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More on Sears Holdings "Going Private"

Ever since the first post on this issue I have been looking into this further. Today’s Autozone (AZO) filing with ESL (Sears Holdings (SHLD) largest shareholder) gave me the information I needed.

From the Findlaw Legal site

“Delaware’s Analysis

Fiduciary principles have long been established to protect minority shareholders in interested transactions. This protection is embodied in the “entire fairness” standard, a reasonably stringent review. Under a fairly recent line of cases, controlling shareholders can avoid the entire fairness review by structuring their going-private transaction as a tender offer. As described in the Delaware Chancery’s decision In re Pure Resources, Inc. Shareholders Litigation, Delaware courts now apply two distinct fiduciary standards to boards evaluating a controlling shareholder’s acquisition of the remaining shares of a company.7 On the one hand, as detailed in Kahn v. Lynch Communications Systems, Inc., Delaware courts apply the “entire fairness” standard to long-form merger transactions involving a controlling shareholder:

“The concept of fairness has two basic aspects: fair dealing and fair price. The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock. However, the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of this issue must be examined as a whole since the question is one of entire fairness.” 8

Moreover, in Lynch “[t]he Court held that the stringent entire fairness form of review governed . . . [even though]: i) the target board was comprised of a majority of independent directors; ii) a special committee of the target’s independent directors was empowered to negotiate and veto the merger; and iii) the merger was made subject to approval by a majority of the disinterested target stockholders.”9 Even with these additional protective mechanisms, the Kahn Court determined that merger transactions involving a controlling shareholder contain an “inherent coercion” of the interests of minority shareholders, thereby requiring the more stringent “entire fairness” standard.

On the other hand, as demonstrated in Solomon v. Pathe Communications Corp., Delaware courts do not apply the “entire fairness” standard to tender-offer transactions involving a controlling shareholder if the tender offer is not coercive.10 Specifically, the Solomon Court found that “in the absence of coercion or disclosure violations, the adequacy of price in a voluntary tender offer cannot be an issue.”11 Recent decisions in In re Aquila12 and In re Siliconix Inc. Shareholders Litigation have followed this doctrine and found that “unless coercion or disclosure violations can be shown, no defendant has the duty to demonstrate the entire fairness of . . . [a] proposed tender offer.”13 The tender offers in Siliconix and Aquila contained a majority of the minority tender conditions and agreements to consummate DGCL §253 mergers at the same price as the tender offers. While the Chancery Court in those cases determined that the tender offers were not coercive, they did not specify factors for determining whether a tender offer is coercive.

In Pure Resources, while the Chancery Court “remain[ed] less than satisfied that there is a justifiable basis for the distinction between the Lynch and Solomon lines of cases,”14 it was unwilling to apply the Lynch “entire fairness” standard to tender offers involving a controlling shareholder. The Court found “the preferable policy is to continue to adhere to the . . . Solomon approach, while giving some greater recognition to the inherent coercion and structural basis concerns that motivate the Lynch line of cases.”15 In an effort to blend both lines of thought and expand upon the decisions in Siliconix and Aquila, the Court determined that a tender offer by a controlling shareholder would be noncoercive only when “1) it is subject to a nonwaivable majority of the minority tender condition; 2) the controlling stockholder promises to consummate a prompt [DGCL]§253 merger at the same price if it obtains more than 90% of the shares; and 3) the controlling stockholder has made no retributive threats.” Accordingly, although the distinction between a noncoercive tender offer and a long-form merger appears to rest on form over substance and has been questioned by commentators (e.g., Franklin Balotti), Delaware courts continue to honor the distinction.16

Conclusion

As seen by the Delaware Chancery’s decision in Next Level Communications, Inc. v. Motorola, Inc.17, target boards evaluating going-private transactions involving a controlling shareholder should continue to use the framework provided in Pure Resources. Whether a going-private transaction involving a controlling shareholder is structured as a merger or a tender offer, additional protective mechanisms should be employed to insulate target boards from breaching their fiduciary duties. For long-form mergers, “an approval of the transaction by an independent committee of the directors or an informed majority of minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder-plaintiff.”18 Alternatively, tender offers can avoid a coercive taint by including (i) a nonwaivable majority of the minority tender requirement, (ii) a back end short-form merger at the same price as the tender offer, and (iii) the absence of any retributive threats.19 Given the Chancery’s internal struggle with this issue, the Delaware courts appear likely to revisit the matter.”

Sears Holdings is a Delaware Corp. and would fall under its jurisdiction should this come up.

Any attempt by ESL to take Sears private would fail the “fairness” tests.

Price. Lampert has publicly said repeatedly that the market is undervaluing Sears shares and its prospects. Those statements alone would require him to offer a massive premium to the current price in order to satisfy the “fairness in price” requirement.

“Majority of minority”. In order to be free of a “coercive” offer claim, a majority of the minority shareholders would have to vote for the transaction. Does anyone really think Legg Mason, Pershing and Bill Ackman and Bruce Berkowitz, who all own shares in the $100 plus range would vote for a deal for anything less that what they bought shares at? Do we think they would demand a nice premium to even consider saying ok? Me too..

Those three hold 22% of the outstanding shares or, a virtual “majority of the minority”. Here is the kicker. As Lampert uses Sears cash to buy up shares to increase his ownership, he also increases theirs, giving them even more power in any deal.

Special deal for the big three to sell? Nope. This is what killed the Sears Canada deal. Pershing argued that Lampert achieved his “majority of the minority” by offering the banks that gave him their shares a higher price that the rest of the shareholders. The courts ruled that this is “unfair” to the remaining shareholders and ruled the “majority” Lampert had invalid. Without the bank shares being counted, Lampert lost his “majority”. The same scenario would hold here. Any deal the big three get, we would also.

The oft said “if Lampert owns 60% of the shares he can do whatever he wants” claims are patently false. As a shareholder, no matter how small, you do have rights…

Disclosure (“none” means no position):Long SHLD, none

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Whitman's Q2 Letter

As usual, great reading regarding Whitman’s Third Avenue Value Fund (TAVF).

On “Bear Raids”:
“It seems as if it is now easier, and more economical, to conduct bear raids than has ever been the case heretofore – even before 1929.
1) There is no longer an uptick rule. Prior to July 2007 and since the early 1930’s, a common stock listed on the New York Stock Exchange (as was Bear Stearns Common) could be shorted only at a price that was higher than the last price or change of price.
2) There are now well-developed options markets, where one can go short without incurring any material cash outlays – say, buy put options and offset the cost of
put options, by selling call options.
3) It is now feasible to sell short specific indices, e.g., the Markit ABX.HE, the indices that track prices of residential mortgages.
4) Perhaps most important, the means are more available, and more effective than they have ever been, to spread rumors through new communications devices – the Internet and business television stations.”

He continues:
“Bear raids will continue unabated unless those people leading shortselling forays can be shown some downside, whether economic, legal or both. For example, there appears to be a four-pronged approach toward trying to destabilize MBIA as a going
concern. First, there are efforts to strip the holding company of assets so that the holding company might become insolvent. Second, there is pressure brought on the
ratings agencies to remove the AAA ratings from MBIA’s insurance subsidiaries. Third, there are pleas to regulators suggesting that they restrict the insurance subsidiaries’ ability to write policies. Finally, and as part of the other three, the bear raiders are trying to discourage clients from doing business with
MBIA. None of these actions seem to have any merit at all. But from the bear raiders point of view, why not press these approaches?

After all, there is no downside.”

Now, I have no problem with short sellers. None at all. What I do take issue is their ability to establish positions and not be held to the same reporting requirements “longs” are. If you can make money by either being long or short, all the power to you. But, to enable those being short to hide positions while requiring those long to fully disclose is questionable.

It seems as in that vein , especially when you consider the MBIA (MBI) and Ambac (ABK) cases have the longs and shorts pitted against each other, the disclosure requirements and lack thereof gives one side a decided advantage over the other.

I do not know ultimately who will be born out right regarding MBIA and Ambac but we do know, Ackman has shrunk his position, dramatically. Whitman has increased his. Dinallo will not let the insurers blow up on his watch as regulator, it would be viewed as his failing.

I think the shorts were right to this point and Whitman will be proven right by the this time in the next year or two.

Read Full Letter Here:

Disclosure (“none” means no position):Long Third Avenue Value (TAVF), None

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Whitman’s Q2 Letter

As usual, great reading regarding Whitman’s Third Avenue Value Fund (TAVF).

On “Bear Raids”:
“It seems as if it is now easier, and more economical, to conduct bear raids than has ever been the case heretofore – even before 1929.
1) There is no longer an uptick rule. Prior to July 2007 and since the early 1930’s, a common stock listed on the New York Stock Exchange (as was Bear Stearns Common) could be shorted only at a price that was higher than the last price or change of price.
2) There are now well-developed options markets, where one can go short without incurring any material cash outlays – say, buy put options and offset the cost of
put options, by selling call options.
3) It is now feasible to sell short specific indices, e.g., the Markit ABX.HE, the indices that track prices of residential mortgages.
4) Perhaps most important, the means are more available, and more effective than they have ever been, to spread rumors through new communications devices – the Internet and business television stations.”

He continues:
“Bear raids will continue unabated unless those people leading shortselling forays can be shown some downside, whether economic, legal or both. For example, there appears to be a four-pronged approach toward trying to destabilize MBIA as a going
concern. First, there are efforts to strip the holding company of assets so that the holding company might become insolvent. Second, there is pressure brought on the
ratings agencies to remove the AAA ratings from MBIA’s insurance subsidiaries. Third, there are pleas to regulators suggesting that they restrict the insurance subsidiaries’ ability to write policies. Finally, and as part of the other three, the bear raiders are trying to discourage clients from doing business with
MBIA. None of these actions seem to have any merit at all. But from the bear raiders point of view, why not press these approaches?

After all, there is no downside.”

Now, I have no problem with short sellers. None at all. What I do take issue is their ability to establish positions and not be held to the same reporting requirements “longs” are. If you can make money by either being long or short, all the power to you. But, to enable those being short to hide positions while requiring those long to fully disclose is questionable.

It seems as in that vein , especially when you consider the MBIA (MBI) and Ambac (ABK) cases have the longs and shorts pitted against each other, the disclosure requirements and lack thereof gives one side a decided advantage over the other.

I do not know ultimately who will be born out right regarding MBIA and Ambac but we do know, Ackman has shrunk his position, dramatically. Whitman has increased his. Dinallo will not let the insurers blow up on his watch as regulator, it would be viewed as his failing.

I think the shorts were right to this point and Whitman will be proven right by the this time in the next year or two.

Read Full Letter Here:

Disclosure (“none” means no position):Long Third Avenue Value (TAVF), None

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More on Bond Insurers MBIA (MBI), Ambac (ABK)- Update

Hedge Fund Manager Tom Brown of Second Curve Capital, has recently taken a long position in MBIA’s stock. He recently responded to an email sent by Whitney Tilson.

In looking at this lately, it seems like the Bear argument against the stocks has gone from a strict dissertation of fact to a bit of yelling fire in a crowded theater. Even Ackman has been extremely quiet lately about the subject preferring to talk more about short selling in general vs. just about the insurers. Perhaps this is because he has drastically cut back or totally eliminated his short position in both.

In the post, Brown says:
“Next, Whitney slams the company for changing its plans for the $900 million. He argues the company once said it would downstream the cash, and is outraged it has had a change of heart without (until now) informing investors, customers, the rating agencies, and regulators. He then suggests the company’s actions might constitute fraud and market manipulation.

Say what? That’s as harsh as it is inaccurate. Here are the facts. Management only expressed an intention to downstream the $900 million, and didn’t do so right away so it could receive more clarity on future actions by the rating agencies. The New York State Insurance Commissioner was certainly involved in the discussion of where the money would go, since one of the company’s options under review was (and still is) the possibility of downstreaming the $900 million into a new subsidiary to write new business. So this is not fraud and market manipulation. It’s simple, above-board capital allocation.

Whitney goes on to claim MBIA has denied policyholders money that’s been promised to them so that management can keep their jobs. Policyholders are thus “screwed.” He then ends his tirade with a nice piece of thundering self-righteousness:

MBIA seems to have forgotten that they’re a regulated entity and that they’re not allowed to balance their “obligations to policyholders with optimizing returns to our shareholders”. The deal with any insurance company is that policyholders come first and only if there’s money left over does anything go to the holding company, which is why MBIA is [likely to fall further] and why we’re still short it.

The good news is that, based on what I’ve read, NY State Insurance Commissioner Eric Dinallo is on to these guys and I assume won’t allow these . . . actions.

Whoa! Can we get back to Insurance 101 for a second? Whitney surely understands the difference between a holding company and an insurance subsidiary. Dinallo regulates the insurance sub; he has no jurisdiction over the holding company. What’s more—and I’m sure Whitney understands this, as well–Jay Brown and the other members of MBIA’s board of directors have a fiduciary obligation to their shareholders. It is very, very simple. “

He then finishes with:
“If the rating agencies don’t rate MBIA’s insurance sub AAA, then the insurance subsidiary (which was overcapitalized even when it was rated triple-A, recall) is extremely overcapitalized at its new rating. The last thing the board should be thinking about, therefore, is sending the unit another $900 million. Especially since, with the company writing little new business, its risk exposure is declining.

Don’t forget, MBIA already exceeded S&P’s stated minimum capital requirements for a triple-A rating by $900 million at the end of the first quarter, and exceeded Moody’s minimum by $2.8 billion.

Despite what vocal shorts like Whitney Tilson have to say, neither MBIA or Ambac have capital or liquidity shortfalls. Interestingly, in eviscerating Jay Brown’s letter to his shareholders this week, Whitney let the following comment stand: “we continue to feel comfortable with our economic loss estimates embodied in the reserve and impairment figures we provided to the market in our last earnings call.”

So the company is manifestly well-capitalized, and continues to be comfortable with its loss estimates.

Whitney, maybe, just maybe, the outlook for MBIA isn’t nearly as bleak as you insist. It might pay to take a harder look! “

Now, I am a fan of Whitney and readers here have known for some time that I am as I regularly post his appearances in and his writing on a variety of subjects. That being said, I think the short story for both monolines is done. The only thing left is insolvency which, NYC Insurance Commissioner Dinallo will not allow. If that is true, then the only way the shorts can influence prices is too scare people more.

I think Whitney may be running the risk of looking a bit like a fear monger on this one….

Read Felix Salmon’s take on it here:


Read Whole Post Here:

Disclosure (“none” means no position):None

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Sears' "Going Private"? Not So Fast

This has been going around for a long time now so let’s take a look because as the price falls and Sears’ (SHLD) Chairman Eddie Lampert continues buying shares, some folks are claiming his goal is to take the company private and shareholders, except him, will get “screwed” for lack of a better term.

While Lampert may continue to buy shares and increase his ownership percentage, Sears’ is not “going private” for a number of reasons.

From the SEC Website:
“If the transaction is initiated by an affiliate (an insider) of the company, or the company could be deemed to be making an acquisition of its own shares Rule 13e-3 of the Securities Exchange Act of 1934 requires the affiliate and/or the company to file a Schedule 13E-3 with the SEC. When Rule 13e-3 applies, the company is said to be “going private” under SEC rules. While SEC rules don’t prevent companies from going private, they do require companies to provide information to shareholders about the transaction that caused the company to go private. The company also may have to file a merger proxy statement or a tender offer document with the SEC.

The filing of a Schedule 13E-3 is also required when issuer-initiated or affiliated transactions result in a company’s publicly held securities no longer being traded on a national securities exchange or an inter-dealer quotation system, such as Nasdaq.

The Schedule 13E-3 requires a discussion of the purposes of the transaction, any alternatives that the company considered, and whether the transaction is fair to all shareholders. The Schedule also discloses whether and why any of its directors disagreed with the transaction or abstained from voting on the transaction and whether a majority of directors who are not company employees approved the transaction.

Going private transactions require shareholders to make difficult decisions. To protect shareholders, some states have adopted corporate takeover statutes that provide shareholders with dissenter’s rights. These statutes provide shareholders the opportunity to sell their shares on the terms offered, to challenge the transaction in court, or to hold on to the shares. Once the transaction is concluded, remaining shareholders may find it very difficult to sell their retained shares because of a limited trading market.”

So the “Lampert can force a share sale” is erroneous. While he could take the shares off the market by “going private”, he cannot force you to sell your shares to him if Sears’ decided to go private. You could still opt to retain your ownership percentage. It is different from a merger in which you “exchange shares” from one company for another.

“Fairness of offer”. This was a large bone of contention in the failed Sears takeover of Sears Canada. Sears USA owned 53% of the outstanding shares of Sears CA at the time of the offer. The buyout was fought in court by minority shareholders who eventually prevailed. The fact that Lampert has been buying share at prices far above where they sit now, would eliminate any argument he would make that a “going private” price he is offering does NOT violate this element.

Also, current minority shareholder Bill Ackman, who lead the fight against Lampert in his Sears CA bid is now a Sears Holdings shareholder. Ackman bought in at prices well above current valuations and anyone who knows anything about him know he would fight any “going private” bid below the $100 plus a share he paid.

Let’s also not forget the conflict of interest here. Using shareholder money to eventually take the company from them for yourself despite public comments to the contrary would spark a wave of lawsuits Lampert has no interest in spending the next 10 years fighting.

That being said, roughly 60% of Sears’ shares are held by Lampert, Management and Funds that are value oriented. What is more likely is that Lampert will continue to repurchase shares and shrink the float. Now, consider this, when you subtract short shares (26 million) and shares held by long-termers, it leaves only 27 million shares actively trading or 20% of the total.

At today’s prices that means $2.1 billion can buy the remaining trading float and then you create a short squeeze like you have never seen as shorts rush to buy shares that virtually do not exist to cover their positions.

Anyone want to bet this is Lampert real game? Keep buying up what trades and then watch the shorts cut each other throats to cover. It would be justice for him and real profitable for shareholders as the buying without selling would cause share prices to rocket up.

What does Lampert gain buy going private? If the goal is to attain wealth, then isn’t having Sears publicly traded the way to go? Won’t his wealth climb faster that way than if Sears is privately held? Maybe he takes it private, “fixes” it and then spins it back out for a a nice profit? Well, if that is true, then why not just keep your shares and ride the wave? Either way, if his goal is the same as yours, where is the problem?

Disclosure (“none” means no position): Long SHLD

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Sears’ "Going Private"? Not So Fast

This has been going around for a long time now so let’s take a look because as the price falls and Sears’ (SHLD) Chairman Eddie Lampert continues buying shares, some folks are claiming his goal is to take the company private and shareholders, except him, will get “screwed” for lack of a better term.

While Lampert may continue to buy shares and increase his ownership percentage, Sears’ is not “going private” for a number of reasons.

From the SEC Website:
“If the transaction is initiated by an affiliate (an insider) of the company, or the company could be deemed to be making an acquisition of its own shares Rule 13e-3 of the Securities Exchange Act of 1934 requires the affiliate and/or the company to file a Schedule 13E-3 with the SEC. When Rule 13e-3 applies, the company is said to be “going private” under SEC rules. While SEC rules don’t prevent companies from going private, they do require companies to provide information to shareholders about the transaction that caused the company to go private. The company also may have to file a merger proxy statement or a tender offer document with the SEC.

The filing of a Schedule 13E-3 is also required when issuer-initiated or affiliated transactions result in a company’s publicly held securities no longer being traded on a national securities exchange or an inter-dealer quotation system, such as Nasdaq.

The Schedule 13E-3 requires a discussion of the purposes of the transaction, any alternatives that the company considered, and whether the transaction is fair to all shareholders. The Schedule also discloses whether and why any of its directors disagreed with the transaction or abstained from voting on the transaction and whether a majority of directors who are not company employees approved the transaction.

Going private transactions require shareholders to make difficult decisions. To protect shareholders, some states have adopted corporate takeover statutes that provide shareholders with dissenter’s rights. These statutes provide shareholders the opportunity to sell their shares on the terms offered, to challenge the transaction in court, or to hold on to the shares. Once the transaction is concluded, remaining shareholders may find it very difficult to sell their retained shares because of a limited trading market.”

So the “Lampert can force a share sale” is erroneous. While he could take the shares off the market by “going private”, he cannot force you to sell your shares to him if Sears’ decided to go private. You could still opt to retain your ownership percentage. It is different from a merger in which you “exchange shares” from one company for another.

“Fairness of offer”. This was a large bone of contention in the failed Sears takeover of Sears Canada. Sears USA owned 53% of the outstanding shares of Sears CA at the time of the offer. The buyout was fought in court by minority shareholders who eventually prevailed. The fact that Lampert has been buying share at prices far above where they sit now, would eliminate any argument he would make that a “going private” price he is offering does NOT violate this element.

Also, current minority shareholder Bill Ackman, who lead the fight against Lampert in his Sears CA bid is now a Sears Holdings shareholder. Ackman bought in at prices well above current valuations and anyone who knows anything about him know he would fight any “going private” bid below the $100 plus a share he paid.

Let’s also not forget the conflict of interest here. Using shareholder money to eventually take the company from them for yourself despite public comments to the contrary would spark a wave of lawsuits Lampert has no interest in spending the next 10 years fighting.

That being said, roughly 60% of Sears’ shares are held by Lampert, Management and Funds that are value oriented. What is more likely is that Lampert will continue to repurchase shares and shrink the float. Now, consider this, when you subtract short shares (26 million) and shares held by long-termers, it leaves only 27 million shares actively trading or 20% of the total.

At today’s prices that means $2.1 billion can buy the remaining trading float and then you create a short squeeze like you have never seen as shorts rush to buy shares that virtually do not exist to cover their positions.

Anyone want to bet this is Lampert real game? Keep buying up what trades and then watch the shorts cut each other throats to cover. It would be justice for him and real profitable for shareholders as the buying without selling would cause share prices to rocket up.

What does Lampert gain buy going private? If the goal is to attain wealth, then isn’t having Sears publicly traded the way to go? Won’t his wealth climb faster that way than if Sears is privately held? Maybe he takes it private, “fixes” it and then spins it back out for a a nice profit? Well, if that is true, then why not just keep your shares and ride the wave? Either way, if his goal is the same as yours, where is the problem?

Disclosure (“none” means no position): Long SHLD

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Bond Insurer Buying????

There has been some intersting buying in shares of both Ambac (ABK) and MBIA (MBI)

Insiders:
MBIA’s Chairman Joseph Brown bought 159,000 shares of stock at $5.91 per share last week, giving him 2,611,456 shares of direct ownership.

Ambac’s Chairman and CEO Michael A. Callen bought 10,000 company shares at $2.60 per share. Director Laura Unger disclosed transactions from June 3 for purchases of 103,334 shares at $3.00 in two transactions. Jill Considine, Philip Duff, and Henry Wallace all also each bought 33,334 shares at $3.00 on June 3.

Big Fish:
Martin Whitman added to his holdings in Ambac (ABK) during the 3-months ended 2008-04-30 by 322.07%. He holds 9,707,362 shares as of 2008-04-30. Whitman also added to his holdings in MBIA Inc. (MBI) during the 3-months ended 2008-04-30 by 84.62%. He now holds 23,149,845 shares as of 2008-04-30.

Chris Davis added to his holdings in Ambac(ABK) during the 3-months ended 2008-03-31 by 108.9%. He holds 29,744,503 shares as of 2008-03-31.

Pershing’s Bill Ackman has dramatically reduced his short exposure to both insurers.

We first talked about this in early May and the situation for both has improved since then, not worsened. While that seems like a joke, it is the first time in a very long time we can say that.

Guys like Whitman are rarely wrong when it comes to these types of investments. Having insider pony up cash is also a real sign of support and future clarity. These folks are looking through the lenses at what is happening and must see something they like..I think it may be time to dabble soon.

Disclosure (“none” means no position):None

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Borders 10-Q

Some interesting items from Borders (BGP) 10-Q

Inventory:
“During the first quarter of 2008 the Company implemented an initiative to actively reduce inventory in its stores. As a result, the Company significantly reduced inventories in the music category, as well as space allocated to that category. In addition, the Company reduced inventories in book and DVD categories as well, in order to make its inventories more productive. These two factors significantly contributed to the reduction in inventories and generated $88.9 million in cash in the quarter. As a result of the decline in inventories, account payable decreased $56.5 million during the first quarter of 2008. The Company will continue to actively manage inventory levels throughout 2008 to drive inventory productivity and to maximize cash flows.”

CapEx:
“The Company expects capital expenditures to be between $80.0 and $85.0 million in 2008, compared to the $142.7 million of capital expenditures in 2007. The Company has critically reviewed all capital expenditures to focus on necessary maintenance spending and projects with very high return on capital. Capital expenditures in 2008 will result primarily from investment in management information systems, the Company’s new e-commerce Web site, as well as a reduced number of new superstore openings. In addition, capital expenditures will result from maintenance spending for existing stores, distribution centers and management information systems. The Company currently plans to open approximately 14 domestic Borders superstores in 2008. Average cash requirements for the opening of a prototype Borders Books and Music superstore are $2.8 million, representing capital expenditures of $1.6 million, inventory requirements (net of related accounts payable) of $1.0 million, and $0.2 million of pre-opening costs. Average cash requirements to open a new airport or outlet mall store range from $0.3 million to $0.8 million, depending on the size and format of the store. Average cash requirements for a major remodel of a Borders superstore are between $0.1 million and $0.5 million. The Company plans to lease new store locations predominantly under operating leases.”

The real good news is the level of disclosure prior to the filing. There aren’t any “what?” items in the filing. A good measure of this is probably because the book business is not overly complicated and more still is because Ackman is the largest shareholder. CEO George Jones does deserve some credit though, he has been totally upfront up until this point with shareholders.

Good…

Disclosure (“none” means no position):Long BGP

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Ackman on Short Selling (video)

Youv’ve got to see this.

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Amazon & Borders: Ackman Stokes Fire

So, I get away and get flooded with email about comments Bill Ackman allegedly made.

Business Week reported Ackman said “Amazon could buy the company for about $400 million to get those locations that would take more than $1 billion to build,” he told reporters on the sidelines of a conference in New York. “You have to think of it like how Apple has retail stores across the country.”

Now let’s just ignore the repeated use of his name as Ackerman. Does anyone really think Ackman would agree to sell the company for a loss? Really? What is more likely is the $400 million price figure is as accurate as the name they gave him. Either it is a misprint or a reporter error. Bill Ackman will not sell for a loss. If that was the plan, why not sell now and make more $$? Think about it.

Now the justification of an Amazon (AMZN) buy makes sense. “One reason that might persuade Amazon is that the company may soon lose its state tax advantage across the nation. Some 18 states are ramping up to require e-commerce businesses to collect sales tax, and about 1,100 online retailers have already volunteered to collect them.

Ackerman said that once Amazon loses its tax advantage that buying retail locations will make sense. He believes customers will benefit from getting same-day delivery that a network of retail stores can provide, and Amazon would also get an opportunity to sell other products not currently carried at Border’s locations.” According to BW

This makes sense. But, Ackman is more likely just trying to remind Barnes & Noble (BKS) that there will likely be other bidders for the company and that they ought not to delay the process too long. He is also most likely publicly letting them know what the potential competition from Amazon in Borders locations would be without implicitly making the threat.

Everyone just take a breath………..

Disclosure (“none” means no position):Long BGP, None

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Wednesday’s Links

Ackman, iPhone, Fuld, Klarmen

– Some very interesting thoughts on Sears’ Home Services

– Yea, but you’ll actually sell some…

– At least the other CEO’s stood there and took it, he hides

20% plus a year returns…listen

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Wednesday's Links

Ackman, iPhone, Fuld, Klarmen

– Some very interesting thoughts on Sears’ Home Services

– Yea, but you’ll actually sell some…

– At least the other CEO’s stood there and took it, he hides

20% plus a year returns…listen

Todd Sullivan's- ValuePlays

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Visit the ValuePlays Bookstore for Great Investing Books

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Whitney Tilson Talks About Shorts

Tilson talks about Ambac (ABK), MBIA (MBI), Lehman (LEH), Citigroup (C), Washington Mutual (WM) and Wachovia (WB). He always makes great points. Is it just me or do the short sellers like Ackman, Tilson and Einhorn (when they are short) make the best points?

Disclosure (“none” means no position):Long C, WB, none

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Borders (BGP) To Sell Australian Unit for $110 Million

This is the first in either preparing for a sale by improving equity and debt levels OR, continuing the turnaround by improving liquidity.

From the press release:
Borders Group, Inc. (NYSE: BGP) today announced that it will sell 100 percent of its Australia/New Zealand/Singapore businesses — which includes 30 Borders superstores — to A&R Whitcoulls (ARW), the leading Australasian retailer of books and related products owned by private equity firm Pacific Equity Partners (PEP). The total transaction is valued at up to $110 million and is expected to close next week.

Upon closing of the transaction, Borders Group will receive proceeds of approximately $95 million (AUD) or approximately $90 million (USD based on current exchange rates). Additional deferred payments of up to $15 million (AUD) or approximately $14 million (USD based on current exchange rates) will be paid to Borders Group on or about March 31, 2009 if certain performance targets are achieved.

As part of the agreement, ARW, which owns and operates over 260 stores including Australia’s oldest bookstore chain, Angus & Robertson, as well as popular New Zealand book, magazine and DVD retailer Whitcoulls, among other holdings, will have the right to use the Borders brand throughout Australia/New Zealand/Singapore consistent with a brand licensing pact that is part of the agreement.

“These businesses have performed well led by a talented management team who has consistently delivered strong execution in Borders superstores in Australia, New Zealand and Singapore,” said Borders Group Chief Executive Officer George Jones. “This transaction represents an attractive valuation, permits us to forgo further investment in these businesses, and provides our company with a significant cash infusion to further reduce debt, which is one of our key financial initiatives. ARW is a well respected and highly successful retail company with outstanding leadership that will be strengthened with the addition of the local Borders executive team and our stores. We trust A&R Whitcoulls to successfully manage the Borders brand.”

A&R Whitcoulls Group Managing Director, Ian Draper, said that the Borders assets are complementary to his company’s existing holdings, offering a different yet enhanced shopping experience to Angus & Robertson in Australia and Whitcoulls in New Zealand. “Borders will bring a new dimension to our retail offerings,” he said. “The customer-experience based model invites shoppers to browse with a vast range of books, music, movies and cafes in Borders stores. This model has proven popular in the local market and will complement our existing presence by targeting a different demographic through the premium format and vast selection of products.”

Managing Director of Borders Asia Pacific, John Campradt, will continue to serve in his current role managing the Borders business. “Building the Borders brand throughout Australia, New Zealand and Singapore has been fulfilling,” he said. “Now, we enter an exciting new chapter as part of ARW, which has welcomed our management team, our stores, and our people, and will provide the support we need to drive profitable growth.”

In March the negotiations were put on hold while Borders looked at “other options”, primarily a financing agreement with Pershing and Bill Ackman.

Disclosure (“none” means no position):Long BGP

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Lehman vs Einhorn: Lehman Will Lose

Why can David Einhorn affect Lehman’s (LEH) stock price? The answer is simple really.

It comes down to believe-ability. Einhorn has it, bankers do not.

Investors sitting and watching for the last few years have witnessed the savaging Bill Ackman took from bond insurers MBIA (MBI) and Ambac (ABK) as well as threats from NYC Insurance Commissioner Eric Dinallo. For years they asserted he was “off base” and accused him of spreading rumors, innuendos and outright lies. What happened? Everything Ackman said came to fruition yet he was still blamed for the world’s reaction to the prices of both company’s stocks. As though the actual crippling losses at both company’s has nothing to do with it.

Now it is Einhorn’s turn. Having been short Lehman since last summer, Einhorn is now being blamed for the current rush to sell the stock.

Here is the thing. Einhorn has been saying the same thing for a year now but the stock only cratered since February. Why? The things Einhorn has been saying are now coming true. Lehman has massive CDO exposure, has not written it down properly, has needed more money and has more loses in the works.

Lehman, for its own part is fanning the flames by denying they need money and then going out and raising more of it. Lehman’s advantageous disclosure on page 56 of an SEC filing that seemed to contradict public statements also lead investors to doubt management and gave Einhorn yet more ammunition.

Lehman’s management has spoken about Mr. Einhorn, but they have declined to comment publicly beyond a statement that says Mr. Einhorn “cherry picks” and misconstrues information. Isn’t good enough. Einhorn is being very specific in his critic of the company, unless your refutation of him is the same, you lose. Basically Lehman is saying, “trust us, he is wrong, by the way, got $4 billion you can spare?”

Crying about short sellers is a losers game. Why? If your results and disclosures do not give them anything to stump, they go away or get crushed. When you get into a “tit for tat” with them, they win unless you are 100% accurate and disclose everything not just in a filing, but in public statements. Unless you do both all the time, and Lehman has not, you lose.

PS. The NY Times described Einhorn as a “rabble-rousing hedge fund manager“. Having heard him speak, nothing can be further from the truth. Icahn? Yes, Einhorn? Not by a mile. Einhorn reminds one of a librarian.

Disclosure (“none” means no position):None

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