Wall St.Journal, Ackman, Weight Loss, Kid’s Colds
– Another thank you to David Gaffen at the Wall St. Journal for the mention.
– Chad Brand agrees with my assessment that Ackman can’t do much at Sears Holdings
– The Stockmasters have some thoughts on trimming down
– If you are afraid to use cold medicine on your little one, here is what to do
It been a few months since the last round so I guess it is time for people to begin guessing what Sears Holdings (SHLD) Eddie Lampert will buy next. My guess?
One rumor says: Lampert could respond by teaming up with Steven Roth of Vornado Realty Trust to take over Macy’s (M) department-store chain — a recurring rumor that most recently pushed up Macy’s share price on Sept. 14, said Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm.
Vornado has reportedly been interested in making a bid for Sears Holdings since 2005.
A Macy’s takeover by Lampert and Roth would be intelligent because Vornado has unlimited capital, Roth is a successful shopping-mall developer, and Macy’s would give Lampert a new opportunity to slash costs and sell off real estate, Davidowitz said.
“Lampert would save a fortune” in a Macy’s takeover by combining Sears, Kmart and Macy’s functions and saving costs on items such as accounting, distribution, administration and merchandising.
Lampert also would gain tremendous power because he would own two department-store anchors at shopping malls nationwide, Davidowitz said.”
All of the above is true, but one thing gets me. Lampert has never had a partner, why would he want one now? The reason Lampert owns over 50% of Sears shares (after the current buyback is finished) is that he wants autonomy. If it is true Vornado has been after Sears since 2005 and Lampert has not budged, why would he now? When you consider he could pull off the deal by himself (Macy’s has a market cap 1/2 that of Sears and Sears is virtually debt free at the moment)the chances of a Vornado partner ship seems even less remote.
The next prognostication has new shareholder Bill Ackman pressuring Lampert into dumping Sears valuable real estate holding. Does anyone really think Lampert would let a 3.5% holder pressure him into selling real estate during a real estate slump?
Personally I presume he would rather remove his eye with a dinner fork than have Ackman tell him what to do with his company. A more reasoned guess would be Ackman sees the value in Sears and is hopping on for the ride. Ackman is no dummy and I am giving him some credit here for not being such an egomaniac that he would expect to be able to pressure Lampert into doing anything he does not want to.
What people who believe in this scenario do not understand is the patience of Lampert. If this summer has proven anything, a dramatic drop in the price of the stock will not push him into making a move he does not want to make. What was his reaction this summer? Gobble up shares as fast as he could.
Alas rumor mongers, there most likely is nothing there. But I will admit that the exercise is a ton of fun… keep the rumors coming…
At the annual meeting in May, Sears Holdings (SHLD) Chairman Eddie Lampert said that he planned to double the number if Lands End “store in a store” locations to around 200.
Since Halloween is rapidly coming upon us and Sears is well on track to spend $3 billion (or more) on share repurchased this year, I was concerned as to whether or not they were still on target. If you remember as far back as January I commented that the concept, then only in it infancy was “a great change” and I later commented in March, two months before Lampert made the expansion announcement that I thought it would eventually become the center of Sears retail clothing operations.
Since the products are good and the division is having record year after record year, I did need to know if we were buying back shares instead of continuing the Lands End expansion or if (hopefully ) we were doing both. I would have been greatly concerned if one was being done at the expense of the other. What is the saying “robbing Peter to pay Paul”? In that scenario, the massive share repurchase, while something I love would have been accomplished at the expense of the retail operations and that would have been just a temporary band aid approach. Not so good.
Were are we? As of last week we are at 171 Land’s End “store within a store”. So? It means we are well ahead of the pace to get to the 200 Lampert stated he wanted to be at while at the same time are in the process of taking 15% of the shares off the open market through repurchases. Perfect…
My guess is that the rush to get the stores done was to maximize their sales for the Holiday’s this year and that after the first of the year the rate at which they open will slow a bit. No matter, what is important is that both the retail operation and returning cash to shareholders goals are being accomplished at the same time and neither is suffering to accomplish the other.
I am guessing Bill Ackman already knew this and perhaps this is why be has been buying 3.5% of the shares????
Good news for Sears Holdings shareholders.
At a charity event in Dallas yesterday William Ackman, the owner of activist hedge fund Pershing Square Capital, told the audience that he owns a 5 million share (3.5%) stake in Sears Holdings Corporation (SHLD) . Unlike Ackman’s large stake in Target (TGT) in which he pushed for a sale of companies the credit card unit, Ackman said was thrilled with the efforts of Sears’ Chairman Eddie Lampert and was looking forward to working with him.
The two have a history as last year, Ackman won a battle against Lampert’s Sears Holdings in the $899 million attempted takeover of Sears Canada. Ackman successfully argued that Sears Canada was worth at least twice what Lampert offered and Lampert was only able to purchase 70% of the company.
Ackman must be planning on being a partner with Lampert. The reason? Lampert at this point must own over 50% of the outstanding shares depending on how much of the $1.5 billion buyback the company completed in the last quarter.
If nothing else, this illustrates the potential in the shares that at $138 a share are vastly undervalued. Sears has been trading in sympathy with both the homebuilders and the financials (Sears is a quazi hedge fund with Lampert’s ability to invest its cash at his discretion) lately and both those sectors have been hit hard. Now that they are rebounding, expect that and the Ackman news to push shares higher.
I have said it before and it bears repeating, if you are buying shares in a company and you have people like Ackman and Lampert buying shares in the open market with you, you have to feel very comfortable with your decision.
Okay, my last post on the topic as I have already spent way too much time posting on a company I have zero interest in. I do this because I think my arguments are being “summarized” in a way that does not accurately reflect the true nature of them.
In his post, Mr. Cohen states:
“The spin-off of Wendy’s from THI created value. Why? Because both organizations can now concentrate on maximizing value of their own operations. THI is a great chain that was for a long time masking the ineptitude of Wendy’s mgmt team.”
It created a shareholder profit, not value. Why could the two management’s not concentrate on doing this when the companies where together? Why is separation necessary?
Cohen: “To me, Sullivan’s argument boils down to the fact that Wendy’s (WEN) and THI should have stayed together because of the “synergies” that could be created by keeping them together.”
Yes, that and as I stated “Horton’s would have buffered Wendy’s shareholders while the management tried to fix it”
Cohen: “I think it’s mostly self-evident that there are few synergies between a Canadian doughnut chain and an American burger chain. THI has 2,700 locations in Canada and ~330 in the US. Wendy’s has about 7,000 locations in the US, and 370 in Canada. Are there really any synergies between these two in terms of “integration of logistics and getting product to locations?” I don’t really think so.
Wendy’s sells burgers and fries and meat and fish and potatoes. Horton’s sells coffee and tea and snacks and doughnuts and yes, sandwiches also. But cost savings from combined purchasing? The two chains don’t really sell similar stuff. I can see Dunkin Donuts and THI having cost savings from combined purchasing, but not a coffee & doughnut shop with a burger chain.”
Here is where his argument falls apart. Why, consider how Wendy’s is attempting to jump start sales. From Wendy’s site:
“Wendy’s is expanding its new breakfast menu to more than 75 additional restaurants in markets across the U.S. this month. This move comes after an extended test involving about 160 restaurants in five markets.
The Company is on track with the planned timing of its breakfast expansion, and expects to offer breakfast in more than 650 restaurants by the end August.
“Breakfast is the fastest growing business segment in the quick service restaurant category; and, we’re raising the bar by introducing a fresh, delicious, premium-quality breakfast menu,” said Wendy’s Chief Executive Officer and President Kerrii Anderson. “We believe it’s a better breakfast, and the positive customer reaction that we’ve received so far bears this out.”
As part of its breakfast menu, Wendy’s will be the only major quick service restaurant or convenience store chain to offer a proprietary blend of Folgers® Gourmet Selections™ coffee.”
Now, I am sorry but “Folgers” and “gourmet” belong in the same sentence only slightly more than “spam” and “gourmet” do. How much better would that sentence be with “Tim Horton’s Gourmet Coffee” instead of Folgers? How many more people would be willing to partake in a Wendy’s breakfast if the coffee they are serving did not remind them of the “extra screws” can in their father’s and grandfather’s garage? How much more “value” would Tim Horton’s coffee bring to the equation? Now, if I am out and want breakfast and coffee, I will not go to Wendy’s for the Folgers, even though I have a positive mindset towards their food quality, I will go to McDonald’s (MCD) for the Newman’s Own coffee. How many other people out there feel that way? I would argue a ton.
Cohen: ” McDonald’s introduced premium coffee that was branded McDonald’s. Wendy’s can introduce premium coffee that’s branded Wendy’s. The ability for Wendy’s to introduce premium coffee in cups that say Tim Horton’s doesn’t really justify keeping the conglomerate together. They can always license the THI name if they think it will help. If you read this Wall Street Journal article, though, you’ll see that Americans in general don’t really recognize the Tim Horton brand, so I don’t think it would really help Wendy’s to introduce Tim Horton-branded premium coffee in its 7000 US locations.”
Again, just untrue. McDonald’s coffee was not only NOT branded McDonald’s it was branded, advertised and sold as “Newman’s Own”. For proof take a look at this cup of iced coffee, if you look hard enough at the bottom you can see the McDonald’s logo, barely visible. As for American’s “not recognizing” Tim Horton’s, I would not expect folks in Tuscon, 2,000 miles away from the closest Tim Horton’s to recognize it, but, the same poll taken in areas where Horton’s does business would yield starkly different results. There is a reason Dunkin Donuts has not entered those markets yet.
Cohen: “Sullivan also claims that the Wendy’s management could have handled THI and Wendy’s together because there’s no reason why management can’t “walk and chew gum” at the same time. I would argue that if the management team (which by the way has already changed its CEO since then) couldn’t handle Wendy’s properly, they would’ve eventually screwed up THI also.”
This fails to recognize that the chains had separate management.
Cohen:”Sullivan argues that “everyone knew the burger chain was mismanaged” before the THI spin-off “and if they did not, they just did not look into the company very well before they bought shares.” I don’t really agree with that statement. Until Bill Ackman and Nelson Peltz came onto the scene, it didn’t seem like shareholders really cared about management ineptitude. Both Ackman and Peltz pushed for the spin-off to create value. Peltz, by the way, has significant experience in the restaurant field and he still holds Wendy’s shares today, indicating that he thought and still thinks that the spin added value. Now that Wendy’s is a stand-alone entity, Peltz can get his hands dirty with either fixing the company himself (which Wendy’s management is doing its best not to do) or getting it sold off. None of this would’ve happened without activist shareholders urging a spin-off. Certainly a purchase of Wendy’s would have been much harder to pull off if it was an entire conglomerate.”
I will not speak for the thousands of Wendy’s shareholders and what they did or did not think but I will say that a cursory look at the company would have revealed the burger chain was not doing very well. I will say most people knew Wendy’s was in third place in a 3 horse race vs. McDonald’s and Burger King. I will address the Peltz issue at the end.
Cohen:”As Whitney Tilson writes in this FT article (.pdf) from last year, “with the stock in the high $30s, the company?s Tim Hortons subsidiary was worth nearly the entire stock price.” Well, if that was the case, why wasn’t the stock trading higher? It all boils down to transparency. That, after all, is why spin-offs outperform the market almost all the time.”
Again, not really. Now it is true that percentage wise, spin do outperform the market. But, one cannot just blindly invest in spin offs and expect to beat the market. For instance if we have three spin offs that perform 25%, 8% and 8% and the market does 10%, the average gain for the spins was in excess of the market even though 60% of them did not beat it. I believe the actual % of spins that beat the market is around 60%, a far cry from “almost all”. Now, the transparency argument. Mr. Tilson also argues that Warren Buffett’s Berkshire Hathaway (BRK.A) is undervalued. Is there a more transparent company out there? Is Mr. Cohen advocating Berkshire start selling off assets to “unlock” this value? Or, should we wait for the market to recognize the true value of Berkshire and price shares accordingly? Isn’t this after all the very essence of Buffett’s style of value investing? Are we going to argue against his results?
Cohen:”In this case, keeping Wendy’s and THI together didn’t make sense. And hey, you don’t believe me? Ask Nelson Peltz. He has much more experience with both value investing and restaurants than either Sullivan or myself. He both supported the spin-off and continues holding the stock. I couldn’t ask for better proof than that”
What happened to Mr. Ackman? You cannot in one post trumpet Ackman’s beliefs and activism and call him a “long term investor” and then casually omit he dumped his stake in Wendy’s when you are trying to make a point about why holding Wendy’s shares is a good idea. It should also be noted that Ackman’s stake was nearly twice the size of Peltz’z current one (9% to 5.5%)and that he no longer holds Tim Horton’s shares either. Since we are throwing famous investors names around, let’s not forget George Soros dumped shares in both Wendy’s and Tim Horton’s after the spin along with Ackman.
I think the fundamental disagreement we have is what “value” means. I believe to Mr. Cohen it means “what can I get for my shares today” while to me it’s means “how much will they appreciate over the next several years”. This is why I have advocated Andrew Liveras NOT sell Dow Chemical, (DOW) because I believe the value of it long term is multiples of the $15 to $20 a share quick hit I would get from a sale. I believe Wendy’s long term would have made more money for shareholders with Tim Horton’s than without, especially when you consider the push they are making into breakfast which is what Horton’s really does well. It was a natural fit for the two.
Alas, we will never know “what could have been” for Wendy’s but one thing we do know, Ackman and Soros seem to believe the valuations of both companies no longer present investors with a “value” nor are they optimistic enough about the separate entities to continue to own shares.
I usually ignore things like this but when they cross the line from a well though out rebuttal (like Andy Kern’s Berkshire rebuttal to me that I requested from him and actually posted on my site) to one that takes selective items from a post of mine while ignoring and misstating others to make a point, I need to set the record straight.
In a post, David Cohen states: “Aside from ignoring and/or mis-stating key facts (Bill Ackman is indeed a long term value investor, and Nelson Peltz, who still holds Wendy’s shares, also pushed for the THI spin-off), I think the argument is off-base.” THI is Tim Horton’s International
First things first. I never claimed Ackman was a long or short term investor and as a matter of fact I alluded to him still owning McDonald’s (MCD) saying “he recognizes the bright future there”. What I said was that he had “a short term interest in the company (Wendy’s)”. Ackman first disclosed a Wendy’s stake in April 2005 and by November 2006 (immediately after the Tim Horton’s spin) had liquidated it and yes I consider this short term. Don’t believe me? Let Ackman himself tell you, “We buy things when they are discounted, and once they reach the potential of what we think they are worth, we sell. It could take months, or it could take years. That is our business.” Bottom line? He is “long term” or “short term” depending on the situation and what he wants out of it. Is this any different that what I said?
Nelson Peltz. In my post I said “agitation from activist investor Nelson Peltz and former shareholder William Ackman that action be taken to boost the company’s share price.” I am not sure what the point of restating my comment as though I alluded to something else is.
He continues “Sullivan’s argument is that Wendy’s could be doing much better if it only sold coffee to its customers, as McDonald’s seems to be succeeding in doing. My retort: Can’t Wendy’s (WEN) sell coffee without THI just as it could with THI? What in the world does Tim Horton’s have to do with Wendy’s selling coffee?”
Again this only touches the and I think intentionally misses the core of my argument. It never implied it was the “only” thing they would have to do, just a glaring opportunity they now do not have. Also, the argument was “premium” coffee, not “brown liquid in a cup”. Again to accurately quote my post, “given the overwhelming success McDonald’s (MCD) has had with it’s premium coffee offering.” McDonald’s sold coffee before but the introduction of the premium (Newman’s Own) stuff has lead to an explosion in coffee sales for the chain. Along with the added customer trips come more ancillary sales of food items. There is a reason in every monthly earnings release “breakfast” (coffee) is at the top of the list of reasons for yet another record month at the Golden Arches.
If anyone has been to where Tim Horton’s does business, they are wildly popular, more so than Dunkin Donuts. It is a premium brand in those areas. Are we really going to believe that selling premium coffee at Wendy’s drive thru’s would not lead to increased business? This is true if for no other reason it would stop people from defecting to McDonald’s for a cup and give them a reason to stop at Wendy’s. More customer trips always equal more sales in the fast food business. Selling Tim Horton’s coffee would have assured additional trips to Wendy’s as McDonald’s has proven premium coffee drives business.
Again Mr. Cohen: “I would argue that if the spin-off of THI never happened, then Wendy’s would still be basking in the glory of its well-run THI operation and not focusing on its mismanaged core business. Now that THI exists (and is thriving) on its own, everyone can see how badly Wendy’s is lagging behind McDonald’s and Burger King. With this transparency comes shareholder pressure to improve operations. If the THI spin-off never happened, it never would have been so painfully obvious how badly Wendy’s is managed. With the transparency of the spin-off comes a recognition of problems. While the solutions may not be easy, recognition is the first step.”
Not sure why he “would argue” this after I said “Now holders are stuck with a third rate burger chain that is missing what would have been the fastest growing part of it.” I think everyone new the burger chain was mismanaged and if they did not, they just did not look into the company very well before they bought shares. What Horton’s did was buffer shareholders while they tried to fix it. There seems to be this thought out there that management cannot walk and chew gum. Like the recent Home Depot (HD) sale announcement, it is a short term gain at the expense of long term performance. Neither the Tim Horton’s spin or the Home Depot sale are going to “fix” the problems at the parent nor will they make them any more apparent. They both will make shareholders happy initially and scratching their heads later. Why? Had either Wendy’s or Home Depot fixed what really ailed them and kept the items they sold off, shareholders would have been rewarded in multiples down the road with two thriving businesses that would have had wonderful synergies together.
Now, am I opposed to all spins? No, just the ones done for the wrong reasons. Ones like the Wendy’s and Home Depot spin are like taking diet pills instead of exercising and eating right. You’ll get immediate gratification at the expense of long term benefits. In the post I referenced the Chipotle (CMG) spin by McDonald’s as one that was done right. The two businesses were unrelated (Mexican food vs Burgers and eggs)and the synergies between the two on a retail level were nil. It made sense to cut Chipotle loose to shareholders so they could experience the full benefits of both operations. It was not done to mask problems. Even the recent Altria (MO) spin of Kraft (KFT) was done for the right reason, to fully recognize the full value of BOTH entities, not one.
Mr. Cohen concludes: “Now, shareholders can decide to own either Wendy’s or Tim Horton’s or both. As a shareholder of Wendy’s, you would’ve received your fair share of THI in the spin-off. You can decide to do with that whatever you want, but you can easily create the old Wendy’s/THI conglomerate by just keeping your shares. I don’t understand why having more flexibility in building your position results in a destruction of value.”
I agree, you can own one one, both or neither. You cannot replicate the old conglomerate by owning both, however. You cannot replicate the cost savings of not having two entirely separate corporate structures, the increased purchasing power of the larger combined entity, the savings from combining advertising, the savings from the integration of logistics in getting product to locations and the increased revenue that could be realized from cross selling products with each other.
Having portfolio flexibility and the destruction of value in Wendy’s “Long Term” (which was the title of my original post on my blog) are two wholly unrelated items. This confuses the “price” you received for your shares vs. the “value” in the company. Shareholders had flexibility when they first bought shares and continued to have it as they held them. They could have sold them or added to their position at anytime.
The long term value in the combined entity would have come from what the two businesses could have done for each other to generate earnings for shareholders. My argument was and still is that Wendy’s was better off with Tim Horton’s long term than without.
Shares of Wendy’s (WEN) closed down 3.7% at $38.26 Monday after the company cut its full-year earnings forecast and currently sit at $37. Wendy’s also said for the third time since April that it is considering a sale. They lowered 2007 EPS guidance to $1.09-1.23, down from a $1.26-1.32 forecast and below analyst expectations of $1.27. EBITDA is now forecast at $295 million-315 million versus a prior range of $330 million-340 million. Wendy’s, which is facing intense competitive pressure, has also had to contend with agitation from activist investor Nelson Peltz and former shareholder William Ackman that action be taken to boost the company’s share price
Activist investor Bill Ackman, though his Pershing Square Capital hedge fund, owned 6.42 million as of 9/30/2006. By 12/31/2006 after he got the spin he wanted that stake was liquidated. Now holders are stuck with a third rate burger chain that is missing what would have been the fastest growing part of it.
Ackman was instrumental in pushing Wendy’s to spin-off its Canadian Tim Horton (THI), which was completed in Sept. 2006. Given the popularity of the Tim Horton’s coffee and the overwhelming success McDonald’s (MCD) has had with it’s premium coffee offering, one has to wonder how much better off Wendy’s would be if they were serving the coffee in their stores and at their drive-thru’s. One thing is for sure, they would not be any worse AND they would be driving traffic to their stores for the coffee.
This what happens when management caves to somebody who only has a short term interest in the company. Conversely, Ackman’s demands to McDonald’s were essentially rebuffed. Yes, they spun the Chipotle (CMG) chain but that was rumored in the works before Ackman stepped in. He then wanted a sale of the corporate owned stores and real state sales but was denied by management. Where is McDonald’s sitting now? At an all time high with a future as bright as it has had in decades. It should be noted that Ackman, even though he was denied his proposed changes, is still a McDonald’s shareholder, apparently even he sees the bright future there.
Looks like Home Depot (HD) CEO Frank Blake caved to activist shareholders and now officially deserves the moniker, “Bend over Blake.”
In February I contemplated buying HD shares but wanted to see what was going to happen to the only division in the company actually growing, the Supply unit. Later, when it looked like the unit might remain a member of Home Depot, I backed off Blake and decided to take a “wait and see” approach. It now looks like my initial assessment was correct.
CNBC today announced “Home Depot Inc. agreed to sell its Home Depot Supply
business to a consortium of private equity companies for more than $10 billion,
the New York Times reported in its online edition on Tuesday. Citing people
briefed on the talks, the paper said Home Depot will announce the deal later
today with Bain Capital, the Carlyle Group and Clayton Dubilier & Rice.”
At least the folks at the PE companies see the value in the unit. This move is all about Blake trying to appease Relational Investors and jump the stock price today at the expense of long term gains. This smells eerily similar to what happened at Wendy’s last year when Pershing Square’s Bill Ackman demanded a spinoff of the Tim Horton’s (THI) coffee chain. He got what he wanted, cashed in, bolted and now Wendy’s (WEN) shareholders are left wondering what became of their company. How much better would Wendy’s sales and profits be today if they sold Tim Horton’s coffee at their drive thru’s given the success Mcdonald’s (MCD) has had with premium coffee?
Getting rid of the Supply unit will not fix the problems at Home Depot. The problems there are systemic, not financial. The thought that they cannot execute both a retail and a Supply unit only means they have incompetent management there, not that it cannot be done. Is it really that far of a stretch to picture them selling pvc piping to a homeowner vs a business owner? Had they entered the food business, it would make sense to sell it. This is a value destroyer long term…..
Too bad…
Carol Levenson, an analyst with independent research firm Gimme Credit, wrote in a note to investors Tuesday that Sears Holdings (SHLD) could be a “dark horse” target, possibly so Ackman could lobby for a Sears Canada spinoff to boost shareholder value. This is foolish
Last week, analyst Sean Egan, managing director at Egan-Jones Ratings Co., raised the speculation that Lampert might buy the 58 percent of Sears Holdings Corp. he doesn’t already own and take it private, given its poor performance. Not foolish but unlikely. Let’s address these one at a time.
In the past Ackman has made a name for himself with high profile shareholder initiatives at McDonalds (MCD) and Wendy’s (WEN). An attempt to do battle with Lampert at Sears will be a disaster for him. Unlike McDonalds and Wendy’s, Lampert controls 65 million shares of Sears or over 40% of all shares and based on the recent 10Q filed June 1st, the number of outstanding shares is decreasing, increasing his ownership percentage. Nothing, I repeat nothing will be done at Sears that Lampert does not want done. You also have to consider the stocks rise from $23 to $180 in four years. Ackman will have a tough time convincing anyone he could do better and that getting rid of Sears Canada will benefit anyone but him (he owns I believe 12% of it). If anything, shareholders will tell him to take a hike, sell Lampert (who owns 70% of it) his stake and let Eddie do his thing with it. His battle with Lampert over Sears Canada (SCC.TO) was well documented and he has profited with it’s stock price rising 50% the past year as he refused to sell his stake. Now, refusing to sell your shares and convincing Lampert to spin off his are two entirely different things.
Ackman is no dummy and he surely realizes this.
Now, for the “taking private” argument. Possible but unlikely. If Lampert has any desires to become the “next Warren Buffett”, he cannot do that with a private company. What has made Buffett iconic is that mom, pop and the next door neighbor got rich with him, a private Sears Holdings eliminates that possibility. Will he purchase more shares for himself and have Sears purchase more to decrease to count and increase EPS? Yes and he is. Good
Alas this seem to be not much more than rampant Lampert speculation….