-cap activist-targeted model portfolio. We see the likes of Walgreen, another Jana target, as providing more upside. In the restaurant space, we'd be very interested to see an activist jump in at Yum! Brands (NYSE:YUM). Howard Penny lays out a very compelling case here. We think it'd be easier to unlock value at YUM."

The Corporate Governance Argument At Spinoffs

Added on by Gordon Gekko .
Carl Icahn 

Carl Icahn 

This will be somewhat controversial, but a conversation needs to be started about whether newly spunoff companies truly deserve a chance on their own.

While it might be true that some companies thrive after being spunoff, there’s a decent argument about whether corporate governance rules should be changed for spinoffs. Right now, it’s fairly difficult to take on a newly spunoff company given staggered boards and bylaws that prevent large shareholder to call a special meeting.

However, many younger or newly spunoff companies could actually benefit from an activist intervention? Carl Icahn is at the forefront of trying to change the bylaws of newly spunoff companies. He got a win with Manitowoc (NYSE: MTW) agreeing to ease the restrictions when it comes to having an activist involved with a newly spunoff company. He’s pushing for the same at Gannett Co. (NYSE: GCI).

As we’ve noted before, corporate governance for spinoffs is ripe for change. Consider this: 55% of 2014 spinoffs stagger their director elections, making a board coup a yearslong effort and nearly two-thirds of 2014 spinoffs don’t give investors the right to call special meetings. The thesis here is whether spinoffs should have stronger corp governance to give them time to figure things out, or should they be subject to activists and takeovers like normal companies?

Fulfilling a company's material need for in-house re-evaluations, or a fresh perspective is not always welcomed, but usually very much needed.

We think the message is being conveyed wrong, when it comes to activists in spinoffs. As the old adage teaches, “it is not what you say but how you say it.”

Activist investing is spreading around the globe, including the recent reluctant participation of Japan. The country's historical and cultural tradition is not adapt to change. Now, however, Japanese companies are availing themselves of the "activist investing sword." Still, they emphasize that they do so "in the most polite way". Only Japanese fund managers could use those two expressions in the same context.

One is reminded of the adage about winning more with honey than vinegar. Or, a first carrot, then stick approach. Something that, perhaps, much of the media would like to see U.S. activists employ more. Regardless, activist investing is here to stay for now. If Japan is opening its mind to the idea of activists, why can't we get corporate governance at spinoffs right? 

So, in closing, one of the more notable trends to watch for in 2015 is activists taking on newly spunoff companies. With corporate governance laws being challenged, this could be another area of “low hanging fruit” for activist investors to pick.

Previous coverage: 

CDK Global ($CDK): Why This New Spinoff Has Two Activist Investors, Jan. 2015

Gannett ($GCI): Icahn, The Spin-Off Isn't Good Enough, Jan. 2015

Activist Investor Bill Ackman And The Defense Space

Added on by Gordon Gekko .
Bill Ackman of Pershing Square Capital 

Bill Ackman of Pershing Square Capital 

One of the poster boys of the activist investing movement has been Pershing Square Capital Management, founded by billionaire, Bill Ackman. At just 48 years old, he’s managing four hedge funds and over $18 billion. Across those four funds, he’s long nine stocks and short  two stock.

Per Marty Lipton, the legendary New York lawyer and defender of numerous hostile takeovers, corporate raids, he thinks Bill Ackman is an alpha-wolf who spots his prey and moves in for the kill. This was likely pointed toward Valeant Pharmaceuticals’ attempt to takeover Allergan, which is a client of Lipton's law firm. Ackman moved on Allergan, maker of Botox and several high-yield brand pharmaceuticals, for one thing, their bloated research division.

With this "Heads I Win, Tails You Lose", Pershing Square's stake in Allergan rose from $3.6 billion to $5.7 billion.

With more money than God to invest, everyone wants to know where Pershing will turn to next. Recall that last month, Ackman made a comment McDonald's (NYSE: MCD) could be run better. But Ackman has already taken a run at McDonald’s a decade ago. Rather, he’s had success in the pharma space, and already has a stake in Zoetis (NYSE: ZTS). We still think Zoetis is ripe for a takeover target.

Another interesting market that could be ripe for activist investing is the defense space.

Ralph Whitworth of Relational Investors

Ralph Whitworth of Relational Investors

Ralph Whitworth, who runs Relational Investors (although he’s winding his holdings down) is involved with Harris Corp (NYSE: HRS). Harris has a takeover bid for $4.75 billion to acquire  aerospace defense specialists, Exelis (NYSE: XLS).

Recall that Relational Investors took a 4% stake in ITT back in 2011, threatening a proxy war. The result was that ITT split its conglomerate division into three parts, Exelis, Xylem, and Vectrus. The takeover of Exelis has been dubbed a crowning moment in the activist plan coming full circle.

We’ll end with an interesting note about the defense space, where many companies have aerospace and defense divisions. General Dynamics (NYSE: GD) and Northrop Grumman (NYSE: NOC) come to mind.

Previous coverage-

What's Bill Ackman Up To At Zoetis ($ZTS), Dec. 2014

Ackman Makes Zoetis His New Plaything, Nov. 2014

Mangrove Partners Wants A Piece Of The Ocwen ($OCN) Action

Added on by Gordon Gekko .
Nate August, Mangrove founder

Nate August, Mangrove founder

Mangrove, which owns just 2.2% of the Ocwen (NYSE: OCN) affiliate, Home Loan Servicing Solutions (NASDAQ: HLSS), is making some noise. Recall that Home Loan Servicing was spunoff of Ocwen in 2012.

On Monday, the fund sent a letter to the Home Loan Servicing board. The fund wants Home Loan Servicing to end its agreement/relationship with Ocwen. It laid out plans to nominate directors.

Mangrove points out the October downgrade by Moody’s, which cited the reason being HLSS’ link to OCN as the primary reason. Mangrove thinks that by transferring the servicing rights away from OCN that there’s $8 a share to $13 a share of value to be unlocked. The key being, HLSS should insulate it from the risk at OCN. If you’ll remember, OCN has been heavily scrutinized of late, for better or worse. Regulation risk appears to be something many investors grossly underestimated at OCN.

Then, yesterday, Mangrove announced its slate of director nominees. This includes the Mangrove founder Nathan August. Its director nominees are here.

Also, note that Blue MountainCapital came out at the end of Jan. and said it was shorting OCN, claiming that it had defaulted on its bonds.

Recall that Kingstown Partners went active on OCN earlier this month. And it’s officially 13F season, where hedge funds reveal their portfolios as of the end of last quarter. Notable value investor had been a key owner of OCN shares, but he reduced his shares owned by 15% in 4Q 2014. However, Kyle Bass’ Hayman Capital took a new stake in the company -- which makes up 22.6% of its portfolio.

In other news, a couple bigger funds also took 5% plus stakes, including Highfields Capital and Capital Research. Of note, Capital Research sold its HLSS shares and took a stake in OCN during 4Q.

Previous coverage on Erbrey’s complexes-

Ocwen ($OCN): Finally Has An Activist Investor, Sort Of, Feb. 2015

Luxor Capital Is A Huge Altisource Asset Mgmt Bull, Nov. 2014

Shares off 25% of last 52-weeks, but still holding up better than $OCN, which is down 79%

Shares off 25% of last 52-weeks, but still holding up better than $OCN, which is down 79%

Mario Gabelli Joins Barington Capital At Eastern Company ($EML)

Added on by Gordon Gekko .
Mario Gabelli, GAMCO Investors CEO

Mario Gabelli, GAMCO Investors CEO

Synalloy has upped its bid to $21 a share. The company is now willing to pay in all cash, previously it would be cash and stock. Also, Mario Gabelli and GAMCO filed a 13D today - owns 5.9% of the company.

Barington Capital is no stranger to hedge fund activism. The activist hedge fund has been involved with multiple companies where many of its campaigns have flown under the radar.

The activist launched a new offensive at the end of 3Q 2014 with its sights set on Eastern Company (NASDAQ: EML). Its major goal is to push Eastern to target faster growing parts of the market or entertain getting bought out. This type of hard pushing is common place for Barington; they've been doing this for 15 years.

Well after three short months they came calling at Eastern Co. last week. The hedge fund sent a letter (per a SEC filing) calling management out for having self-serving interests and threatening a proxy fight. Note that Barington has a 5.2% stake in Eastern Co. and has had conversations with the company in the past (a total of six it seems) about generating shareholder value. Read the full piece here.

Previous coverage-

Synalloy ($SYNL) Makes Another Offer For Activist Targeted Eastern Co. ($EML)

EMC ($EMC): At A Truce With Activist Investor Elliott Management

Added on by Gordon Gekko .

Since October, Elliott has been pushing for a breakup of EMC (NYSE: EMC) and its Federation structure, which it believes "obscures enormous value at the company." In particular, the fund wants EMC to spin off VMware (NYSE: VMW) and consider acquisition offers for parts or all of its remaining business. EMC has stuck to its guns, noting that VMW is an integral part of its business. And there is somewhat of a basis for that,

Given how enterprise IT has increasingly moved away from discrete hardware and software components and toward more integrated systems, I fall on the side of EMC management. Were VMware independent, and were a company like Hewlett-Packard to acquire it, I think EMC would be much more vulnerable in the evolving cloud market as VMware facilitates EMC developing systems with built-in virtualization - Patience with EMC has yet to pay off

Elliott has agreed to back off for now, standing behind EMC's board nominees and cease agitating for change at the company until September. The fund was allowed input on the addition of two new directors to the board. Ultimately, Elliott is likely betting that these two directors will help sway the board to consider a breakup. EMC is a large part of Elliott's portfolio, making up 11% of its long equity portfolio - and putting it as its second-largest holding. Read the full piece here.

2015 Trend To Watch: Activist Versus Activist

Added on by Gordon Gekko .
Sardar Biglari, $BH CEO

Sardar Biglari, $BH CEO

The battle of activist investor versus activist investor battle isn’t necessarily what you’d expect. Activists do go head-to-head over what they believe will or will not unlock value at a company. Think of Hertz and the differing views that Carl Icahn and Jana Partners’ Barry Rosenstein had over who should become CEO. 

But, again, something completely different in activism is taking place. This includes an activist hedge fund taking on a publicly traded activist vehicle. There are only a few publicly traded activist vehicles out there, with the most notable ones being Biglari Holdings (NYSE: BH).

Now, the issues surrounding Biglari are well-circulated, which includes its compensation practices, but the big news is that a fellow activist — Groveland Capital — is calling the company out.

Groveland is looking to take over the entire Biglari board, which consists of six people. So, a proxy battle will be waged, with Groveland CEO Nick Swenson putting himself up for a board seat. The annual Biglari meeting is on April 9th. Groveland owns just under 1% of Biglari. 

What are the issues: Biglari owns Steak n’ Shake thanks to a well-fought proxy battle in 2008. It also has a large stake in Cracker Barrel. At Cracker Barrel, Biglari owns some 20% of the company but has lost proxy battles in each of the last three years. 

There's some controversy over how Biglari runs Steak n’ Shake. But the real issue lies in compensation and corporate governance issues of Biglari. And there’s a number of them, but Biglari CEO, Sardar Biglari, seems to be the biggest problem.

Firstly, Sardar’s power grip on Biglari Holdings needs to be broken. Sardar owns 2% of Biglari Holdings but has voting power that equates to nearly 20% of the shares — some of which are held by company affiliates. 

Second, Sardar pulled in $10.9mm in total compensation in 2014. Compare that to Apple CEO Tim Cook, who pulled down $9.2mm last year. It’s perplexing and Biglari’s stock was down 22% in 2014 while shares of Apple were up 37%. 

Groveland’s solution is to put Sardar’s compensation under the control of two truly independent directors. But there’s also a licensing deal with Sardar that was inked a couple years ago. In it, Sardar gets tens of millions of dollar if he’s ousted during a hostile takeover. Dealing with that will be a task. 

Warren Buffett

Warren Buffett

Bottom line: 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. 

To be successful in the proxy battle Groveland will have to get the support of Biglari’s largest investors, which includes the likes of Gamco, BlackRock and Vanguard. This should be an interesting battle, but one that’ll likely fly under the radar.