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

Trian Partners Latest DuPont ($DD) Presentation: DuPont Rhetoric

Added on by Lee Ho Fook.

Trian Partners put out another short (13-slide) presentation re: DuPont ($DD) yesterday. This comes as the annual meeting is set for May 13 and ISS is expected to make its recommendation in a week or so. The latest presentation is basically a rebuttal piece, where Trian takes various statements that DuPont has made in the past and rebuts them, hence the title, DuPont Rhetoric vs. Reality.

Here are  the slides, Trian's Presentation from April 24. The two key slides from the deck: 


Trian's previous presentation on $DD here, Trian Partners 13D Investor Summit | DuPont ($DD) Presentation  

Orange Capital's Letter To Macerich ($MAC) Shareholders: Talk To $SPG

Added on by Lee Ho Fook.

Orange Capital put out a letter to Macerich ($MAC) shareholders yesterday. The activist and fellow activist Land & Buildings are pushing for the mall REIT to end its litigation with L&B and allow shareholders to vote for a new slate of directors for the upcoming annual meeting. 

As well, the activist duo wants Macerich to create a special committee to "explore strategic alternatives and maximize shareholder value, including engagement with Simon Property Group."

Quotes from the activists. Here are Orange Capital's thoughts: 

“We believe that Macerich continues its pattern of trampling on the rights of its shareholders. The Macerich Board appears to us to somehow believe that litigating on the validity of the L&B nominations, as opposed to allowing shareholders to exercise their rights as owners of the REIT, is in the best interests of shareholders. We are convinced that shareholders share our views on the Simon transaction and that there is an urgent need for change at Macerich.”

And L&B's thoughts:

“In our view, the decision to stagger the board and adopt a poison pill without a shareholder vote was a disturbing and seemingly desperate attempt to entrench management. Moreover, we believe there is absolutely no excuse to sue a shareholder in an effort to further disenfranchise investors at the upcoming at the annual meeting on May 28th 2015.”

West Face Capital's Activist Letter On Gran Tierra ($GTE)

Added on by Lee Ho Fook.
Jeff Scott, Chairing Gran Tierra 

Jeff Scott, Chairing Gran Tierra 

Earlier this week, Canadian hedge fund, West Face Capital, went active on Gran Tierra Energy (GTE). It owns 9.78% of the Canada-based $1bn market cap oil explorer. Below is the chopped and screwed version of West Face’s letter, emphasis ours.

We will nominate six candidates for the board at the June 24 meeting.  The new directors will have a mandate to replace the current Interim CEO with Gary Guidry.

Since the beginning of 2011, the current board has approved $1.7 billion in spending, with $860 million spent in Peru, Argentina and Brazil. There’s been no appreciable new discoveries or production growth from this spending. Thus,  its share price has gone from $8.18 to $3.38, a 59% loss in market value per share.

The board has been gambling on high-risk exploration using shareholders’ capital. Its Colombian assets still provide most of the production. The chairman has called these excursions outside of Colombia “elephant hunting”.

It has $482 million of “buying power” and attractive assets in Colombia and an ability to grow through targeted spending on new lands. With the right leadership, we believe that Gran Tierra could become a very valuable company.

First, Gran Tierra has excessive general and administrative (G&A) expense. Its G&A was $5.82 per BOE of production in 2014. By comparison, a subset of its peers had average G&A of $4.74 per BOE of production in 2014

Gary Guidry is the man that should be running Gran Tierra. He and his team have acquired 2.5 million Gran Tierra shares. Gary’s first order would be to stop spending in Peru and Brazil and focus on Colombia

Six director nominees include Bob Hodgins former Pengrowth Energy Trust CFO and TransCanada Pipelines CFO; Brooke Wade the President of Wade Capital; Pete Dey the Chair of Paradigm Capital; Ronald Royal having worked at Exxon; Dave Smith chair of Superior Plus; and Gary Guidry former CEO of Caracal Energy and the man we want running Gran Tierra.

This Week In Activism

Added on by Lee Ho Fook.

Sent this out over the weekend, just getting around to posting it. 

News

  • Barington Capital sent another letter to Eastern Co., where it was seeking getting two members elected to the board. Our initial Barington | Eastern Co. coverage.

  • Zoetis agreed with Pershing Square to put Paul Bisaro on the board. Coverage of Zoetis and Pershing back in Dec. here.

  • Lone Star Value Management sent a letter to Dakota Plains Holdings, urging the company to pursue strategic alternatives. Our thoughts on this are below. 

  • Cannell Capital calls for shareholders to cast a “withhold vote” for all company backed directors of TheStreet board.

  • Rosetta Stone put Nierenberg Investment Management founder David Nierenberg on its board after a three year long battle. Our initial Rosetta and two activist coverage.

New campaigns

  • Praesidium Investment Management goes active on Quanex Building Products, with a 7.2% stake.

  • Maguire Asset Management and a group of other shareholders went active on iPass with a 7.7% stake looking to get nominees on the board.

Ownership changes

  • Farallon Capital cut its stake in Hudson Pacific Properties by close to 60%. Now owning 4.1% of the company.

  • Chieftain Capital upped its stake in Tempur Sealy marginally, but also reiterated that it’s been having discussions with management to overhaul the board. The fund owns 5.8% of the mattress company. Our coverage of when H Partners went active.

  • Starboard Value upped its Integrated Silicon Solutions stake by 30% to 3.14mm shares. Now owning 9.9% of the company. Coverage of Starboard’s quiet campaign at Integrated Silicon.

  • Atlantic Investment Management dumped nearly 50% of its Oil States stake. The fund now owns just around 4% of the oil company. Our thoughts from when Atlantic went active.

Interesting activist reads around the web—

  • Breaking Up Qualcomm May Be Hard to Do, WSJ

  • Activist leads America's biggest iron miner out of Ring of Fire, but not danger, Fortune

  • Beware Betting Against Short Sellers, WSJ

  • MGM Resorts Urged to Pursue REIT by Land & Buildings’ Litt, Bloomberg

  • Director Ousted in Vail Resorts Board Dustup Speaks Out, MoneyBeat

Most read posts from stockpucker this week—

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

Have feedback, or questions about certain activist campaigns, email us at stockpucker@gmail.com. Or drop us a line if there’s a campaign you want us to cover. Until next weekstockpucker.

Queue The Merger Talk: Carlson Capital Active At Vitamin Shoppe ($VSI)

Added on by Lee Ho Fook.
Clint Carlson, Carlson Capital founder

Clint Carlson, Carlson Capital founder

Start the merger engines, featuring Vitamin Shoppe ($VSI) and GNC Holdings ($GNC)

Clint Carlson and his Carlson Capital went active on Vitamin Shoppe today, revealing a 5.34% stake. Meaning it upped its stake more than 150% from what it had at the end of 2014. The vitamin retailers stock is spiking 10% on the news. It’ll still be a small part (less than 0.7%) of Carlson’s $10 billion-plus fund.

However, it does say something that Carlson has been selective of late. In the fund’s old age, it’s averaging an activist campaign every year or so. Its last was Pennsylvania REI in May of last year. Before that, it was Boise in September of 2013.

There’s been plenty of machinations that GNC should buy Vitamin Shoppe. This could be part of that push. Previously, there was a handful of large shareholders calling for Vitamin Shoppe to consider a PE buyout or merger with GNC. There are benefits to that, including combining websites, lowering price promotions, merging back-end operations and closing a significant number of overlapping stores. Carlson was the final straw to get Boise sold to Packaging Corp in 2013, is he the final straw in the GNC-Vitamin Shoppe merger.

ISS backs H Partners in its quest to overhaul Tempur Sealy ($TPX)

Added on by Lee Ho Fook.

ISS came out in support of H Partners yesterday, recommending that shareholders oust 3 members of the board. The keys takeaways from the ISS report are below. Emphasis ours. 

  • “Given the failures of the CEO and the Chairman to address the numerous execution failures manifested over the past three years, as well as the evidence from the long tenures of the Chairman and the third targeted nominee…that their skills and experience are of questionable relevance to the company’s current needs, votes in line with the dissident recommendation AGAINST these incumbents appear warranted.”
  • Sarvary, who joined the board as CEO in 2008, clearly bears responsibility for poor execution not only since 2012, but over the years leading up to that pivotal earnings announcement when it became clear just how unprepared the company had become for the competitive challenges building around it.”
  • Neither McLane nor Masto have industry operating experience: both [are] from private equity firms which were once invested in Tempur-Pedic, and stayed on the board years after those firms exited their positions…they would seem to bear responsibility not only for tolerating the poor preparedness leading up to 2012, but for enabling the poor performance since then.”

Previous Tempur | H Partners coverage: Apr. 8, H Partners Publishes Website On Tempur ($TPX)

PICO Has An Activist Pushing To Break Up The Company

Added on by Lee Ho Fook.

River Road Asset Management runs a fairly diversified $7bn fund. It doesn’t have a history of activism. But it’s making an exception for PICO Holdings (PICO). The fund went active in Feb. and it’s only the third fund company that the fund has active on in its seven-year history. 

History of River Road Asset's 13D filings

History of River Road Asset's 13D filings

River Road owns 8.8% of PICO at a cost basis of around $19 a share. Per River Road’s letter to PICO urging the company to sell noncore assets and implement a buyback.

There appears to be a few ways to unlock some value at PICO:

This includes getting the company to monetize its NorthStar stake (est. to be worth $55M), do something with its agribusiness, as well as taking a closer look at its real estate business (called UCP and est. to be worth $180M). The ultimate goal is to potentially get the company bought out, but in the worst case return some capital to shareholders after monetizing those assets.

Its core business is water, which is a unique business as it creates net operating losses even while its business is growing. In any case, it has some $130M in NOLs to use up, which means the after-tax value of the company looks to be somewhere north of $500M.

The Nelson Peltz versus Jeff Sonnenfeld battle

Added on by Lee Ho Fook.

Over the past couple of weeks, the Yale School of Management professor, Jeff Sonnenfeld, has been taking Trian Partners (specifically, its founder Nelson Peltz) to task over the fund’s performance. Part of the story is that Sonnenfeld has been trying to defend DuPont ($DD) against Peltz, where the activist hedge fund has been waging a proxy battle in hopes of getting board seats and breaking the company up.

As part of that, Sonnenfeld has called into Trian and Peltz’s record of generating returns for investors, noting that Trian’s return in 2014 was just 8.8%, while the S&P 500 returned 13.7%. Peltz has responded by saying that Sonnenfeld can’t simply use short-term returns, but has to look at the long-term picture for an accurate portrayal.

Trian says:

We have generated a return of approximately 137% net of fees since inception, outpacing the S&P 500 by approximately 2,900 basis points. Shareholder returns for Trian portfolio companies on which Nelson Peltz served or serves on the board, from the day we invested until today, outperformed the S&P 500 by an average of almost 900 basis points annually.

Sonnenfeld says:

I am focused on the mediocre performance following Trian Fund Management’s board service than its investor success. Five out of 11 boards Trian has joined since Trian’s inception well underperformed the S&P 500 during the period of its service. Looking over the past three years, Trian’s cumulative returns at 54% are far below the S&P 500 at 74.6% and far lower than several leading activist funds.

It’s also interesting that Sonnenfeld has been defending DuPont against Trian for several months and just recently took to personal attacks on the fund. As we noted in one of last week’s daily activist emails, there’s a lot that Sonnenfeld isn’t tell us. Replicated below:

At our behest, the @joshkosman and the NY Post finally shine some light on Jeff Sonnenfeld’s “relationship” with DuPont CEO Ellen Kullman. Josh notes that being friends with Sonnenfeld has its benefits, a dig directly at his “closeness” with Kullman. Key takeaway, “…the professor [Sonnenfeld] backed DuPont CEO Ellen Kullman and bashed activist investor Nelson Peltz…Kullman received a Legend in Leadership award from Sonnenfeld in December 2013. None of the op-eds disclosed either the financial backing the companies supplied to the Sonnenfeld-led nonprofit or that CELI had honored their CEOs”

In any case, we’ve had a love-hate relationship with Trian for sometime. In doing a quick ad-hoc analysis of Trian’s official activist campaigns (where a 13D was filed), it’s pretty evident that Trian has been a mediocre performer.

Trian has filed seven 13Ds, with one big winner, being Dr. Pepper.

source: Activist Strategy

Now, we dug a bit deeper and looked at the performance from the 13D filing date until today. Granted, five of Trian’s targets have outperformed S&P 500 on an annualized return basis, but overall, all of Trian’s 13D targets returned an annualized 11.2%, compared with the S&P 500’s 10% return. You can draw your own conclusions.

 

Trian analy.png

David Nierenberg finally gets his board seat at Rosetta Stone ($RST)

Added on by Lee Ho Fook.
David Nierenberg

David Nierenberg

David Nierenberg and his Nierenberg Investment Management have been active at Rosetta Stone since June of last year. Since he’s going the board he’ll be going dark, with no communication to the public after officially joining the board, he’s decided to lay out everything he hopes to accomplish with Rosetta.

Recall that Nierenberg owns 7% of the company fellow activist John Lewis' Osmium Partners is also involved with a 10% stake.

Here’s Nierenberg’s quick thoughts on why he loves Rosetta so much:

  • Rosetta Stone is a valuable, globally recognized brand name and the company has a substantial customer base.

  • The company has a solid balance sheet, with almost $3 of net cash per share as of December 31, 2014. Having 35% of the market cap in cash should be a solid margin of safety.

  • The company has a capable board of directors, especially as it has been enhanced by the recent additions of John Hass, Caroline Tsay, and Steven Yankovich. These additions help the board address the company’s future direction.

  • The company has a profitable, cash generating “serious learner” consumer language business.

  • The company has two institutional businesses which have the potential to become attractive growth vehicles. Of particular interest to me personally, as a community servant and philanthropist in education, from preschool children through college, is the tremendous promise which Lexia Learning has demonstrated in teaching elementary school students how to read. School spending is the largest spending by state governments and literacy is the gateway to economic mobility.

  • Because so much is spent for education, and because of education’s huge impact on individual mobility, corporate success, and national competitiveness, the private and public equity markets have a strong interest in education-related businesses, particularly those which deploy relevant mobile telecommunications and cloud technology to deliver software as a service (SAAS). This week, for example, LinkedIn announced that it would acquire learning company Lynda.com for ten times revenue. While Rosetta is still evolving, it is notable that the company generated more than 60% of its revenues DIGITALLY in the most recent quarter – yet the stock trades at a disappointing enterprise value to sales multiple of only 0.4x at a time when successful public SAAS companies are valued at 24x or higher.

  • For all of these reasons, we believe that Rosetta Stone presents an opportunity for investors to multiply the value of their stakes in the company over time. It is too early for me to know – not being inside yet – exactly what actions could increase value, whether, for example, it could happen with Rosetta remaining an independent company, or whether parts of it might be separated and sold. To us right now, no option can be off the table. I have a fiduciary obligation to do what is best for the shareholders.

Here is what I hope to accomplish, as one member of a nine person board:

  • As we have emphasized in our prior 13D’s, we believe that success hinges on having a corporate focus which is RIGHT and TIGHT. We believe that Rosetta has been doing far too much. We believe that inadequate focus caused poor allocation of financial and human capital and that it also caused inconsistent, often poor, execution. Rosetta recently began sharpening its focus, and we applaud those positive steps. We want to help accelerate and complete that process, so that Rosetta will become a simpler company, doing less, but executing better, allocating resources shrewdly and building value, rather than destroying it.

  • The board must find and engage the right permanent CEO to lead the execution of the company’s new strategy successfully. Articulating the strategy and hiring the CEO to execute it are the two most important decisions a board makes. We must make them right.

  • The board “sets the tone at the top.” I am certain that Rosetta colleagues are troubled that they do not know where the company is going or what their role in it may be. We have a duty to treat Rosetta colleagues the right way: to be truthful and compassionate, to listen, to encourage dialogue and feedback, to treat people with dignity. When spending and cost reduction are required, the board should demonstrate its commitment to intelligently reducing all governance-related costs and spending within its control. We are all in this together.

  • We believe that substantial spending and cost reduction is necessary. The sooner this is completed the less uncertainty and anxiety will linger. Spending and cost are too high for two reasons. First, because the company’s strategy was much too diffuse, it spent too much on too many things in too many places. Second, because Rosetta was very successful until about five years ago, and because it aspired to grow much larger, we believe that it created a cost structure and a spending culture of a much larger company, one which is no longer realistic. We don’t care how large the company is. What we care about instead, is how profitable it is, how much cash it generates, how rapidly it grows, how intelligently it allocates capital, and how it builds human capital. If first Rosetta needs to get smaller, in order to then get bigger and better, that’s perfectly fine.

  • As a large shareholder with skin in the game we want to heighten the sense of urgency about doing these things right and doing them quickly. The faster we move RIGHT and TIGHT, grounded on analytical INSIGHT, the happier our stakeholders will be.


Previous coverage: Jan., Rosetta Stone ($RST): Two Activist Investors And A Language Learning Disaster

Is SanDisk ($SNDK) an activist target?

Added on by Lee Ho Fook.
SanDisk founder, Eli Harari

SanDisk founder, Eli Harari

Last week, Sanford Bernstein called SanDisk an activist target. This comes after the stock is down nearly 40% over the last quarter. The key is that the company is facing pricing pressures and struggling with sales of enterprise products. SanDisk is a leader in NAND flash memory and it has Toshiba as one of its major partners. Ultimately, it’s one of the only vertically integrated players in the memory space.

Bernstein's biggest focus is that SanDisk is trading at a deep discount to what it considers fair value. Bernstein has a $100 a share replacement value on the company, citing the cash balance, IP portfolio and undervaluing as reasons that it’s an activist target. .

Or, there's the buyout potential for SanDisk, with Western Digital being the rumored name. And there’s also Seagate, Micron and SK Hynix that could step up.

Here’s the key issue though -- the entire memory space is relatively cheap, so the fact that SanDisk is “cheap” isn’t a viable reason for an activist to get involved. Now, that’s not to say further industry consolidation won’t happen, it will, in part because it has to.

Western Digital appears to hold a lot of the power right now, so that company makes more sense as the primary target for an activist. Being a hard drive player, they’d also attract less scrutiny by buying up a memory flash player. Western Digital is the likely activist target and SanDisk or Micron will be the M&A bait. You can read the full piece here.

Voting Results of the Biglari Holdings ($BH) Annual Meeting

Added on by Lee Ho Fook.

The results of the Biglari Holdings ($BH) annual meeting from last week was released a couple days ago. Presented, with just a few comments, below.

It really wasn't as close as some of the media would have you believe. Mario Gabelli sided with Groveland Capital as it said it would, but the small fund couldn't get enough of the big institutions to either vote for its candidates or abstain from voting for the incumbents. The lowest  for vote on Biglari's side was Ruth, with 839k, but Groveland's highest for vote was James Stryker with just 567k. Final note on how the Groveland Capital managers did - Nick Swensen got 478k for and 119k withheld votes, but BH shareholders didn't like Seth Barkett, who got 250k for and 319k withheld votes. 

Winning directors. Number of for votes and number of withheld votes:

— Sardar Biglari, chairman and CEO: 1.0 million vs. 199,372.  He really killed it, wasn't close here. 

— Philip Cooley, vice chairman and retired business professor at Trinity University: 884,102 vs. 327,214.

— Kenneth Cooper, attorney: 836,560 vs. 351,386.

— William Johnson, president of business consulting firm: 981,382 vs. 206,564.

— James Mastrian, former chief operating officer of Rite Aid Corp.: 836,973 vs. 350,973.

--Ruth Person, former administrator in higher education and current professor of management at the University of Michigan-Flint: 836,812 vs. 351,134.  She got the fewest for votes of the incumbents, but this was still well more than Groveland's highest for votes, James Stryker got 567,408.  

Defeated nominees. Number of for votes and number of withheld votes:

— James Stryker, former chief financial officer of Perkins & Marie Callender’s Inc. and other chains: 567,408 vs. 2,039.

— Stephen Lombardo III, attorney: 562,284 vs. 7,163.

— Nick Swenson, CEO of Groveland Capital: 472,583 vs. 119,964.

— Ryan Buckley, director of investment bank Livingstone Partners LLC: 250,629 vs. 318,818.

— Seth Barkett, portfolio manager at Groveland Capital: 250,422 vs. 319,025.

--Thomas Lujan, principal of the law firm Lujan Legal Counsel LLC: 244,162 vs. 325,285. 

iPass ($IPAS) Shareholders For Change Is Now Active

Added on by Lee Ho Fook.
Brent Morrison, Zuma Capital CEO

Brent Morrison, Zuma Capital CEO

A collective of activist investors have teamed up to take on iPass ($IPAS), the sub $100 million market cap Wi-Fi roaming company. The group is calling themselves the iPass Shareholders for Change, owning 7.7% collectively, and nominating five members for the board. Of them, is Hedge Fund Solutions' Damien Park, CEO of Ethos Management Ken Traub and MD of Zuma Capital Brent Morrison. 

These guys believe that the gross underperformance of the company (where it's off 90% since its 2003 IPO) is the direct result of the incompetence of the board. Here's the key takeaways (chopped and screwed version) of the letter released today: 

There's been multiple (failed) attempts to sell the company over the last seven years. During that time, the company has changed its business plan many times, leading to large a cash burn and losses.   

But there's hope, as iPass is the world’s largest commercial WiFi network, having some 18 million access points in 120 countries. It's an underappreciated business, it's just lacking investor confidence, which an overhauled board could provide. 

Lone Star Value Gets Backdoored By Dakota Plains ($DAKP)

Added on by Lee Ho Fook.

Per a SEC filing filed earlier today, Lone Star Value Management has upped its stake by a couple hundred thousand shares, now owning just under 8% of Dakota Plains Holdings. This small activist fund has been waging a lot of under the radar battles since bursting on the activist scene in 2013. Dakota Plains is one of its latest. On a pro forma basis, the oil and gas company is its four largest holding. But these boys from Connecticut with an affinity for Texas companies are down 30% on their Dakota Plains shares since going active last year.

Basically, Dakota Plains grin fucked Jeff Eberwein and his Lone Star Value fund. The oil and gas company agreed to board changes and to review strategic alternatives for selling itself to an MLP. Instead, the company has hired “activist defense specialists,” and rather than sell the company, they plan on embarking on an acquisition spree.

Here’s our look at the letter. A chopped and screwed (if you will) version:

In December we called for the board to initiate a sale of the company to the highest bidder, most likely to an MLP.  We believe a sale of the company to the highest bidder would fetch $3.50 a share, representing at least an 80% premium to the current stock price and would be a far superior outcome to any acquisition Dakota Plains could feasibly make. The company should close the valuation gap by selling itself to its natural owner -- an MLP.

We were bait and switched by the company when it added new directors with relevant expertise.

The board met our demands of forming of a strategy committee and retained SunTrust to assist with this process. But things have gone cold since then. The changes were made in reaction to our involvement, with no intent to follow through on boosting shareholder value.

Here are some examples of the board’s underhandedness:

Jeff Eberwein, Lone Star Value founder

Jeff Eberwein, Lone Star Value founder

  • CEO McKenzie now wants to be paid a change in control payment of approximately $3 million (not immaterial for a $100mm market cap company)

  • While purporting to support good corporate governance, the board went behind our back and retained “activist defense” specialist advisors.  

  • Instead of adding independent experts to the board, McKenzie added his own hand-picked candidates and an old business connection. Kroloff is a longtime friend of CEO McKenzie. They served together at BP Amoco and Toreador Resources. The Kroloff-McKenzie era at Toreador was not a good one for shareholders. Toreador’s stock price declined more than 60% while Kroloff was on the board.

  • In March, the board prematurely released its Annual Report prior to its auditor, BDO, signing off on the report. As a result, BDO has said it will step down as the company’s auditor.

--

Jeff Eberwein

Lone Star founder

And former portfolio manager at Soros and Viking Global

Trian Partners 13D Investor Summit | DuPont ($DD) Presentation

Added on by Lee Ho Fook.

Nelson Peltz was kind enough to post his presentation on DuPont ($DD) online. He gave this presentation at yesterday's 13D Active-Passive Investor Summit. The full presentation is linked here: Trian Partners 13D Monitor Presentation | April 13.

It's a short 12-slide presentation. Here's the takeaway. 

Our latest DuPont | Trian coverage: Mar. 27, Comments On Nelson Peltz And DuPont ($DD), Featuring Jeff Ubben

This Week In Activism Apr. 13

Added on by Lee Ho Fook.

Programming note, i.e. shameless plugs and advertising—We’re still rolling out a product for institutional investors. The idea is to use activist targeted stocks to help generate actionable ideas.

It’s a pretty comprehensive product that includes real time alerts, deep dives into activist targeted stocks, performance analytics of activist investors, etc. We’re still testing this out but offering a 30-day free trial for anyone willing to offer feedback, email us at stockpucker@gmail.com.

THIS WEEK IN ACTIVISM VOL. 11

News

>>  J2 Global only wants to by part of Carbonite, not the whole company. Specifically, its Endpoint security business. J2 had considered buying the whole thing, but no longer feels it fits with its core direction. J2 still owns just over 9% of Carbonite.

>>  Macellum Retail Fund is battling Christopher & Banks over the company’s board oversight issues. It sent a letter to the company pushing for a sale.

>>  Casey Capital has nominated 3 directors for the Essex Rental Corp board. Shares are are up 80% since the fund went active in Feb.

>>  Polar Securities has nominated five nominees for the Central GoldTrust board. The fund owns 5% of the company.

>>  GAMCO has nominated three directors for the Myers Industries board. It owns over 20% of the company.

>>  Bulldog Investors has nominated three directors for the LMP Real Estate Income Fund board.

>>  Blue Clay Capital has nominated two directors for the Select Comfort Corp board. Recent coverage of Select Comfort is here.

>>  Stewart Information Services has settled with Bulldog Investors, which owns 5% of the company, and agreed to appoint one of its directors and submit a shareholder proposal for doing away with its dual share class structure. Our previous coverage on Stewart is here.

New campaigns

**  Red Mountain has gone active on iRobot with a 5% stake. It’s goal is to get iRobot to sell off its security business and focus on the at-home robots it manufacturers.

** Lawrence Seidman has gone active on ASB Bancorp with a 5.9% stake. The company is working with management to unlock shareholder value.

** Maltese Capital has gone active on Hamilton Bancorp with a near 10% stake.

Ownership changes

++  Trian Fund has cut its stake in Legg Mason by selling 5%, now owning 10.9% of the company.

++  Anchorage Capital reduced its Central Pacific Financial stake by roughly 40%, now owning 13.5%, after selling a large part of its shares back to the company.

Interesting activist reads around the web—

  • A kinder activist gets more done, MarketWatch

  • Activist investors attract the big bucks because they get shit done, ValueWalk

  • Moody’s says activist investors are dangerous to corporate credit ratings, Reuters

  • The idea of IBM generating interest from an activist is a joke, DealBook

Most read posts from stockpucker this week—

  • Broadfin Capital Continues To Tap The Small Cap Pharma Space. Broadfin Capital recently upped its stake in Derma Sciences by about 15% and changed its status from a passive investor to an active one. Broadfin first started investing in Derma toward the end of 2015.

  • Comments On Nelson Peltz And DuPont, Featuring Jeff Ubben. 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.

  • H Partners Publishes Website On Tempur-Pedic. H Partners Management went active on Tempur-Pedic back in Feb. The fund is trying to overthrow the CEO.  It's now published a website taking to task the company, www.fixtempursealy.com.

  • Marcato Capital Calls Out BNY Mellon Over Jobs. Marcato Capital put out another presentation on BNY Mellon earlier this week. This time it’s about how its employee base is "bloated," being much larger than other banks. Specifically, BNY has over 10,000 in excess employees (about 20% of its workforce). Earlier this year, Marcato called for the ousting of BNY Mellon’s CEO.

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

Have feedback, or questions about certain activist campaigns, email us at stockpucker@gmail.com. Or drop us a line if there’s a campaign you want us to cover.

Until next weekstockpucker.

Qualcomm ($QCOM) Now Makes Up 19% Of Jana Partners' Portfolio

Added on by Lee Ho Fook.

You’ve no doubt heard the news by now, Jana Partners has made a big bet on Qualcomm ($QCOM). Reportedly, owning over $2 billion in stock, which is still less 2% of the company. Assuming this is true, this is Jana’s biggest bets ever.  Qualcomm would make up some 19% of the fund’s portfolio.

Jana Partners pro forma portoflio

Jana Partners pro forma portoflio

The basic idea is to split the company up, forming two separate businesses -- a chip-making business and a patent licensing player. We saw similar calls for Broadcom to spin out its cellular parts business back in 2013 to no avail. However, no activist got involved there.

The other things Jana wants is a more aggressive share buyback and costs cuts. Recall that Qualcomm did announce a $15 billion buyback just last month. Jana and Qualcomm have been in talks since the beginning of the year. No doubt, Qualcomm has been a laggard (compared to the market), but it’s still holding its own versus other chip makers.

The thesis is a classic, break up the company up and they’ll get higher trading multiples. Even last month there was talk that the chip making segment was being valued at $0 because it was being overshadowed by Qualcomm’s IP business. The true value? Rumored to be $80 billion. Couple that with the expected value of its IP business, also rumored to be worth $80 million, and you have a $160 billion company trading at a $116 billion market cap...

Full disclosure: No position 

Select Comfort ($SCSS): The Latest Activist Target In The Mattress Industry

Added on by Lee Ho Fook.
  • Select Comfort now has an activist investor.

  • The thesis is to boost store growth by overhauling the board.

  • Nearly every company in the mattress industry has an activist target.

While H Partners has been going toe-to-toe with mattress maker, Tempur-Pedic (NYSE: TPX), its chief competitor now has its own activist. Blue Clay Capital is taking on Select Comfort Corp. (NASDAQ: SCSS). Hedge fund 40 North is also involved with the other mattress company, Mattress Firm (NASDAQ: MFRM).

We covered this stock way back in 2013, noting that Select Comfort was an interesting stock. Shares have been a bit volatile since then. At the time, we felt shares could eventually trade close to $60 a share. The stock is still trading below our justified EV/EBITDA multiple and has a return on invested capital of above 25%.

In any case, the entire mattress industry is under pressure. Blue Clay is waging a proxy battle at Select Comfort. The activist is looking to push for accelerated store expansion, which it hopes will make up for the company's lackluster performance.

Quick thesis: Blue Clay could be the catalyst to help bring the stock more in line with its growth. But it's also worth noting that another major Select Comfort investor is backing the company. Discipline Growth Investors believes that the company is executing well, with no need to change. We believe there is a need for change, but note Blue Clay as an uphill battle. Read the full piece here.

Assessing Corvex's Seal Of Approval At Signet Jewelers

Added on by Lee Ho Fook.
  • Corvex upped its SIG stake, but minimally.
  • The activist is now interested in shareholder returns via dividends/buybacks.
  • But we believe there’s more to the SIG story.

A couple of weeks ago, activist investor Keith Meister and his Corvex Management upped its Signet Jewelers ($SIG) stake to 7.2%. It was a less than a 5% increase in shares owned, but the bigger news is that the fund is supporting Signet's recent plans to buy back $100mm to $150mm in stock, while also upping its dividend. Shares of Signet are up 83% since Corvex went active on the name in Jan. 2014.

Signet grossly consolidated the industry last year with its buyout of Zale, bringing together the leaders in the U.S. jewelry business. Signet now owns the U.S. and U.K. markets, and gained a foothold in Canada (where it didn't have a presence before acquiring Zale).

Quick thesis: We think the easy money has been made here. Shares are up 75% since the announcement of the Zale buyout and 30% since the merger was approved. That's not to say there's not money to be made. Signet trades relatively in line with its major jewelry peers, Blue Nile and Tiffany, but earnings growth will be the real differentiator for Signet. The fact that Signet might grow earnings at a CAGR that's close to 20% over the next three to five years is being overlooked. While much of the story will be earnings growth from synergies, that could still be enough to catch the market sleeping. Read the full piece here.

Despite the 85% run since Corvex went active, it still has $SIG as its 2nd largest holding. 

Despite the 85% run since Corvex went active, it still has $SIG as its 2nd largest holding. 

Debunking Activist Targets Part II

Added on by Lee Ho Fook.

Here’s the link to the first part of our series, Debunking activist targets part one. In it, we started combing through the Highly Probable Activist Investing Targets piece.

Our take: “When you read such a title, you think, this is going to include some potential activist targets, right? But, in truth, that’s just not the case for many of the names on this list -- with most of the stories already being played out (read: easy money already made). It could be that they’re just a little behind in their analysis.”

In any case, we provided some more insight into the first six “activist targets” on this list. Now it’s time for 7 thru 12. Here’s the table:

7. Lamar ($LAMR)

Corvex Management is the key activist here (not officially active), but owns 6.6% of the company and has it as his 8th largest holding. Crovex likes the REIT space, but it’s tough to see what’s left to be done here as Lamar has already gone through the REIT conversion. Corvex’s focus of late has been the troubled REIT space, such as CommonWealth Equity and American Realty, Lamar doesn’t appear troubled, yet.

Corvex's pro forma portfolio - the fund is not active at $LAMR

Corvex's pro forma portfolio - the fund is not active at $LAMR

8. Avolon Holdings ($AVO)

There’s a couple activist that own a smart part of this company. Corvex Management owns around 1% and Carlson Capital is also an owner. The aircraft leasing business isn’t exactly Corvex’s model company, much less Carlson’s. The other thing making this an unlikely activist candidate is that it was just IPO’d in December, getting out of the grasp of its private equity owners. It’s also Ireland based. Granted, there were talks of the company being bought by a number of Asian aircraft companies before its IPO.

9. Baker Hughes ($BHI)

Baker Hughes already has ValueAct Capital as active here. The fund owns just over 5%, which is its 3rd largest holding. There’s not much to be done here on the activist front. It’s more just a wait and see as Haliburton and Baker jump through regulatory hoops in an effort to merge. As a side note -- we did highlight in our quarterly activist letter that Baker also had Atlantic Investment Management owning just around a percent of the company (but it is Atlantic’s 2nd largest holding).

ValueAct's pro forma portfolio -- the fund has been active in $BHI since Jan. 2015

ValueAct's pro forma portfolio -- the fund has been active in $BHI since Jan. 2015

Atlantic Investment's pro forma portfolio -- not active at $BHI

Atlantic Investment's pro forma portfolio -- not active at $BHI

10. Computer Sciences Corp ($CSC)

Again, Computer Sciences already has an activist investor, Jana Partners owns 5.9% of the company, although its just the fund’s 7th largest holding. We’ve covered Computer Sciences since the fund went active back in March, but the stock is down 10% since Jana got involved. Recall that Jana is pushing for a buyout of Computer Sciences. A play Jana and Barry R. just played at PetSmart.

Jana's pro forma portfolio -- the fund has been active in $CSC since Feb. 2015

Jana's pro forma portfolio -- the fund has been active in $CSC since Feb. 2015

11. Crown Castle ($CCI)

Another REIT play. Corvex, again, is the name involved here, owning 1% of the company (and its the fund’s 9th largest holding). SPO Advisory also owns small stake. Corvex did try and get a little forceful with Crown Castle back in October, putting together a presentation on the REIT’s capital allocation at the site, CorvexCCIpresentation.com, but the site has since been taken down. The biggest changes that Crovex was pushing for has already been implemented, as we’ve covered the company in the past; most notably here, Corvex calls out CCI in Oct.

SPO Advisory pro forma portoflio -- it owns a small stake in $CCI 

SPO Advisory pro forma portoflio -- it owns a small stake in $CCI 

12. Golar LNG ($GLNG)

Jana Partners is the obvious choice as the Golar potential activist, owning 3.7% of the company, but it's still a small part of the activist portfolio. I will say, this is an interesting idea, however. The company has a somewhat convoluted structure, has been performing, and Jana has been focused on the energy space of late. But there's a but. Jana took a new stake in Gloar during 4Q14, but the fund has owned Gloar in the past, only to sell off its entire stake. The activist built up a 3.2mm share stake (more than what it owns today) toward the end of 1Q14, only to sell all its shares the next quarter. LNG is a bit trickier than oil plays (which is the sandbox here Jana has been playing in), look for Jana to dump its shares in a quarter or two -- this is more a directional commodity bet for them. I’ve also seen Jana’s name through around as going active at SunEdison. It’s 6% or so stake right now is passive, but many hope he’ll go active. He’d be a fool to take on Elon. 

Until I get around to 13 thru 18...

Vector Stake Fuels ClickSoftware ($CKSW) Buyout Rumors

Added on by Lee Ho Fook.
Alex Slusky, Vector Capital founder

Alex Slusky, Vector Capital founder

  • Vector went active on ClickSoftware in early March.
  • The fund owns about 5.8% of the company and has been known for its affinity for software companies.
  • And given CKSW’s lackluster performance, a buyout might be shareholders’ best bet.

Rumors have been circling for months that workforce management software company ClickSoftware ($CKSW) is an acquisition target. SAP ($SAP) or salesforce.com ($CRM) were thought to be the likely buyers, but the announcement of Vector Capital's 5.9% stake in CKSW raises the prospect of the company being taken private.

This would not be an unusual move for Vector, which completed a $400 million deal for struggling enterprise software provider Saba Software in February. CKSW's similarities to Saba in both size and industry make it a clear potential target for a private takeover by Vector.

Vector's involvement will undoubtedly be seen as a positive by investors after previous unconfirmed buyout rumors pegged the asking price at $300 million, a figure that many analysts thought to be too low.

Recall that Vector went active in early March, taking a 5.8% stake. Of note, shares are flat since Vector announced its active stake.  Read the full piece here.