Deal.com, Barrons on Whitman, Ohio AG, Hmmmmm
– Thank you for the mention…..
– Barron’s did a nice piece over the weekend on Marty Whitman.
– What is wrong with these guys?
– Now, where did we read this story before? Maybe, here?
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This is really good news for shareholders…
Here are the new terms:
* A lower interest rate of 9.8% on the $42.5 million senior secured term loan. The original Pershing Square financing commitment carried a 12.5% interest rate.
* An increased backstop purchase offer (“put”) of $135 million for the international subsidiaries. The original Pershing Square financing commitment included a purchase obligation at a price of $125 million. As previously stated, Borders Group believes its international subsidiaries are worth substantially more than the amended backstop purchase offer price and the company has retained the right to continue its ongoing strategic alternatives process for these businesses.
* A reduction in the number of warrants issued at closing to Pershing Square to 9.55 million warrants to purchase company common stock at $7.00 per share and a reduction in the term of all warrants issued to Pershing Square from 7.5 years to 6.5 years. The original Pershing Square financing commitment included 14.7 million in up-front warrants at $7.00 per share. Under the new agreement, Borders Group is required to issue an additional 5.15 million warrants to Pershing Square if any of the following three conditions occurs: the company exercises the put related to the sale of the international subsidiaries, a definitive agreement relating to a change-of-control of the company is not signed by October 1, 2008, or the company terminates the strategic alternatives process.
“We are pleased to have reached a final financing agreement with Pershing Square that includes more advantageous terms and still provides Borders with the necessary funding to continue implementing our key initiatives,” said Borders Group Chief Executive Officer George Jones. “The process of reviewing alternative financing proposals over the past two weeks was beneficial as it yielded an outcome that is better for our company and our shareholders. We are pleased to have the backing of Pershing Square, our largest shareholder, as we move forward and we appreciate their continued confidence. Borders is now turning its focus to the broader strategic alternatives process.”
Essentially Ackman has told the company “I’ve got your back. Go get any offer you can and I will make you a better one.” This really does illustrate the belief ha has in the prospects for the company. It also shows us how bad he wants to keep control of it. Rather than let a third party come in and stake a claim, he has given the company the latitude to shop for deal that he will willingly beat. Good…
Disclosure (“none” means no position):Long BGP
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Here is what folks read the most of in March.
1- Altria’s Spin: Your Questions Answered
2- Ackman’s Target Loss: Wow
3- Circuit City Being Sold Soon?
4- Altria’s Kraft Spin: Q & A
5- T2 Partners Glenn Tounge on Berkshire (Video)
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Here is what folks read the most of in March.
1- Altria’s Spin: Your Questions Answered
2- Ackman’s Target Loss: Wow
3- Circuit City Being Sold Soon?
4- Altria’s Kraft Spin: Q & A
5- T2 Partners Glenn Tounge on Berkshire (Video)
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Her are the Top 20 this week at Value Investing News
1. Official SEC XML Feeds
(via www.fatpitchfinancials.com)
This weekend I spotted orange XML feed images all over EDGAR. It looks like the SEC finally added feeds to the output of their database. Now we can track company filing updates from our news readers!
2. CS21 Net/Net Index Week in Review: Into Positive Territory
(via stocksbelowncav.blogspot.com)
Cheap Stock’s index of net/net stocks was very volatile this past week, with 20% of index members up at least 12%.
3. Premier Exhibitions (PRXI): Value not Without Controversy
(via stocksbelowncav.blogspot.com)
Good write up of the value in Premier Exhibitions. Be sure to check out the accurate and funny comment at the end.
4. Forum on Emerging Issues & Trends in Real Estate – University of Missouri
(via business.missouri.edu)
Warren Buffett will be speaking for an hour at this event on Friday, April 4, 2008. It is a free event open to the public.
5. Fooled by a Percentage Into Catching Falling Knife!
(via fundooprofessor.blogspot.com)
The good professor discusses the problem of price anchoring.
6. Little Books For Big Profits
(via magicdiligence.com)
Combining Joel Greenblatt’s The Little Book that Beats the Market with Pat Dorsey’s The Little Book that Builds Wealth provides an investor with a framework for finding the best value based investment opportunities on the market today.
7. Ackman’s Target Loss..wow
(via valueplays.blogspot.com)
Ackman lost a cool $8oo plus million so far
8. US recession will not hinder those emerging market stocks
(via www.ft.com)
Mark Mobius of Templeton Emerging Markets sees continued growth in emerging markets even though the U.S. facing a recession.
9. Multiple Disciplines
(via mikesnewsletterinvesting.blogspot.com)
Charlie Munger advocates learning multiple disciplines to add to a latticework of mental models. This post goes over how to apply some rules of economics to investing.
10. Peter Lynch Interview
(via mikesnewsletterinvesting.blogspot.com)
Famed mutual fund manager is interviewed.
11. Small Cap Stock Ideas
(via www.stockpursuit.com)
Some small-cap stock ideas. Some are contrarian. Boss Holdings is a Benjamin Graham Net Current Asset Stock.
12. Overstock’s Moat
(via mikesnewsletterinvesting.blogspot.com)
Overstock.com is a tech company that doesn’t appear to have a moat, this article disputes that
13. Recurring Revenues and Industrials
(via valuediscipline.blogspot.com)
Economic uncertainty generally steers investors toward steady eddy businesses such as foods, consumer staples, healthcare and utilities. But what investors should be seeking is recurring revenues, predictable and stable revenues with a high degree of certainty.
14. Altria’s Spin Cost Basis
(via valueplays.blogspot.com)
Here is the cost basis for your shares
15. Third Avenue Q1 Shareholder Letters
(via www.thirdavenuefunds.com)
Martin Whitman devotes a section of his quarterly letter to refuting William Ackman’s views on MBIA. My favorite sentence: “The argument that if an entity is in trouble, every liability on the balance sheet of that entity is also in trouble is strictly ‘amateur hour’.”
16. Borders New Concept Store (Video)
(via valueplays.blogspot.com)
Here is what it looks like
17. Borders Delays 10-K
(via valueplays.blogspot.com)
Some scenario’s involving the recent announcement
18. N*1 Screen: Sanderson Farms
(via ei-forum.com)
Looking for value, we decided to run one of our typical ‘best in industry’ screens on companies with a market capitalization of under 1,000,000 USD. The only company that made the screen is Sanderson Farms (SAFM). We had followed this company in the past but the stock had been severely punished during the avian-flu scare and is slowly recovering.
19. Market Underestimating Ingersoll-Rand’s (IR) Earnings Power
(via collegeanalysts.com)
Ingersoll-Rand, after a series of acquisitions and divestitures, is set to become a leading “cyclical-lite” with significant earnings power thanks to its climate control segment.
20. Moslty an Rant
(via mikesnewsletterinvesting.blogspot.com)
How I got screwed over by government regulations, and why restsraint on how minors can manage their money are unecesary.
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Borders (BGP) announced yesterday that it is delaying its 10-K and made an interesting disclosure.
Here is the announcement:
“Borders Group, Inc. (NYSE: BGP) today announced that it is delaying the filing of its Annual Report on Form 10-K for fiscal year 2007, ended February 2, 2008. The company expects to make the filing on or before April 17 after it has completed its evaluation of financing alternatives and can include finalized transactions in its 10-K filing.”
“As stated in the company’s most recent financial news release dated March 20, as well as in exhibit 10.1 to its current report on Form 8-K filed March 21 with the Securities and Exchange Commission, Borders Group has received a financing commitment from Pershing Square Capital Management, L.P. Under the terms of the commitment, which expires on April 4, 2008, Borders Group is allowed to explore alternatives to the Pershing Square financing that may be more advantageous to the company.”
Here is the interesting part:
“Borders Group has entered into discussions with several parties regarding alternative financing proposals. The company’s board of directors and senior management are currently evaluating the terms of these proposals against the Pershing Square commitment, and no decision has yet been made. As this process is not complete as of today’s filing deadline, Borders Group is delaying the filing in accordance with Rule 12b-25 under the Securities Exchange Act of 1934.”
This is good stuff and the possibilities are endless. Is it just another financing option on better terms? Is there a buyer? Will someone just take a large chunk of the company? Is it simply an international operations sale?
The good news is that any of the options will be an improvement over what Ackman was going to do (not that what he was going to do was bad). We can be assured it will be a shareholder friendly deal since Ackam owns 25% of the shares and has Board representation.
Can’t wait to hear….
Disclosure (“none” means no position):Long BGP
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Another nugget from Leucadia’s (LUK) 10-k. This one has to do with Bill Ackman’s Target (TGT) investment.
As of 12/31, Ackman owned 5.8 million shares and has call options on another 75 million shares. The total cost of the investment was $1.78 billion through Pershing Square IV, L.P.
The net loss on the investment as of 12/31 was $842 million. The loss included interest and dividends received. $135 million of the loss was actually realized, meaning the securities were sold at a loss. The remaining is still being held.
A 47.3% loss…..wow…
Pershing Square IV, L.P. (the “Partnership”) is organized as a limited partnership under the laws of the state of Delaware on May 22, 2007 and commenced operations on June 1, 2007. The objective of the Partnership is to invest all of its assets in Pershing Square IV A, L.P. (the “Subsidiary Partnership”). The Subsidiary Partnership is an exempted limited partnership formed under the limited liability partnership laws of the Cayman Islands on May 31, 2007 and commenced operations on June 1, 2007. The investment objective of the Partnership and the Subsidiary Partnership (collectively, the “PSIV Partnerships”) is to create significant capital appreciation by investing in stock, total return swaps and call options of Target Corporation.
Also,
Pershing, in its sole discretion, may advance or extend the Lock-Up Date for up to one year beyond December 31, 2009 if they believe it is in the best interest of the Partnership to do so.
Disclosure (“none” means no position):None
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Finally got around to reading the Borders (BGP) earnings call and the take away for me at least was very positive…
A couple of things struck me.
1- Guidance:
Despite a 2% comps sales increase number last year, guidance for the current year was in the words of CEO George Jones “very conservative”, “given the current environment”.
2- Cost cutting:
DVD “shrinkage” (read:theft) was at $20 million last year. The company has both made changes to security measures and will be reducing the number of titles sold and the expectations are for this number to fall dramatically.
Inventory ended the year at $1.3 billion and change, essentially flat over the previous year. Now, the company is moving towards a “face out” strategy on books that will reduce the number of titles sold at the store level. The results will be a dramatic fall in carried inventory at the store level. This savings drops immediately to the bottom line. The locations that have the “face out” shelving, carry 20% fewer titles yet are seeing double digits sales growth. hmmm.
The dividend was stopped (for now) and that will save $25 million and change.
3-Selective Promotions:
The Borders Rewards program now sports a membership of 25 million people. The importance of this is huge. It allows Borders to track purchases from its members and then tailor promotions to maximize the value of them. Retailers have been using these programs for years but Borders is only now getting involved. The tie in with the upcoming website launch will allow email-to-purchase marketing previously not available on this scale to the company.
4-Borders.com
The heavy costs involved with rolling out the site are done. Estimates of them were not given but looking sat the site one ought to assume they were substantial. It is important to note that in the previous year, Borders reaped no benefits from that investment. This year they will both reap the benefits and see a decrease in costs. CEO Jones said that he expects CapEX to fall from $200 million to “around” $140 million
5- Sale of assets
The minimum that will be raised in the $125 million offered by Ackman. Now, the company only has a market cap of just under $400 million at the current share price. They could conceivably by back 25% of the shares and have cash left over for operations or debt repurchases.
So where does this leave us? A cursory look shows $80 to $100 million in cost cuts available without any real effort or impediment to operations. The inventory reductions should be over an additional $100 million as the stores (not the company) begin stocking fewer titles.
Border lost $157 million last year and it looks as though it could easily cut its way to break-even or better this year now that much of heavy lifting in investment has be done. This assumes the above conservative guidance. Should that guidance prove to be conservative, results could improve even more.
Disclosure (“none” means no position):Long BGP
It seems there are four options for a purchaser of Borders (BGP).
1- Barnes and Noble (BKS)
This has been talked about fr a few years now. The theory being that a combined entity would be better able to compete with Amazon (AMZN) without the cannibalization of the foot traffic market the two currently compete for.
2- Indigo-
Canada’s largest bookseller has been mentioned as a possible suitor. This has some interesting story-lines to it. Indigo leads in market share in Canada. Here is the interesting part. Indigo’s CEO Heather Reisman knows Borders well. She lead the attempt to expand Borders into Canada in 1996 that was blocked by the Canadian government. She eventually left Borders,started Indigo, and then took over Canadian rival Chapters in 2001, claiming market dominance in the country. A combination of the two would lead to a North American powerhouse and with the controlling interesting being Canadian, would see no objection from that country’s government.
3- Pershing.
Ackman will already own the international operations soon enough, why not just convert his soon to be 40% stake into total ownership, do what he wants to it, and then spin it out in a few years when the climate is better?
4- Nothing.
It is possible for the company to continue on its own should no legitimate offered come about as the Ackman loan allows for uninterrupted operations through 2009. This option is not likely though. It was probably done to give the company some bargaining power in negotiations.
No matter what happens, Pershing will own the international operations on Australia, New Zealand, Singapore and Britain. Having those operation off the books may clear the way for Indigo to scoop up the US assets at a reduced price.
Borders is a profitable business that is turning around albeit very slowly in the current environment. With that being said, there is a market for the business for a buyer.
Again, the good news for current shareholders is Ackman’s interest. Being the largest shareholder and essentially in control of the sale process, shareholders can be assured of a good deal should one come about.
Disclosure (“none” means no position):Long BGP, none
Well, that didn’t take very long. “Ask and ye shall receive” I guess?
So yesterday I posed some questions about Borders (BGP) and today, answers came piling in.
Bill Ackman’s Pershing Square Capital Management Borders’s largest holder, has entered into the following agreement with Borders.
– A $42.5 million secured term loan to Borders at a 12.5% annual interest rate; the loan matures Jan. 15, 2009.
– Pershing committed to a “backstop purchase offer” that gives Borders the option until Jan. 15, 2009, to sell its Paperchase, Australia, New Zealand and Singapore units and its 17% interest in Borders U.K. to Pershing for $125 million, “after the company has pursued a sale process to maximize the value of those assets.”
– Borders will issue to Pershing 14.7 million warrants to buy shares at $7 each. That would be just under a 20% stake in Borders. The stake would be protected against dilution if Borders were to issue more equity, except shares issued for employee stock options.
The proposal is binding on Pershing Square until April 4. Borders has the right until then to seek better financing deals. If Borders finds a better deal, it can end the Pershing agreement with no break-up fee, although Pershing can request reimbursement of “reasonable expenses”, Borders said.
And oh yea….
The company today also reported results for the fourth fiscal quarter and full year 2007, ended Feb. 2, 2008. As detailed below, on an operating basis, fourth quarter income from continuing operations was $84.7 million or $1.44 per share compared to $87.7 million or $1.45 per share a year ago. Total consolidated sales from continuing operations were $1.3 billion in the fourth quarter. Excluding the impact of the extra week during fiscal 2006, this represents a 2.8% increase over the same period a year ago.
Ok.
After Ackman exercises the warrants, his ownership of the chain will be 40% when you take into consideration his economic interest being held in “total return swaps”. This ownership percentage will effectively give him total control of the chain. This is very good for shareholders.
Let’s not forget, Ackman began buying at $24, doubled down at $12 and now will pick up another chunk at $7.
A key here is the dilution protection. Buying shares here can be done with a reasonable as can be expected assumption of no further dilution. That is important. One could probably assume that Ackman may be buying more now with the stock hovering around $5.50 a share.
Here is why all the above is good news. The equity stake by Ackman in Borders is a non issue because his interest in the chain is the same as mine. He is “eating his own cooking” when it comes to the company as Berkshire’s (BRK.A) Warren Buffett is fond of saying.
Were this an outside equity stake, we could not be sure what the intent of the holder was. The loan that is issued would take priority over the stock price but with the loan holder being Ackman, and he having an interest in 40% of the shares, the stock price will not be ignored.
Yes the dividend was eliminated but let’s be honest, 11 cents a share ain’t gonna buy a summer home. Keep it and get this going.
The question that was not answered was the online store. But, a look at the results there from Barnes and Nobel (BKS) show that there is definitely growth there (13%) apart from Amazon (AMZN).
All that being said, at $5 and change, time to pick it up…
Disclosure (“none” means no position): Long BGP
Borders (BGP) reports earnings tomorrow and while one would not expect stellar results, there some things that could give us real clarity into the future.
Borders expects operating profit, excluding one-time items, to be $1.45 per share or less in the fourth quarter. Analysts predict profit of $1.42 per share on revenue of $1.34 billion.
The key to Borders is Bill Ackman. He has upped his stake to 24.4% and has had discussions with management. Recently he was able to get a Pershing partner, Richard Mcquire appointed to Borders board of directors.
Based on Ackman’s success at McDonalds (MCD) and the fact he initially bought in at $24 and doubled down at $12, one has to think there is considerable upside from here.
Let’s assume the quarterly numbers meet expectations. What we are looking for is clarity. We want to know results at the newest location. Now that Ackman has a voice on the board, are there any announcements coming. Debt reduction? share repurchases (not likely). When the sale of the Australian is completed, what is the use of those funds going to be? Recent negotiations on the sale of it were terminated but it is a matter of time before a buyer is found.
The website. What expectations are there. What did they receive from the Amazon (AMZN) partnership and by how much do they expect to exceed that with their own site.
When is the new concept coming close to me? One was announced in Massachusetts but I am not willing to travel an hour for a bookstore. A central Massachusetts location is needed. Alright, this last one will have no effect whatsoever on the stock but I would like it.
Disclosure (“none” means no position):None
looks like another activist victory for Bill Ackman.
It is being reported that Target (TGT) is currently in talks to sell 1/2 it credit card business. Details are not forthcoming at this time.
The sale is expected to net $4 billion which could repurchase almost 10% of outstanding shares at today’s prices
The move is a good one considering the deterioration in quality of the portfolio and will enable to company to repurchase shares to keep EPS growing to satisfy investors even is the actual net income line does not grow that fast.
Disclosure (“none” means no position):None
Thank you to David for the heads up on this. Want to know the reasons why Ackman is short MBIA (MBI) and Ambac (ABK)? Here is a video of his presentation. It is very detailed and outstanding. He goes through the process step by step.
You need to register on the site. It take two seconds and they do not spam you with emails.
This is Bill Ackman at the Hudson Institute. It is a great video as he goes into more detail on the machinations of the bond insurers.
Disclosure (“none” means no position): None
This is becoming the investing world’s Ali vs. Frazier. Legend Martin Whitman takes on Bill Ackman for another round in his latest letter:
I am torn on this one. The only mutual fund I own is Whitman’s Third Avenue Value (actually my son has it in his Coverdale) and I am a huge fan of Ackman and do watch his action closely. So who is right? I have documented Ackman’s stance on both MBIA (MBI) and Ambac (ABK) here in the past in detail so let’s go to Whitman’s retort.
Whitman states “MBIA is now strongly capitalized. It ought to qualify easily for an AAA rating with a $17 billion claims paying ability. If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business.”
He then says there are 3 main reasons this may not happen:
1- Capricious regulators (they actually seem to get as much of his wrath as Ackman does)
2- NY State insurance Regulators and Elliot Spitzer
3- Ackman and his “bear raiders”
He then says that while Ackman is an “articulate advocate” (this contrasts to the “slick salesmen” comment he made late last year) who is wrong for three reasons.
1- The “cheapness” of AAA insurance is not a broken model
2- GAAP analysis of the insurers portfolio by a “mark to market approach”. Whitman claims this is “arrogant nonsense” and that they should be judged on “what percent of obligations default and how they work out”. He sarcastically points out the the market has “correctly predicted 9 out of the last 5 recessions.”
3- Debt senority: Whitman says that MBIA’s structured debt appears to be almost all “senior” or even “super senior” and the risk of default is minute despite what Ackman and others claim.
So, what do we think? They are both right. Ackman has been dead on to this point and Whitman will be right long term. Ackman correctly predicted the current situation the insurers find themselves in. He was the first to make the call in 2002 and has not wavered in his belief.
Whitman will be right long term because there are too many parties with too much at risk to let the insurers fail. Now, there will be a massive dilution of shareholder interest along the way, but they will not fail.
That being said it does not mean that shares may not see low single digits before then so if you are going to invest, do so with a very strong stomach.
With all the plans out there and all the big fish billionaire investors like Buffett, Whitman and Ross circling around, my guess is Ackman will take his winnings and leave the tale very soon, if he has not already. He will does so as a huge winner in this fight.
Please read the full letter here:
Disclosure (“none” means no position):Third Avenue Value Shareholder and now long MBIA through the fund, Ackman fan