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

An Ode To Kirk Kerkorian

Added on by Lee Ho Fook.

This started as a quick post on the impact Kirk Kerkorian has had on how I view activist investing, but has quickly turned into a couple thousand-word Ode of sorts. The full PDF version of the mini-ebook is available here.

Part I: The Making Of A Visionary

Kirk Kerkorian passed away on June 15, 2015.

The activist community lost an icon. But in reality, the entire investing industry should be mourning his passing.

When you hear the term corporate raider you think of a Carl Icahn or even Nelson Peltz from the 80s, and some of you true ballers know Victor Posner and Asher Edelman.

But Kirk was making deals when Carl Icahn was still in diapers. Icahn was four years old when Kirk had already dropped out of school and been working for half his life.

Kirk wasn’t well known by everyday investors. He liked it that way. He could walk into any of his casinos and hotels and never be noticed.

Former SVP of MGM, Peter Bart, recounted Kirk from the 90s, calling him an enigma. He wasn’t a showman like Steve Wynn, never naming a hotel-casino after himself.

Mainly, because he wasn’t fueled by the public spotlight like Warren Buffett or Carl Icahn, but rather, he was fueled by the art of the deal, win or lose. Lee Iacocca called Kirk a “...born gambler with a sixth sense for sniffing out value. Doing deals is what keeps him alive.” And it kept him alive for 98 years.

Born to immigrants, Armenian was Kirk’s first language. He isn’t “well educated” by Wall Street standards, never making it past the eighth grade. Kirk once said, “I wish I could talk like Donald Trump or Steve Wynn. Hell, I’d love it.”

Carl Icahn likes to talk about his roughneck childhood in Far Rockaway Queens and the stacked odds he had against him, quoted as saying, “My parents never thought I’d amount to much.” But any man that goes to Princeton University has been afforded some opportunities.

Ahorn Kerkorian, Kirk's father, was a fruit broker in LA, forced to move the family every few months because they couldn’t pay the rent. And while Icahn dropped out of New York University School of Medicine after three years, Kirk dropped out of Jacob Riis, the delinquent boys school, in eighth grade.

After dropping out of Jacob Riis, Kirk turned to boxing, ultimately becoming a Pacific amateur boxer. His nickname was Rifle Right Kerkorian and he ended his career with a 29-4 record. But it wasn't until after boxing and during the 1940s that Kirk really started his hustle.

Part II: The Hustle begins

During the 40s, Kirk really started his hustle. After he quit boxing, Kirk took an interest in flying. He cut a deal with a flight school owner where he’d get flying lessons in return for doing work on the owner’s farm. After six months of shoveling manure, Kirk had a commercial pilot’s license.

He tried his hand at being a flight instructor, but needed more of a thrill. He signed up with the Canadian Air Force to fly risky missions in World War II. The risky trips paid fairly well, but for good reason. The trips included flying Mosquito bombers from Canada to England, with only about one-in-four actually making the trip due to the long distance and treacherous weather. In just over two years, Kirk flew over 30 missions.

After the war, he used the money he saved up from the missions to move to Vegas and buy a single-engine plane, which he used to start a charter business. He did the mechanic work, sold the tickets and flew the plane. As his business grew he began buying up more transport planes to grow his LA to Vegas charter business.

This was his first real taste for the potential that gambling had in Vegas. With his charter business profits, Kirk started putting his money to work buying hotels in Vegas.

Kirk owned the Desert Inn and the Strip parcel, which he sold to the company that ultimately turned that property into the Caesar’s Palace in 1966. He built the International Hotel in 1969 [construction pictured above], which is now the LVH on Paradise Road. But it was when the 70s rolled around that Kirk started becoming more of a household name when he first took control of MGM from the Seagram’s family.

Part III: MGM

Kirk might be best known for his dealings with MGM. Kirk first took control of MGM in 1969 with a hostile takeover and has had a unique love affair with the company ever since.

To gain control of MGM, Kirk won a battle against MGM chairman Edgar Bronfman, whose family founded the Seagram empire. Edgar was the chair of MGM for less than a year and only had it because of the Seagram family owned shares of the studio. Kirk bought a 40% stake in MGM for $80 million from the Seagram family and second largest shareholder Time Inc. A staple in the Jewish community, Edgar passed away at 84 in 2013.

Now, Kirk is known for his prowess in Vegas, but when he got involved with MGM in 1969, MGM was a major player in Hollywood. With Kirk in control, he dismantled the MGM movie making business and sold off MGM Records. The real appeal was the MGM Culver City real estate - the location of the former MGM Studios [since bought by Sony Entertainment].

In 1973, he built the MGM Grand Hotel in Vegas, the largest hotel in the world at the time. In the early 1980s, a fire closed down the original MGM Grand.

In the early 80s, Kirk bought United Artists for its library and merged it with MGM, creating MGM/UA Entertainment. Then, in the mid-80s, he sold MGM/UA to Ted Turner for $1.5 billion, roughly $28 a share, while the stock was trading at $9 a share. Just months later, he bought it back from Ted at a huge discount.

Kirk then sold it again in 1990 for $1.2 billion to Giancarlo Parretti. Ultimately, Giancarlo fell on hard times [money wise] and had to sell it to the French bank Credit Lyonnais in 1992. Kirk stepped in and bought MGM/UA from Credit Lyonnais in 1996.

In the meantime, Kirk was still in control at MGM Resorts, building the MGM Grand in 1993 - the largest hotel in the world at the time. Kirk built the largest hotel in the world on three different occasions, once in 1969, once in 1973 and then in 1993.

In 2000, MGM bought Mirage Resorts from Steve Wynn. Few people realize it, but Kirk was the real king of Vegas. Then, in 2005, Kirk sold MGM/UA to a consortium of private equity firms and Sony Corp. for $5 billion.

He was still MGM Resorts’ majority shareholder until 2009 when he dropped his stake from 54% to 37%, and eventually whittled it down to the current 16.2%.

Per his will, Kirk’s holding company, Tracinda Corp. (named after his two daughters Tracy and Linda), will be selling its 16.2% stake in MGM. Kirk’s legacy doesn’t end there, however.

Part IV: Fade to black

Kirk approached dealmaking with a chip on his shoulder.

He was a truly an unwanted child. His mother, Lily Kerkorian, was told to take scalding baths to induce an abortion. She did it. It didn’t work.

Kirk was resilient, even before birth.

Nine days after his 98th birthday, death finally caught up to Kirk. But not before this true corporate raider put his mark on the investing industry.

His father, a fruit broker in LA, moved the family around every few months because they couldn’t afford rent. This appears to have helped teach Kirk an important lesson in life, applicable to investing as well, don’t get attached. Anything and everything can be taken away.

But Kirk wasn’t perfect. He once invested $50,000 in a Vegas hotel during his early days, but ultimately lost it all. However, another lesson he learned from his dad’s failures that softened the blow of losing $50,000 was, don't bet everything you have on one roll of the dice, because if you fail you won't have anything left to bet next time.

Kirk had the ultimate sixth sense: The ability to see around corners.

Many overlook Kirk’s foray into autos, where he teamed up with Lee Iacocca in the 90s to make a hostile bid for Chrysler [Iacocca was the former Chrysler CEO]. Kirk’s advisor, Michael Tennenbaum of Bear Stearns, was dumbfounded when Kirk wanted to invest in the auto space in the early 90s.

At the time, Chrysler was the number three automaker, with a hefty dead load. Tennenbaum recommended having Bear Stearns have a closer look at Chrysler for him. Kirk refused and Tennenbaum complained to then Bear Stearns’ chairman, Alan Greenberg. Greenberg told Tennenbaum, “Don’t tell Babe Ruth how to hold his bat.” Over the next couple years, shares of Chrysler more than tripled.

Kirk is often compared to Howard Hughes, who also flew planes, owned a Hollywood studio, an airline and Vegas casinos. Kirk and Howard actually met. Yet, Kirk remained humbled by Howard, noting that "this guy broke real speed records. He designed airplanes. He was a great engineer. He did huge things."

Kirk is a big reason I do what I do. He was a true trailblazer. A true corporate raider and visionary, very much unlike some of the mickey mouse stuff we see from today's activist investors.

Kirk Kerkorian. The self-made billionaire. The Armenian. The enigma. The reason.

Twitter As An Activist Investor Target

Added on by Lee Ho Fook.

Nothing better to do on a Monday than to mull over Twitter as an activist target.

Twitter has been battling Wall Street over monetization since it came public. With activist investing being a hot topic, it’s natural that everyday investors would start yearning for an activist investor to get involved and drive the stock price higher.

But for what? There’s no clear catalyst or path to unlocking value at Twitter. Excluding a forced buyout of course. The likes of Google, Apple, Facebook, Yahoo and Microsoft all being named as potential suitors.

Carl Icahn is the activist mentioned the most, yet, Dan Loeb’s Third Point would likely be a better fit, seeing as he’s had some experience in the space - taking on Yahoo a few years back.

Twitter is also in no man’s land without a clear leader, which only further excites investors pushing for an activist intervention.

Again, with the sale being the only clear catalyst, or the potential push to help with the search for a new CEO, there really is only one kingmaker for Twitter, and that’s Google. Google has a big hole that needs to be filled - social. Mobile and other players are eating into its core business - search - but social search could be the next level for Google.

Still - it’s a fool’s errand, as there is easier to money to be made in activist investing. Twitter has no clear path to income and recharging user growth. The true gain for an activist to get involved with Twitter would be publicity. As this point, though, activist investing is front and center and there’s easier ways to get attention without relying on a pipedream that would include a Twitter buyout.

Full disclosure: Long Twitter, but for the right reasons

This Week In Activism Vol. 19

Added on by Lee Ho Fook.

The weekly email has turned more into a bi-weekly piece. We’ve been busy, so excuse the delay.

This Week In Activism Vol. 19

News

  • Maguire Asset upped its stake in Novatel, now owning 6.7%.

  • Draper Associates continues to reduce its stake in Solar City, taking its stake below 8%.

  • Relational has reduced its stake in Magnum Hunter Resources to 10.5%, from the 16% it owned when it went active about a year ago.

  • Train Partners begins the planned sale of its Wendy’s stake, now owning 21.95% - down from 24.6%.

  • Franklin Resources ups its Axiall stake to 7.4%.

  • ValueAct boosts its stake in activist target Agrium to 6.8%.

New campaigns

  • Roumell Asset Management joins a gaggle of other activists involved in Rosetta stone, owning 5.5% (Nirenberg's thoughts on $RST)

  • Wexford Capital joins LionEye Capital and a couple other activists in Famous Dave’s. Wexford owns 19%.

  • Blue Harbour is now active at AGCO after upping its stake. It owns 5.3% of the ag company.

  • Jana Partners has targeted ConAgra, with a 7.4% stake. It is prepared for a proxy battle. The biggest issue that Jana has is the poor execution following the Ralcorp purchase in 2013 - note that other activist fund Corvex Management was a big reason ConAgra did the Ralcorp buyout.

Most read posts from stockpucker this week—

In case you missed our last activist update, here it is from the other week.

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. Full disclosure: We don’t own any of the stocks mentioned.

Until next weekstockpucker

This Week In Activism Vol. 18: All things end badly

Added on by Lee Ho Fook.

Things are increasingly busy on our end, which means less time for small talk and weekly emails. Real quick, we’ll try to catch you up on the major happenings over the last couple weeks. And since we hit the 30-day window in terms of 13-Fs, we’re now offering the activist newsletters as a one-time purchase, no subscription necessary, but prices are higher. Email us for that or subscribe here and save 25%.

This Week In Activism Vol. 18

News

  • Marcato Capital got a win at Sotheby’s by getting permission to review the redacted parts of the 2014 settlement between Third Point and Sotheby’s

  • Sabra Capital and Ronald Chez have teamed up to take on Cinedigm, penning a handful of letters. Sabra has been wrong on its Cinedigm, losing out big so far.

  • Wynnefield thinks that MusclePharm has more liquidity issues than it’s letting on.

  • Marathon Partners got two members on the Shutterfly board.

  • RDG Capital convinced TravelCenters to do a sale-leaseback.

  • GAMCO got three directors on the Pep Boys board as part of a settlement.

New campaigns

  • Elliott Associates is back at it in the tech/IT/software/cloud space, calling for a split of Citrix and noting there’s massive upside of 40%+ to $100 a share.

  • Vertex Capital has filed a couple new campaigns, one of which is Maxwell Tech with a 5.1% stake and the other is at Numerex.

  • Bulldog Investors is active at Full Circle.

  • Glenview Capital is now active Manitowoc with a 7.1% stake, joining Carl Icahn.

Most read posts from stockpucker this week—

In case you missed our last activist update, here it is from the other week.

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. Full disclosure: We don’t own any of the stocks mentioned.

Until next weekstockpucker

Finding Value In Japan Activism

Added on by Lee Ho Fook.

As a follow up to the Japan Sohn Conference note, here’s a quick look at one of the companies that’s actually being targeted by an activist investor in Japan. Maybe it’s our fascination with airplanes, but Rolls-Royce is still rather interesting as well - see Andvari Advisors’ letter to Rolls Royce from April if you haven’t.

But back to Japan - things are certainly looking up there.

The airline business seems to double every couple decades or so making it a fairly predictable market - even with all the cyclicality. This comes as buyers are looking for the biggest and most fuel-efficient planes. But Japan and Asia has another tailwind, which is increased travel across emerging markets.

The rainmaker here is IHI Corp., which is the biggest aircraft engine maker in Japan. One of its partners is Rolls Royce. It makes engines that power the big planes like the 787 from Boeing. As with any airline parts company, the bread and butter is the replacement parts business. Think of the razor-razor blade model where you sell the razor for break even and make your money on high margin blades. Same with engine and replacement parts.

But it’s not just an airplane company, it also makes turbochargers for car engines. It’s tailwind here is the shift toward fuel efficiency.  

The activist involved here is none other than Dan Loeb’s Third Point. Last year, Loeb sent a letter to the company with the thesis that shares are worth JPY 1,000 - well above the current trading price of JPY 600.

Now here’s the real thesis to unlock that value - IHI has a lot of owned real estate that needs to be spun off. Loeb thinks the company is grossly underestimating the value of this land. It has land in Tokyo in the Toyosu district and near the site of the 2020 Olympics. In any case, it could spinoff this non-core land owning and real estate developing business into another company and focus on engines.

 

Jet Capital On Coking Coal

Added on by Lee Ho Fook.

Recall that Jet Capital sent a harshly worded letter the SunCoke Energy board last month, arguing that "management's continued lack of any real strategic or capital actions," is to blame for the stock's underperformance. Jet owns about 6.3% stake of SXC and is pushing for capital returns. 

The crux of Jet's argument in the original letter is that SXC, since the spin-off of SunCoke Energy Partners as a Master Limited Partnership in 2012, has not fully utilized this advantaged tax structure. In particular, the fund argues that accelerated drop-down of assets from SXC to SXCP would create up to 10% yield for shareholders. 

In the most recent letter, Jet alleges that, despite conversations where management assured them they were on the same page, no actions have been taken to increase capital return to shareholders. 

"That we have been making this point for months with no real actions or response by management is frustrating," writes Matthew Mark, General Partner at Jet Capital. The sticking point appears to be SXC's reluctance to dropdown assets below its estimate of fair value, whereas SXCP wants to ensure that dropdowns are accretive to its distributions.

Jet Capital has also speculated that SXC may be delaying dropdowns and dividend/buyback increases due to a desire to grow through acquisitions. Management doesn't want to commit to a capital return policy that would constrain its ability to take advantage of acquisition opportunities.

We've talked about SXC being a serial acquirer in the industry, but since then management has shown a marked inability to create growth or shareholder value in recent years. Since the MLP spin-off, the stock is essentially flat, and earnings have largely disappointed. Many other shareholders and analysts expressed agreement with the sentiments in Jet's original letter. 

In defense of SXC's management, falling commodity prices have presented a tough macro situation for the stock to excel, and as SXCP's stock price drops, dropdown deals become harder to carry out at a fair price (since SXCP stock is part of the currency used for the deals). 

Jet's opinion is that any further delays only reinforce the negative feedback loop, where SXCP's falling stock price makes dropdowns harder to accomplish, which drives the stock down even more. 

"Many structuring mechanisms exist that can create mutually beneficial outcomes for both sides," argues Mark, "and the MLP industry is ripe with examples of how to break the feedback loop that now appears to be impeding progress."

Jet Capital ended its letter with the statement "Our patience has been exhausted." This indicates that an attempt to gain board representation may be in the near future. The fund says that either SXC needs to accelerate the pace of dropdowns and boost returns or it needs to sell itself to a buyer that can better take advantage of the MLP structure.

Given its asset base and potential distributable cash flow, SXC's current share price of ~$16.25 is remarkably low. Its paltry 1.18% dividend yield is likely to blame for this low share price. There's no question that SXC could drastically increase its dividend payments if it took Jet's advice and committed to rapidly dropping down assets and distributing the proceeds. 

If SXC also cut back on capital spending and decreased G&A by cutting back on growth initiatives, it could easily support a dividend yield of 10% or higher based on its current share price. Analysts at Wells Fargo have estimated the stock could hit $25-$27/share if distributions are increased to this level. 

SXC's management needs to accept that it's not a growth business and that the MLP structure is best suited to returning cash to shareholders. Jet Capital has the experience, tenacity, and shareholder support to force this change through. The stock's recent underperformance gives it a very high potential yield for investors.

JANA Partners fail? Ashland ($ASH) will be its own activist

Added on by Lee Ho Fook.

A couple of years ago Jana Partners started pushing for a split up of the specialty chemicals company Ashland. The company, with underperforming chemical and adhesive businesses, was due for a change. Ashland is most famously known for its Valvoline motor oil.

Jana closed out its activist position in May, ending a two-year holding period that to a 58.6% return from the day it was announced via a 13D to the day he closed it via a 13D/A filing - locking in a 25% annualized return. But, now that Jana is gone, Ashland could be its own activist.

The key driver? A sale of its prized business, Valvoline. This business includes close to 1,000 oil change shops and makes up over a quarter of sales. This isn’t a fit for a chemicals company, but still a very profitable business. Buyers could include oil producers that want to better compete on the lubricant front - note that some of the big players have a presence in this space - including Exxon Mobil with Mobil engine oil and BP with Castrol.

It could also spin the Valvoline business off. Management knows this asset is not a core part of the Ashland business and has said such. It’s just a matter of time at this point.

Older $ASH coverage - our 2013 piece entitled Jana Partners strikes again

Japan Activism: Sohn Conference edition

Added on by Lee Ho Fook.

With activism in Japan heating up, here’s a quick look at the pitches from the Hong Kong edition of the Sohn Investment Conference. The big trends have been a renewed openness to increasing shareholder returns, but also exploring M&A - which has been notably lackluster in Japan over the last decade.

Yet, corporate governance changes are underway and companies in Japan have close to $2 trillion in cash that needs to be put to work. Some companies have already started, think: Fanuc, which was targeted by Dan Loeb, and shortly after put in place a buyback and higher dividend.

As far as Hong Kong Sohn goes -

Tybourne Capital pitched airport operators, namely Japan Airport Terminal, which is a bet on more Chinese traveling, driven by rising incomes. In Japan, airports are basically huge malls; more travel means more spending. Another Tybourne play is Shanghai International Airport, where that city will see a Disneyland resort open next year - increasing travel to the city.

Indus Capital is long Coca-Cola West on the belief that it will begin consolidation of bottlers across the Western part of the globe. The key is getting margins more inl ine with the number two player, Suntory Beverage, which will lead to higher dividends.

Oasis Capital was pumping Kyocera, which focuses on packaging for smartphones. The problem with Kyocera isn’t its packaging business, but its U.S. telecom business. This segment lost over $150mm while generating $2.8bn in revenues last year. It’s holding the company back, while there’s no hope for competing in the U.S. market. Kyocera could also do a YieldCo for its solar business. Recall that Oasis was involved with Nintendo last year to get into mobile games. He’s crushed it in Nintendo.

Balydasny Asset Management is long Suzuki Motor as a misunderstood play. One that needs to be unwound, where Volkswagen owns 20% of the company and Suzuki owns 1.5% of Volkswagen. Suzuki also owns Maruti Suzuki India, which is a pure play on the growing car market in India.

Graticule Asset Management fingered Chinese brokerage houses as top plays - including CITIC Securities, Haitong Securities and China Galaxy Securities. It’s a bet on higher trading volumes driven by monetary easing.

Saga Tree Capital called out Sun Hung Kai & Company given its exposure to the growing income levels in China. Its wealth management and brokerage businesses will thrive as the country becomes wealthier.

Sardar Biglari Prepping For Next Year's Proxy Battle At Biglari Holdings ($BH)

Added on by Lee Ho Fook.

Sardar Biglari is using the Lion Fund to make a rights offering for 27.8% of Biglari Holdings' shares. Specifically: 

On June 4, 2015, the Lion Fund II commenced a tender offer to purchase up to 575,000 Shares, in cash, at a price of $420.00 per Share, net to the seller less any applicable withholding taxes and without interest (the “Offer”).  If the Offer is fully subscribed, the Lion Fund II will purchase 575,000 Shares, which would represent approximately 27.8% of the outstanding Shares and would result in the Reporting Persons beneficially owning an aggregate of approximately 980,707 Shares, which would represent approximately 47.5% of the outstanding Shares.

With the rights offering at $420 a share, many shareholders can use this as an easy exit or arbitrage opportunity. But the current discount of 2.4% suggests some are skeptical that they won't be able to offer their shares - it's a large part of the outstanding shares, but we could still see an oversubscription. The offer ends July 1. 

It seems Sardar is anxious to put to use that special dividend he'll have coming from the Cracker Barrel announcement last week. The big question is; does Sardar see Biglari Holding shares as undervalued or is this his way of getting his hands around more of the company? It's a convoluted mess, with Biglari owning some 90%+ of the Lion Fund II. So don't think of this as a buyback - merely a way to wrangle more control. 

The other big question is what will Mario Gabelli and Gamco do? Mario owns nearly 10% of Biglari and has been trying to get Sardar to change his corporate governance practices for over half a decade. Gamco owns Biglari shares from back in the day, before it was Biglari in fact, from the days of trading as Steak n' Shake. Now seems like a good a time as any to make an exit for Mario. Especially assuming Sardar gets even a fraction of those shares tendered that he's aiming for, he'll be untouchable.   

In truth - We all knew this was coming to some degree. Sardar wasn't going to sit around and wait on another activist to step up. Recall that Groveland put up too much of a fight for a fund owning 0.16% - a larger fund with a louder activist voice could have easily jeopardized Biglari's job come next proxy season.  Still not owners of Biglari, perceive discount to book value or not. 

Older $BH coverage - 

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

Apr. Mario Gabelli GAMCO Won’t Be Backing Biglari ($BH)

Mar. Biglari Holdings and Groveland Capital, No End In Sight

Feb. 2015 Trend To Watch: Activist Versus Activist

 

Another Look At Nelson Peltz’s Next Activist Target

Added on by Lee Ho Fook.

This’ll be quick, but as we work through the potential next activist target for Nelson Peltz, Stanley Black & Decker stands out.

Again, Emerson Electric is the widely expected target. As we noted this morning, the company has already hired a bank to look into a split of the company - are the being preemptive, or is Peltz already in David Farr’s ear?

The bigger point is - there are better targets. Peltz went “big” with DuPont. Taking on a $60 billion market cap company isn’t easy; Peltz needs a reset activist target that’s in the $10 billion to $20 billion range.

Stanley Black & Decker is right at $16 billion, which means we’d likely be looking at a 13D campaign - recall the last one was in 2012 with the industrial company Ingersoll-Rand.

Stanley has three segments that could be broken up. The security business (padlocks, automatic doors, etc.) doesn't fit with its construction and power-tool business. Plus, the security business represents less than a quarter of company-wide sales and margins are lower.

The cash return on capital invested is right at 9% for Stanley (and Textron - yesterday’s focus, is also sub 10%) but Emerson is already at nearly 16%. Getting rid of that lower-margin security business would help.

Rollups are en vogue - Peltz could leverage Stanley to become a consolidator of the construction tools industry. It would be relatively easy to load up the security business spinoff with debt and pocket the rest of cash to make deals.

But there again, Stanley shares are up 112% (total return) compared to Emerson’s 54% return. Yet, as we saw with DuPont, Peltz isn’t really concerned with past performance - it’s all about where the stock could be trading.

Part I - Textron: Nelson Peltz Activist Target

This chart is one big thing working against us with Stanley Black & Decker 

This chart is one big thing working against us with Stanley Black & Decker 

Thinking About Nelson Peltz's Next Activist Target

Added on by Lee Ho Fook.

There's a lot pointing to Emerson Electric as Nelson Peltz and his Trian Partners next activist target, from bullish call option activity a couple weeks ago to comments made by the media. Let's do a deeper dive into this whole idea.

First - Nelson Peltz has alluded to the fact that he's already looking at two potential targets in the industrial industry; making those comments at the Electrical Products Group conference last month. It's worth noting that Emerson Electric was one of the presenters at that very conference - the media might be reading between the lines too much with this one, using a form of recency bias to link Peltz and Emerson. 

But, Peltz's central thesis is to look for companies that would be better off broken up. Emerson meets that criteria. It's also in the sweet spot with a $40bn market cap. DuPont has a $60 billion market cap, but with the loss there, Peltz likely won't aim that high again, nor will he try his hand at other industrial targets like Honeywell and United Technologies that could use an activist. Plus, he's still got a lot of money tied up in his other larger cap stocks like Pepsi, Mondelez and DuPont. 

Based on his average stake size, you're looking at a 3% to 5% stake in Emerson by Trian.  The big opportunity for Peltz at Emerson is to separate out its network power business, which has been struggling due to its energy market exposure. Ultimately leaving its businesses that create remote monitoring, sensors, etc. 

But, there's a better / more likely opportunity for Peltz 

There's no doubt that Peltz is likely gearing up for another fight in the industrial space, where his fund recently dumped a third of its Ingersoll-Rand stake and took its stake to below 5% of the company. Peltz also stepped down from the Ingersoll-Rand board last year after serving for two years. He booked a win there by getting the company to spin off the security business and raise debt for share buybacks. 

Yet, one big caveat is that when you look at Trian's 13D performance for Ingersoll-Rand, the stock has merely performed in-line with the S&P 500 since the fund went active. 

Nonetheless, Peltz is in need of a win and the best place to get that is not in the $40bn to $60bn market cap range, but the $10bn to $20bn range. So, by all accounts, he's likely gearing up for a new 13D campaign. It just so happens that the last 13D filed by Trian was with Ingersoll-Rand back in 2012. At the time, Ingersoll-Rand had a roughly $10bn market cap at the time. 

One thing we know about Peltz is that he doesn’t put much emphasis on price action (read: doesn't care whether the stock is underperforming or not) and his true specialty is breakups. RBC entered the Peltz-next activist target talk last week, with @valuewalk giving a breakdown of RBC’s thought process on trying to identify Peltz’s next target. Part of that is looking at Trian’s strategy, which includes:

“A focus on the income statement rather than the balance sheet: Unlike a number of shareholder activists who will settle for injecting idle cash towards buybacks/dividends, Nelson Peltz and Trian Partners prefers keep their eye on the P&L statement to find areas for margin improvement such as SG&A, sourcing, or productivity. Given the likelihood of operational experience in the sector, if the top line growth is weak, in many cases Peltz will also suggest new growth strategies.”

And...

“Too much noncore business in the portfolio: The idea of creating more lean and efficient corporate structures by divesting or non-core businesses is very attractive to most activists, including Peltz.”

With all that in mind, the most interesting / likely / intriguing target for Peltz is Textron ($TXT), the $12.6 billion market cap “multi-industry” company, which has its hands in industrial, aircraft, defense and finance businesses. 

Ralph Whitworth’s Relational Investors talked about taking a stake in Textron a couple years ago, but never did. Relational is also an industrial aficionado, having waged battles at the likes of Illinois Tool Works, Flowserve and TimkenSteel. Why Relational passed? I’m not sure. And the other headwind is that Textron has been a decent performer over the last few years. But Textron has four distinctly different businesses, with no true synergies. It's also a relatively cheap stock that has subpar margins.

This Week In Activism Vol 17: Proxy Advisors and Unhappy Shareholders

Added on by Lee Ho Fook.

Not much of an intro, but of note, the pricing on the suite of activist investor newsletters is set to go up tomorrow - new pricing will look something like $200 per quarter for the major activist newsletter, $335 a quarter for the underrated activist newsletter and $265 a quarter for the No 13F newsletter - or all three for $720 a quarter.

This Week In Activism Vol. 17

News

  • Casella Waste got a letter from its activist, JCP Investment, noting that the fund had received inquiries about buying the waste management company. It also took the company to task over corporate governance in the letter.

  • Barington Capital won its proxy battle at Eastern Co., getting two board seats.

  • Sandell Asset Management slammed PartnerRE in a letter for not entertaining acquisition talks.

  • JET Capital sent another letter to SunCoke Energy, saying that the company has basically ignored its recommendations.

  • The Clinton Group got 3 board seats at Imation.

  • Rosetta Stone, the target of Nierenberg Investment Management and Osmium Partners, has received buyout interest from RSD Capital.

  • Orange Capital upped its stake in Bellatrix Exploration yet again (increasing its shares owned 7%), and now owning 16.4% of the oil company. Shares are still down 56% since Daniel Lewis’ Orange went active in 2014 (October coverage).

New campaigns

  • Vector Capital went active on eGain with a 9.8% stake. Good news for eGain investors - we made a short call on eGain back in 2013 with shares down 65% since then. Now, Vector also went active on Clicksoftware in March, a month later the company got a takeover offer and is 40% higher.

  • Glenhill Advisors changed its passive 7% stake in Pep Boys to active - joining GAMCO as an activist investor in the name.

  • Ancora Advisors is active at Mutualfirst Financial with a 5.1% stake, having met with management and believing that the company is trading at a discount.

Interesting activist reads around the web—

  • Tech Firms Seek Ways to Fend Off Activist Investors, WSJ

  • A Shareholder Advocate in Word, but Not in Practice, NYTimes

  • Dimon Chides ‘Lazy’ Shareholders Who Follow Proxy Advisers, Bloomberg

  • Activists May Seek Targets With Unhappy Shareholders, Valuewalk

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. Full disclosure: We don’t own any of the stocks mentioned.

Until next weekstockpucker.

This Week In Activism Vol. 16: Aligning Board Interests With Shareholders

Added on by Lee Ho Fook.

Memorial day and finishing up activist investing newsletters got us behind this week. We sent out the newsletters on Sunday and are getting around to the latest edition of This Week In Activism. You can learn more about the newsletters here and get a taste for the latest major newsletter before the TWIA action below...

Forewarnin' for procrastinators, prices are set to go up (roughly 20%) across the board June 1st.

A taste of the 1Q major activist newsletter: 


This Week In Activism Vol. 16

News

  • David Einhorn effectively ends his activist campaign at Civeo, which was the result of the Oil States spinoff (previous notes on $CVEO and $50 oil)

  • Eriksen Capital is now waging a proxy battle with Solitron, seeing 2 board seats (thoughts on $SODI from Feb. feat. @oddballstocks)

  • Marathon Partners is still battling Shutterfly with a 5.5% stake, waging a proxy battle and now putting together a 50-slide presentation.

  • Perry Ellis’ CEO stepped down and it added 2 independent directors to the board, which convinced Legion Partners/CalSTRs to abandoned its proxy battle.

  • Barington Capital won 2 board seats in a proxy battle versus Eastern Co. (early thoughts on the campaign here)  

  • Barington Capital and Children’s Place settled, with the company adding 2 board members (Barington’s chopped & screwed March letter to $PLCE)

  • Cannell Capital sent another letter re: Jim Cramer’s TheSteet.com, this time to shareholders. Recall Cannell owns 8.8% of the company and took Cramer to task in December, calling for his resignation. Excerpt from Cannell's letter below:

New campaigns

  • Consac has gone active on MusclePharm with a 7.4% stake. They haven’t laid out any plans, but there are various #corpgov concerns there and Wynnefield Capital has been active since April with a 7.7% stake.

Interesting activist reads around the web—

  • Activist investors want to supersize McDonald's stock, Fortune

  • Warren Buffett: the activist investor? Yahoo Finance

  • ‘Advocacy Investors’ Are Activist Wolves in Sheep’s Clothing, Acton Blog

Most read posts from stockpucker this week—

  • The Kraft Remix: My Investigatorial Findings, There are a thousand and one ways to slice the Kraft Foods ($KRFT) deal. These are some chopped & screwed thoughts with some interesting takeaways from those that are much closer to the deal than myself.

  • Lone Star Value Gets Backdoored By Dakota Plains, 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.

  • The Nelson Peltz versus Jeff Sonnenfeld battle, 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.

  • Activist Investing Primer, There’s no shortage of investing strategies out there today, from investing in the Dogs of the Dow to buying water rights in the Western U.S., but one immensely popular strategy among hedge funds has become activist investing.

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. Full disclosure: We don’t own any of the stocks mentioned.

Until next weekstockpucker.

Major Activist Newsletter Teaser: Blue Harbour Profile Page

Added on by Lee Ho Fook.

This is just a quick outtake from a fund page in the Major Activist Newsletter. Feel free to email us for a list of all the funds included in any of the newsletters. 

Blue Harbour Group ~ Founded 2004 | Fund market value $3.3bn

Clifton Robbins takes a constructive activist approach, only investing in companies where management is receptive to his ideas. He got his MBA from Stanford in ’84 and has an M&A and private equity background.

New 13D Positions

No new 13Ds and Blue Harbour kept its top four holdings constant. His 13Ds of interest right now are Investors Bancorp (see below), Chico's (which could be a buyout target with recent industry action). Cliff's top activist position, Rackspace, looks to be dead money at this point - a shrinking market for a cloud company facing more and more competition.  

stockpucker takeaways

  • Cliff has been making a lot of comments in the media about Investors Bancorp over the last few months. His fund upped its stake by 17% last quarter.  
  • Xilinx is a new position but still relatively small for the fund and its upped its AGCO stake by some 130%
  • Blue Harbour continues to blow out of its CACI stake, selling off 49% of its stake last quarter. 
  • It also sold off about 22% of its Progressive Waste shares.

THIS WEEK IN ACTIVISM VOL. 15

Added on by Lee Ho Fook.

13F day came and went in a fury. We’ve been working up the suite of activist newsletters to go out later this week but did find time to put together this week’s edition of This Week In Activism. Before the TWIA action - here’s a sample from the major activist newsletter last quarter and of course the details can be found here.

THIS WEEK IN ACTIVISM VOL. 15

News

  • JANA Partners sold off its Ashland stake, of which, it had taken a an activist stake in the company back in 2013.

  • Engaged Capital has upped its stake in Jamba to 10.2%, up from around 8%.

  • Marathon Partners is waging a proxy battle at its long-time activist target Shutterfly.

  • H Partners managed to overthrow the Tempur CEO and two board members.

New campaigns

  • Elliott Associates is now active in CDK Global, alongside Fir Tree and Sachem Head Capital, owning a 7.6% stake.

  • Armistice Capital has gone active on Spectrum Pharma with a 5.2% stake.

Interesting activist reads around the web—

  • Adidas takes step to defend against activist investors, Oregonlive

  • DuPont wins board battle with activist investor, Plastic News

  • Hedge fund activists buy McDonald's, but are they lovin' it?, Reuters

Most read posts from stockpucker this week—

  • Early insights from 13F day, There’s a Seth Klarman vs. David Einhorn battle brewing. Einhorn pitched a “short the frackers” thesis at Sohn last week. His main target was the mother fracker, Pioneer Natural Resources ($PXD). Klarman revealed that he has it as a top 5 position.

  • More 13F Insights: Kyle Bass, Jeff Smith and David Winters, Precision Castparts got a lot of attention from big name investors. This includes SQ, Soroban Capital, 3G, Tyrus, Farallon, Weitz Investment, Berkshire, Third Point and Eminence.

  • Tempur Pedic: H Partners' Unlikely Win, Last week, Tempur Sealy revealed that shareholders had voted to oust three board members. It accepted their resignation and essentially forced out the CEO.

  • Closer to the Yum! Brands Spinoff?, J.P. Morgan said that it got the impression that a spinoff of Yum China was now more a "probability" than a "possibility." They upped their target from $83 to $108.

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

More 13F Insights: Kyle Bass, Jeff Smith and David Winters

Added on by Lee Ho Fook.

Still combing through 13Fs, building quarter activist newsletters, but more insights below.

  • Precision Castparts got a lot of attention from big name investors. This includes SQ, Soroban Capital, 3G, Tyrus, Farallon, Weitz Investment, Berkshire, Third Point and Eminence.

  • Kyle Bass at Hayman Capital traded out mortgage servicers for oil and gas names; selling off Nationstar Mortgage and Ocwen Financial and adding Concho Resources, Whiting Petroleum and Oasis Petroleum.

  • Ironically enough, Jeff Smith at Starboard Value dumped all his AOL shares before the buyout. Although he’d already dumped most of that AOL stake during the fourth quarter he still owned a couple thousand shares that he sold off last quarter. A couple new positions for Starboard Value were Bank of New York Mellon - which is a Marcato Capital and Nelson Peltz target - and Tempur Pedic - which just lost a proxy battle to H Partners.

  • David Winters at Wintergreen Advisors started blowing out of Coca-Cola after many years of trying to change compensation practices.

  • David Einhorn’s Greenlight Capital took a major stake in General Motors, putting it in its top five. Greenlight noted this position in its letter.

Closer to the Yum! Brands ($YUM) Spinoff?

Added on by Lee Ho Fook.
yum_brands_girder_web_560.jpg

Busy building this quarter’s activist newsletters, but it’s easy to get distracted by the numerous other 13Fs out there. This entry isn't all about the 13Fs, although it's worth noting that we got some more insight into the size of Dan Loeb and Kieth Meister's Yum! Brands position.

There’s no doubt that Yum! has needed an activist for some time now - with the plan of splitting the company. It got two the other week. Dan Loeb and his Third Point have a “sizable” stake. Loeb doesn’t plan on playing an activist role. Loeb’s said before that he’s up for a spin-off, but isn’t necessarily pushing for one.

The cliche goes, invest with a catalyst - in this case, the activist investor is the catalyst. Keith Meister is kingmaker here. It remains to be seen just how big his position is, but it’s said to be his largest position ever and is upwards of 3% of the fast food joint.

Yum! gets a third of its operating income from China. Based on the Yum! investor conference in China last week, J.P. Morgan said that it got the impression that a spinoff of Yum China was now more a "probability" than a "possibility." They upped their target from $83 to $108.

The ultimate scenario looks to be something along the lines of a tax-free spin of its China business, pursuing a joint U.S. and Hong Kong listing.

Early insights from 13F day $QCOM $YUM $PXD

Added on by Lee Ho Fook.

It’s here, 13F day that is; in working up the suite of activist investor focused newsletters to go out in a few days, it’s hard not to get distracted by the various other 13Fs from value investors like Seth Klarman coming across the wire. If you want to get a look at last quarter’s major activist newsletter, drop us a line, but here are some things that have caught my eye thus far...

  • There’s a Seth Klarman vs. David Einhorn battle brewing. Einhorn pitched a “short the frackers” thesis at Sohn last week. His main target was the mother fracker, Pioneer Natural Resources ($PXD). Klarman revealed that he has it as a top 5 position. 
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  • Dan Loeb and Third Point blew out of their Alibaba position ($BABA), which was a top 4 position that it had just initiated last quarter. We got to see just how big his Yum! ($YUM) position was, and it's not all that huge - coming in at its 14th largest position. Recall, Loeb and Corvex have talked about Yum over the last few weeks - Corvex wants to split it up. 
  • We got to see just how big a position Qualcomm ($QCOM) is for JANA Partners and as expected, it's the fund's top equity holdings. Although, JANA did quadruple its put position on the SPY. 

Computer Sciences Corp Plans To Split, Yet Again

Added on by Lee Ho Fook.

Computer Sciences Corp is planning to split its commercial IT and government business. This comes after an apparent failure to sell the entire company.

CSC has a government business that generates a large part of its revenues, but that's not a sexy business - leading the market to discount its multiples. It also has its business services segment, which has been “in transition.”

JANA Partners is active in the name, albeit a smallish $560M position - and shares are down 7% since it officially went active on the name in Feb.

Now, the announced spin is nothing new, nor a surprise. It’s just as the company had initially planned last year - where it’ll sell its government business to a private equity firm and its business services business goes to a foreign player.

The talks are supposedly in advanced stages, but we’ve seen this story before with CSC. The more likely (or feasible) path is to spin off its government business, which sets up the business services/big data/cloud business up to be bought by a larger internet player. Structured right, the government business could be spun off tax-free as a government services company.

Michael Lawrie, the former ValueAct Capital partner, has been in beast mode since taking over as CSC CEO in 2012. Shares are up 110% since then. But he’s really hurting of late.

The May 19 earnings announcement is the date to watch for - more details on the split should come then.

Tempur Pedic ($TPX): H Partners' Unlikely Win

Added on by Lee Ho Fook.

Last week, Tempur Sealy revealed that shareholders had voted to oust three board members. It accepted their resignation and essentially forced out the CEO. It’s really rather unprecedented, where H Partners wasn’t even able to run a conventional proxy battle - having missed the nomination deadline.

The lesson here; when you’ve got nearly 30% of your fund in the stock, don’t underestimate the power of the activist. By any means necessary type of deal. This includes a 100-page presentation. Long-term, I’m still not sure how the stock plays out - the industry is becoming commoditized. The turnaround plan is still uncertain, besides a transition in marketing spend. The stock is up 30% or so in the last couple months; the easy money has been made.