Activist Investors

Short Circuit

Phil Schoonover was pretty sure it would be a bad idea to sell Circuit City. At least that’s what he told Reuters back in February.
Schoonover came over to Circuit City three years ago from rival Best Buy, to increasingly underwhelming investor enthusiasm. Of course, by the time Schoonover was talking to Reuters, Mark Wattles, head of Wattles Capital Management had disclosed a 6.5% stake in the retailer along with a vague warning that he might press for a sale, or buy more stock, or both, or neither. This had the effect of turning some heads. Wattles owns a controlling interest in Ultimate Acquisition Partners, that, in turn, owns Ultimate Electronics, and that owns 32 consumer electronics stores.
Back in February, Circuit City quickly and aggressively moved to expand its borrowing, a fairly transparent anti-takeover move, even given the company’s deteriorating cash position. For a company that had a very limited debt profile, this was unusual. Circuit City’s credit line was blown out by $800 million for a total of $1.3 billion with an option to tack on another $300 million whenever they liked. Not bad for a company that earlier that month had a mere $49.7 million outstanding against their credit facility, held nearly $500 million in cash, and commanded sales of only $2.9 billion.
It is probably fair to say that Wattle was irritated by the move. Wattle Capital Management announced on February 25 that they were nominating a slate for five seats on Circuit City’s 12 person board.
Schoonover (Swoonover?) responded with a cost-cutting plan (which presumably would reduce the need for Circuit City to take on $1.3 billion in debt) and the prospect of selling some or all of Circuit City’s Canadian stores. To say that few people were impressed might even be generous.
Since then, the plot has thickened. Wattles turned up the heat and proposed a total sweep of Circuit City’s board on February 29th. Circuit City, desperate to look like they were in control of matters, quickly showed the door to Steven Pappas the Company’s “Small Store President,” and Peter Weedfald the Chief Marketing Officer. Circuit City had dropped $6 million in bonuses back in December to retain 10 Vice Presidents and another $3 million to retain Executive Vice presidents, including Pappas and Weedfald. Circuit City then declared a $0.04 dividend last week. Too little, too late as the firm now faces being replaced in the S&P 500 by Philip Morris on March 28th. How humiliating. And disastrous for the stock price, as the shares were quickly dumped by institutions holding S&P 500 mirroring portfolios. Firms like Wellington Management and TCW Group turned nearly 20% of the shares over by themselves.
Who stepped in? D.E. Shaw & Co., HBK Investments, Royal Capital Management, and Wattles. The activists are closing in, so you might not want to sell any of the executive corps employment insurance.
Activists Circle Circuit City
[WSJ – Heard on the Street]

pancakes.jpgDealBook reports that Lion Fund chairman and 1.4 percent stake Applebee’s shareholder Sardar Biglari is experiencing some acid reflux regarding IHOP’s proposed acquisition of the chain. While analysts have crowded around the stark ideological differences in business strategies between the two “restaurants” (IHOP owns 26.3% of its locations, whereas Apple is primarily a franchisor, and owns only 10 of its 1,306 establishments), and Keith Hahn refuses to believe that anyone would want to live in a society where soccer moms, Two and a Half Men, AND IHOPplebees exists, Biglari’s issue is that the purveyor of annoying commercials starring celebrity “chef” Tyler Florence is being lowballed.
Since the $1.9 billion deal was made public last week, IHOP’s stock price has surged, shooting up by about 17 percent to $65.76. Since a buyer’s stock tends to go down after announcements of this nature, Biglari thinks an undervaluation is at hand. He told the Applebee’s board that they’ve “made a grave mistake” in agreeing to the bid, and refused to eat in an International House of Pancakes—a restaurant that DealBook points out, “is known for its pancakes”—until conditions (the $25.50 sale price) improve.
Just to play devil’s advocate, and not because we necessarily think Biglari is wrong, here’s what some of our commenters have had to say about Applebee’s in the past:

Used to work for Crapplebees…as a waiter and in the kitchen sometimes…once undercooked the chicken (that ish was more raw than BSD’s bunghole) for the Buffalo Chix Salad…Manager wanted to get it out…just had me douse it in Buffalo Sauce so the customer couldn’t see the pink…and served it…This manager left after a busted-ugly waitress he was having an affair with tried to kill herself…twice. This merger is like a White-trash wedding in a trailer park.
Posted by: LexSteelz | June 14, 2007 12:35 PM
I work for applebees, This would be a glorified Denny’s. Except much more messed up. Yea can I get me a side of bbq covered slap jacks and some steak. Mmm, yeap thats me trailer i live it it follows me 1974 ford pickup where ever I go. And also can I get a beer?
Actually applebees stinks thiscould be a great thing.
Posted by: Apple B*tch | June 14, 2007 02:28 PM
applebees is the work of the devil. if ihop gives them a penny i will take is as a sign that they are in a partnership with the terrorists.
Posted by: Anonymous | July 25, 2007 03:16 PM

Earlier: Mergin’ good in the neighborhood – Ihopplebees in the works
Applebee’s Sale Gives Investor Indigestion [DealBook]

Bally Total Fitness is feeling the burn when it comes to soliciting creditor approval for a prepackaged reorganization plan before filing for bankruptcy. Two activist hedge funds, Liberation Investments and Harbinger Capital Partners (and the award for the two hedge funds most likely to be activist by their name alone goes to…), have proposed an alternate restructuring plan, one that conveniently eschews bankruptcy and gives the two hedge funds majority control of the company.
The activist consortium currently owns 11% of Bally’s common shares, and sent its alternate restructuring plan in a letter to the board on July 4, for effect. The new plan would give sub debt holders $60mm and new notes, and Harbinger 80% of the equity.
Bally’s will continue to solicit approval for its other plan, which has approval from the majority of current debt holders (63% of senior and 80% of senior sub). The company has until July 27 to solicit support from 2/3 of senior noteholders.
We’re still getting a kick out of the consequences of letting a fund called Harbinger and a fund called Liberation accumulate 11% of your company. Is it possible for a fund to have a more ominous “I guarantee these guys will be activists” name? We’ve tried coming up with a list (don’t let these guys near your common shares):
– David’s Slingshot Partners
– CBC (Cockblock Capital)
– La Resistance Capitale Fraternite
– TAMCO (Thermopylae Asset Management Company)
– Icahn’t Believe It’s Not Better Partners
– BYOB (Bring Your Own Board) Capital Management
– Defenestration Investments
– The Black Panthers
– One Man’s Perk Is Another Man’s Indiscretion Group
BALLY DISSENTERS STEP UP TO BLOCK BANKRUPTCY [New York Post]

A group of 100 Yahoo investors are calling for the resignation of CEO Terry Semel in the annual shareholders meeting that began today at 1pm. Their pugnacious leader, Eric Jackson, appeared on CNBC’s Closing Bell last night to emphasize Yahoo’s cliff dive since Google’s IPO, saying, “I’ve spoken to a bunch of the top ten holders of Yahoo’s stock, a bunch of the largest pension funds across the US and everyone is saying, ‘if I’d only put my eggs into Google’s basket three years ago, my portfolio returns would have been so much greater,’ something has got to change.” Although Yahoo’s stock has risen 240% over the past five years, since last June Yahoo’s share price has dropped nearly 10% compared to Google’s gain of 33%.
In February, Jackson posted a series of YouTube videos that detailed his new 9 point plan to save Yahoo. Jackson, who owns 45 common shares of Yahoo, nominated himself for a position on Yahoo’s board in his “Finalized Plan B” video posted in February (watch below). Jackson claims in the video that he has over 900k common shares pledged to the Semel-ousting effort, which amounts to less than one tenth of one percent of all Yahoo shares (over 1.3 billion shares of total common stock).

[This post was written by Senior Activist Analyst / Part Time Feminist / New DB Editorial Intern Peter Ribic]
Activist Yahoo Investor Gunning for CEO Semel [CNBC]

icahnmotorolaboardseatproxyfightcorporateraidergame.JPGAs those of you who read Opening Bell already know, Carl Icahn lost his bid for a seat on Motorola’s board yesterday. He’d previously written a letter to shareholders describing the current board as “passive and reactive” and detailed its failure to “steer management in the right direction.” Icahn failed to win the support of large funds, but was confident that he’d sent a “wake-up call.” One wonders if it was a RAZR phone set to ring at 6am? (Our’s never actually wakes us up because: 1. It’s not loud enough. 2. We don’t use it anymore because our fourth in a row broke).
Everyone here is a little (a lot) depressed that our favorite hybrid of Walter Matthau’s grumpiness and Philip Goldstein’s particular brand of testicularity didn’t get his way, but we’re trying to suppress our feelings of hopelessness and look on the bright side: Icahn will rise again and there’s going to be a Wall Street sequel starring Michael Douglas and (fingers crossed) Ben Affleck.
In honor of these upcoming events, we’ll be playing a round of our favorite game today: Icahn or Gekko. First person to get all correct wins a copy of Jack Welch’s Winning: The Answers signed by Johnathan Fess (the down and out broker who hangs out near our lobby begging for change).
Let’s play.
1. “I have been a professional investor for almost forty years. I seek out companies that I believe are undervalued by the market — I seek them out and I invest. ”
2. “The Carnegies, the Mellons, the man who built this industrial empire, made sure of it because it was their money at stake.”
3. “My significant stock ownership is many times that of the entire board.”
4. “Today management has no stake in the company.”
5. “Whether it’s 100 shares or 100 million — we invest in the hope and belief that the market will recognize that overlooked value and we’ll prosper.”
6. “In the last seven deals that I have been involved with there were 2.5m stockholders who have made a pre-tax profit of $12 billion.”
7. My activist investments over the past 2 years in companies […] have seen their stock prices add billions in market value for all shareholders.
8. “Over the past 6 months, on this board’s watch, almost $20 billion of market value, of stockholder value, of your money, has disappeared.”
9. Altogether these guys sitting up there own a total of less than 3%…
10. “I am convinced that significant stockholder representation in the boardroom, even by a single director, is absolutely necessary at this troubled company.”
11. “You own [the company], the stockholders, and you are being royally screwed over by these bureaucrats with their steak lunches, golf and hunting trips, corporate jets, and golden parachutes!”
Bonus: Identify the speaker: “You motherfuckers aren’t going to get away with this.”
Icahn loses bid for Motorola board seat [BusinessWeek]
Icahn Appears to Fall Short at Motorola [NYT]
Icahn Fails to Win Motorola Board Seat [WSJ]
Even for a Billionaire Like Icahn, Life Isn’t Always a Breeze [Deal Journal]

iStock_000002532962Small-240x68.jpgTwo unrelated hedge fund shareholder activism stories are making headlines today.
Let’s first take the story of the hedge fund reacting against a pending sale of gas and electric utility company Aquila Inc because it involves two of our favorite things: Pirate Capital and the internets. In a first for Tom Hudson’s Pirate Capital, the Jolly Rogerites yesterday launched a website dedicated to opposing the sale of Aquila to Great Plains Energy.
“A Bad Deal for Aquila, Inc. Shareholders” argues that the auction process was flawed and that Aquila is worth more Great Plains has agreed to pay. There’s not really that much to the website right now—a brief introduction, a downloadable presentation in pdf format and contact numbers. But the layout, despite its Web 1996 aspects, is at least entertaining: pirate scrolls, compass watermarks and that fog-hidden pirate ship to the left.
The wags at FT Alphaville point out this is the second time a hedge fund has set-up a website as a shareholder activist tool. They wonder how long it will be till we start seeing hedge fund’s putting up MySpace pages.
So far it’s not clear that the Pirate website is having any effect on the trasaction.
The next story is kind of the opposite: a hedge fund uses a now standard a hedge fund activists tool—the 13-D letter—and gets instant results. Oliver Press Partners filed a 13-D disclosing a 6% holding in Webmethods, and attached a letter imploring the board of the company to explore a sale. This morning the company announced plans to sell itself to a German software company. Results! (Or, you know, a reminder that post hoc, ergo hoc is not the best way of figuring out why things happen.)
Hedge fund ramps up opposition with Web site against Aquila sale [Associated Press in Boston.com]
Hedge fund activism: Pirate Capital vs Aquila [FT Alphaville]
WebMethods To Be Acquired By Software AG; Activists Were Pushing For Sale…Since Yesterday
[Tech Trader Daily]