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

On The Staples ($SPLS) And Office Depot ($ODP) Merger Featuring Starboard Value

Added on by Gordon Gekko .

Shares of Staples ($SPLS) have surged 25 percent over the last month. It appears the idea of a Staples-Office Depot merger caught some off guard. No. 2 Office Depot ($ODP) and No. 3 OfficeMax married just last year - it could still be too soon for further consolidation. But the positives are there, where "industry consolidation" can generally mean "upside" for the remaining players. 

Yet, at 14.5x ev/free cash flow, Staples is expensive from a historical perspective. Its $1.20 in FCF per share has been in decline and at historical lows. Its sub 7 percent FCF yield is the lowest in three years. So things aren't all that rosy from a valuation perspective. With no certainty of a Office Depot deal, there's at a lot of risk in owning Staples given the long-term industry issues. However, I'd be remiss if I didn't admit the fact that there would be some near-term upside if the deal is approved - we're playing wait-and-see with both Staples and Office Depot for now.

READ THE FULL PIECE HERE

Sandell Asset Management And The TransCanada ($TRP) Split Up

Added on by Gordon Gekko .

Sandell wants TransCanada ($TRP) to spin off its power generation business, while also transferring its U.S. assets into an MLP. Sandell wants TransCanada to split off its nuclear, coal and other power generation businesses; granted, without those it would likely be afforded a higher multiple, where it would also be a more stable business and not as dependent on commodity prices.

The counter-argument to Sandell is that the pipeline projects are highly capital-intensive. Canadian pipeline companies are self-funding most of their large projects, and do not need equity funding. With that, its cash distribution payouts are subpar to American counterparts.

Sandell sees two key catalysts: one being the spin-off, two being MLP dropdowns. The spin-off seems the least likely of the two, but it also creates the least value. If TransCanada does show signs of utilizing its MLP more, it would seem to be a buying opportunity for investors. However, we would caution the move for investors with a long-term horizon, and question the suggested benefits to dropping down more assets to its MLP.

READ THE FULL PIECE HERE


Dan Loeb And The Amgen ($AMGN) Split (Or Not)

Added on by Gordon Gekko .

Dan Loeb's Third Point hedge fund is a small owner of Amgen ($AMGN), but it has big plans. He thinks the biotech company should split itself into two businesses. Part of the draw for Loeb is that Amgen is a "hidden value" play. What that means is that Amgen is a cheap stock that has superior revenue and earnings growth.

"Amgen has all the hallmarks of a hidden value situation, which is one of the fund's favorite investment themes. With respect to Amgen's pipeline, we believe the market underappreciates how disruptive some of its new products will be" (Third Point)

 Amgen could be an aggressive growth story despite the current valuation, where with its upcoming products, EPS growth could be the best amongst its pharma peers. However, it appears investors should still do some diligence given the fact that Amgen isn't all that cheap. And with the stock up nicely YTD, and a new shareholder return plan, it's likely that many shareholders (Loeb included) are happy for now.

READ THE FULL PIECE HERE

Web.com: Okumus Refuses To Stay Quiet

Added on by Gordon Gekko .

Okumus Fund Management is a small hedge fund in New York, with a focus on small-cap stocks. During 3Q, Okumus added Web.com (WWWW) to its portfolio. Web.com is an Internet service provider, with a focus on small businesses. Its key businesses include domain name registration, Website design, search engine optimization, social media and local sales leads.

Back to Okumus, Web.com makes up nearly a quarter of Okumus’ half billion dollar public equity portfolio. And last week, Okumus made a filing with the SEC to change its 13G filing to a 13D filing. Basically, meaning that Okumus is now an activist investor at Web.com. At the same time, it also upped its stake by 6.5% to 7.78 million shares. It now owns over 15% of Web.com, with a cost basis around $19.50.

Per the filing, Okumus thinks that Web.com is undervalued. That certainly seems reasonable, with the stock down 40% YTD and shares trading at 7.5x forward earnings.

Okumus isn’t generally considered an activist. Its only other activist campaign was with Vocus, which was bought a few months after Okumus got involved. It’ll be interesting to see what Web.com lays out for the company. It’s worth noting that Web.com implemented a $100 million buyback plan in November. But that doesn’t negate the fact that earning are still expected to come in below expectations for 2015 - versus growth expectations that were laid out earlier this year.

Atlantic Investment Management Takes Owens Illinois To Task

Added on by Gordon Gekko .

Alex Roepers has been running Atlantic Investment Management for over a quarter century, but he's quiet. He takes large stakes in small- and mid-cap companies and works behind the scenes, for the most part. 

But in a rare move, Atlantic Investment Management has publicly called for the firing of Owens Illinois ($OI) CEO Albert Stroucken. The $1.5B public equity portfolio of Atlantic Investment has a big bet on Owens Illinois. The stock is its largest holding and accounts for nearly a quarter of its assets. It first took a large stake in Owens Illinois during 3Q13 and steadily added during 2014. Its cost basis is around $26/share, with the majority of its gains being wiped out over the last couple months. 

Even still, the fund remains resilient. Atlantic Investment filed a 13D/A (link) this afternoon that showed the hedge fund had upped its stake by 8%; now owning 12.091M shares or 7.3% of Owens Illinois. The highlights of Atlantic Investment's plans include: 

  1. Forcing the CEO into early retirement
  2. Separate the CEO and Chairman roles
  3. Put in place an 8 cent a share quarterly dividend - which would be a 1.2% pro forma yield
  4. Use mark to market accounting for pension, which he thinks can boost EPS by 50 cents
  5. Put a $3.50 EPS target in place

 

FULL LETTER BELOW:

December 17, 2014

 

Mr. Peter S. Hellman, Lead Director

Owens-Illinois, Inc.

One Michael Owens Way

Perrysburg, Ohio 43551

Dear Peter:

As you know, Atlantic manages funds and other accounts that currently own over 12 million shares of Owens-Illinois (“OI”), or 7.3% of the Company. Clearly, we have a keen interest in ensuring that OI achieves sustainable growth in shareholder value. We hope the Board shares this interest.

You and the Board are the stewards of a phenomenal enterprise: as the largest producer of glass bottles in the world, owning 77 glass container plants in 21 countries with an estimated $13 billion replacement value, $7 billion in net sales, 22,500 employees worldwide, 1,900-plus worldwide patents, 49,000 customers in 86 countries, having monopoly or duopoly market positions in all key markets, providing the leading beer, beverage, wine and liquor companies in the world with the most preferred premium packaging, OI has sustainable competitive advantages, high barriers to entry and strong customers and end-markets. Effective management of these assets and attributes should translate into solid capital appreciation over time. Yet, it has not. OI stock has underperformed its peers and the equity market in the past 3-5 years and since Chairman, CEO and President Albert Stroucken assumed control of OI in late 2006.

We have engaged in constructive behind-the-scenes dialogue with you and your predecessor, Corbin McNeill Jr., for over two years. As you know, we have also had constructive interactions with Mr. Stroucken for the past five years.

While we acknowledge that you have taken action on some of our proposals, a number of them have been rejected. Most importantly, we are dismayed with the overall poor and reactive leadership style of Mr. Stroucken, which we believe is behind the repeated operational missteps, key employee departures, belated restructurings and an overall lack of effectiveness in running this company. Further, Mr. Stroucken leaves most of the messaging to investors to his CFO and is quick to assign blame to macro factors when earnings miss the target.

This year, OI’s shares are down 32%, again significantly underperforming its peers. Tragically, a large part of this underperformance is self-inflicted and unnecessary. Our patience with the lack of shareholder value creation under Mr. Stroucken’s leadership, and with the Board's failure to adequately address this issue, has run out. Hence, we are filing this letter with our amended 13-D in order to open up the dialogue with other OI stakeholders about the future direction and leadership of this great company.

The Board urgently needs to demonstrate that it is taking its fiduciary responsibility seriously, by taking control of the Company, ending the current management credibility crisis and putting OI firmly on a path towards sustainable long-term shareholder value creation. Here are the actions we urge the Board to take immediately:

1.Announce the early retirement and succession plan for the CEO. Commence an internal and external search for a new CEO.

2.Separate the roles of chairman and CEO. Either you or one of your co-directors should assume the chairman position.

3.Implement a modest dividend. OI can afford an $0.08/share quarterly dividend, which would provide a 1.3% yield to reward existing shareholders and attract income-focused investors who are unable to invest in non-dividend paying companies. This dividend would represent less than 20% of your annual free cash flow, per your public guidance.

4.Move to mark-to-market pension accounting. This would increase earnings per share by at least $0.50, as per your CFO’s December 11, 2014 investor presentation (page 11). Mark-to-market accounting is an increasingly standard practice among U.S. public companies.

5.Re-initiate a $3.50+ EPS target as soon as possible. We believe that with improved operational management, front-loading your $500 million share buyback, and a move to mark-to-market pension accounting, OI can achieve EPS of $3.50 by 2016. State this as your goal and present a credible road map to achieving this EPS goal.

Bold action is required now to put OI back on track to restored management credibility and towards achieving its EPS earnings power. I trust that you and the Board will do what is right and necessary to create shareholder value.

Sincerely,

/s/ Alex Roepers

Alex Roepers

President and CIO