ValueAct Capital Reduces Alliance Data Systems Position

Jeff Ubben's activist firm ValueAct Capital has also filed both a Form 4 and a 13D with the SEC regarding its stake in Alliance Data Systems (ADS). 

ValueAct now only owns 2.7% of the company with a little over 1.377 million shares.  This is down from the 3.7 million they reported owning back at the end of Q2.
The Form 4 filing notes that ValueAct converted its previously disclosed 150,000 shares of Series A non-voting convertible preferred stock into 1.5 million shares of common stock.  The 13D also indicates that ValueAct sold 2 million ADS shares at $101.50 on October 28th and sold another 1.83 million shares at $102 the next day.

Per Yahoo Finance, Alliance Data Systems "provides data-driven marketing and loyalty solutions worldwide."

Third Point's Q3 Letter: EssilorLuxottica Thesis

Dan Loeb's hedge fund firm Third Point is out with its third quarter letter.  In it, they touch on activist investing, their successful investment in Sotheby's (BID), an update on Sony (SNE) and Argentine Credit, and also outline their thesis on newer holding EssilorLuxottica.

Of the latter, they write:

"Our analysis of potential merger synergies points to over €1 billion in additional profit through efficiencies and revenue growth, almost double the Company’s current targets.  In the near‐term, this will be driven by cross‐selling to wholesale customers, insourcing lens procurement, and supply chain efficiencies.  The longer‐term opportunity to disrupt the industry value chain is even more appealing: combining lens and frame to shrink raw material need and waste, reducing shipping costs by merging prescription labs with global distribution hubs, and providing a true omni‐channel sales offering.  These initiatives will transform the way glasses are sold, significantly improving the customer experience."

Third Point sees the company earning over 8 euros of EPS in 2023 and for earnings and FCF to grow at a mid-teens compound annual growth rate.

Embedded below is Third Point's Q3 letter:



You can download a .pdf here.

For other recent hedge fund letters, you can also read Howard Marks' latest letter here.

Corvex Management Goes Activist on ForeScout Technologies

Keith Meister's hedge fund firm Corvex Management has filed a 13D with the SEC regarding shares of ForeScout Technologies (FSCT).  Per the filing, Corvex now owns 7.2% of ForeScout with over 3.34 million shares.  However, the 13D is being filed jointly with Jericho Capital Asset Management which also owns shares, bringing their collective exposure to 14.5% of the company with over 6.68 million shares.

The filing shows Corvex as buying throughout September and October initially at prices around $35.xx but really ramped up their buying when shares traded down to $25.xx.

The 13D also contains information about their new activist stance: "After the close of business on October 18, 2019, the Corvex Persons agreed with the Jericho Persons to work together to engage with the Issuer and its management regarding its business and prospects. The Corvex Persons and the Jericho Persons believe that combining their complementary expertise, skill sets and perspectives will be beneficial in discussions with the Issuer. The Corvex Persons and the Jericho Persons anticipate having private discussions with the Issuer as soon as practicable."

Per Yahoo Finance, ForeScout Technologies "provides network security products in the Americas, Europe, the Middle East, Africa, the Asia Pacific, and Japan. It offers CounterACT that provides for visibility and control capabilities across campus information technology and Internet of Things (IoT) devices, operational technology devices, data center physical and virtual devices, and cloud virtual devices; and SilentDefense, which offers visibility and control capabilities within the operational technology portion of the network."

Mantle Ridge Files Form 4 on CSX

Paul Hilal's investment firm Mantle Ridge LP has filed a Form 4 with the SEC regarding its stake in CSX (CSX).  Per the filing, Mantle Ridge sold 3.45 million shares on October 17th at $67.91.  The filing notes this was "in order to repay Mantle Ridge Fund obligations under a secured credit facility. The Reporting Persons have no current plans to sell any additional shares of the Issuer, although they reserve the right to do so in their discretion."

The Form 4 also shows Mantle Ridge made pro rata distributions of over 34.49 million shares to direct and indirect owners of the Mantle Ridge funds.  Also, 36,813 shares were contributed to certain charitable organizations.

Prior to founding Mantle Ridge, Hilal worked at Pershing Square and runs a similar activist strategy, though more concentrated.

Carl Icahn Boosts Hertz Position

Activist investor Carl Icahn has filed numerous documents to the SEC recently (13D's and Form 4's) regarding his position in Hertz Global (HTZ).  Per the most recent 13D, Icahn now owns 30.92% of the company with exposure to over 43.92 million shares (inclusive of 2.03 million shares underlying forward contracts).

His recent purchases also are via forward contracts.  Per the filing, Icahn acquired exposure to over 1.15 million shares via forward contracts that expire on September 8, 2021.
The price per share is listed at $14.73 and $15 in the transactions.  And the filing notes that these contracts "Represents a forward price of $12 per Share, plus the amount per Share the Reporting Person paid the counterparty to the forward contract upon entering into such forward contract. The forward price is subject to adjustment to account for any dividends or other distributions declared by the Issuer. In addition, the Reporting Person paid a financing charge to the counterparty to such forward contract."

ValueAct Reveals Activist LKQ Stake, Sells Some Arcosa

Jeff Ubben's activist investment firm ValueAct Capital has filed a couple of 13D's with the SEC recently.

ValueAct Reveals Activist LKQ Stake

First, per a 13D regarding shares of LKQ Corp (LKQ), ValueAct now owns 5.2% of LKQ with over 16.03 million shares as of September 3rd.  This is a brand new position for the firm.

The filing indicates they were out buying shares throughout August and into early September with weighted average purchase prices coming between $24.91 and $27.49. 

The 13D also includes this note regarding their stake: "The Reporting Persons have had and anticipate having further discussions with officers and directors of the Issuer in connection with the Reporting Persons' investment in the Issuer. The topics of these conversations have covered or will cover a range of issues, including those relating to the business of the Issuer, management, board composition (which include whether it makes sense for a ValueAct Capital employee to be on the Issuer's board of directors), investor communications, operations, capital allocation, dividend policy, financial condition, mergers and acquisitions strategy, overall business strategy, executive compensation, and corporate governance."

Per Google Finance, LKQ "distributes replacement parts, components, and systems used in the repair and maintenance of vehicles. It operates in three segments: North America, Europe, and Specialty. The company distributes bumper covers, automotive body panels, and lights, as well as automotive glass products, such as windshields; salvage products, including mechanical and collision parts comprising engines; transmissions; door assemblies; sheet metal products, such as trunk lids, fenders, and hoods; lights and bumper assemblies; scrap metal and other materials to metals recyclers; and brake pads, discs and sensors, clutches, steering and suspension products, filters, and oil and automotive fluids, as well as electrical products, including spark plugs and batteries."


ValueAct Sells Some Arcosa Shares

Second, in a separately amended 13D, ValueAct has disclosed it has sold some Arcosa (ACA).  Per the 13D, the fund sold shares on September 9th through 13th at weighted average prices of around $34.50.

After the sales, ValueAct still owns 5% of the company with over 2.41 million shares.

Per Yahoo Finance, Arcosa "manufactures and sells infrastructure-related products and services for the construction, energy, and transportation markets. It operates through three segments: Construction Products Group, Energy Equipment Group, and Transportation Products Group. The Construction Products Group segment offers lightweight and natural construction aggregates, and trench shields and shoring products that are used in construction landscape, including commercial, industrial, road and bridge, and underground construction. It serves concrete producers; commercial, residential, industrial, and highway contractors; manufacturers of masonry products; state and local governments; and equipment rental dealers. The Energy Equipment Group segment provides structural wind towers for wind turbine producers; steel utility structures for electricity transmission and distribution; and pressurized and non-pressurized storage and distribution containers that store and transport various products, such as propane, anhydrous ammonia, and natural gas liquids. The Transportation Products Group segment offers hopper barges, tank barges, fiberglass covers, hatches, castings, and winches for commercial marine transportation companies and industrial shippers; axles, circular forgings, and coupling devices for freight, tank, locomotive, and passenger rail transportation equipment, as well as for other industrial uses; and cast components for use in the industrial and mining sectors. The company is headquartered in Dallas, Texas."

Paulson & Co Files 13D on Callon Petroleum, Opposes Carizzo Oil Acquisition

John Paulson's hedge fund firm Paulson & Co has filed a 13D with the SEC regarding shares of Callon Petroleum (CPE).  Per the filing, Paulson now owns 9.5% of the company with over 21.59 million shares.  This is a brand new position for the hedge fund as they did not report any shares on their most recent 13F filing which discloses portfolios as of June 30th.

Paulson has gone activist and sent the board of directors a letter highlighting they oppose the acquisition of Carizzo Oil & Gas.  Paulson outlines a few reasons for their position: 1) Callon stock is down 36% since acquisition's announcement, 2) Co is offering an unwarranted premium to Carrizo, 3) Callon shareholders would be diluted, 4) Callon would no longer be a premium pure-play company, 5) Callon could be worth over 60%+ in a takeover, 6) Permian basin pure-plays remain attractive acquisition targets.  They go on to list other reasons as well.


Paulson & Co's Letter to Callon Petroleum

Embedded below is Paulson & Co's letter in its entirety.



You can also access it here.

Elliott Management Goes Activist on AT&T

Paul Singer's hedge fund firm Elliott Management has gone activist on AT&T (T), sending a letter to the board to outline what they feel is a 'compelling value-creation opportunity.  Elliott now owns $3.2 billion worth of shares and they see 65% upside to recent trading levels.

Elliott writes, "Elliott  made the investment in AT&T – among  its largest ever – because it exhibits a unique combination of historical underperformance,   a  depressed  valuation,  well-positioned  assets and  a clear path forward to generate extraordinary  value  for shareholders and other stakeholders."


Elliott's Letter to AT&T

Embedded below is Elliott's Letter & Presentation on AT&T.  It includes numerous charts and highlights T's valuation as well as struggling business lines:



You can also visit the website they've setup: activatingatt.com

Dr. Michael Burry Buys More Tailored Brands, Sends Letter to Board

Dr. Michael Burry of Scion Asset Management has been busy lately.  We previously detailed how he re-built a stake in Gamestop (GME) and sent a letter to the board.  Well, he has now also just filed a 13D on shares of Tailored Brands (TLRD), which he's owned and previously also sent letters to the board.

The new filing indicates Burry has boosted his TLRD position, buying throughout August at prices of around $4.7145 and $4.8282.  In total, Scion Asset now owns 5.1% of the company with 2.6 million shares.  This is up from his previous stake of 1.85 million shares at the end of June.


Dr. Michael Burry Sends New Letter to Tailored Brands Board

Burry also sent a new letter to the board dated August 30th where he addresses rumors that Sycamore Partners had approached the company about an acquisition at around $10 per share.  Burry writes, "We do not know if any of this is true.  However, we believe you must know that $10 per share is not fair value and will not be acceptable to shareholders."

Later Burry goes on to write, "With some urgency, we stand by our letters of August 2nd and 19th. Given the quarter-century lows in the common stock and the severe undervaluation this entails, we believe the best use of funds from the corporate apparel segment sale, in good part or in full, is for a share repurchase.While management is considering asset sales, we would encourage exploring the market for Tailored’s Canadian operations. The Board and management ought to focus resources on its core 1300+ store U.S. operations. Proceeds from a sale of these remaining international operations may also be best used to accelerate debt repayment and stock buybacks."

He's previously sent two other letters to the board which you can read here and here.

Per Yahoo Finance, Tailored Brands "operates as a specialty apparel retailer the United States and Canada. It operates through two segments, Retail and Corporate Apparel. The Retail segment offers suits, suit separates, sport coats, slacks, formalwear, business casual, denim, sportswear, outerwear, dress shirts, shoes, and accessories for men. It also provides women's career and casual apparel, sportswear, and accessories; children's apparel; and alteration services. As of February 2, 2019, this segment operated 1,464 stores under the Men's Wearhouse, Men's Wearhouse and Tux, Jos. A. Bank, Moores, Joseph Abboud, and K&G brands. The Corporate Apparel segment provides corporate apparel uniforms and work wear to workforces under the Dimensions, Alexandra, Yaffy, and Twin Hill brands through various channels, including managed corporate accounts and catalogs, as well as through dimensions.co.uk, alexandra.co.uk, and twinhill.com Internet sites. This segment serves companies and organizations in the airline, retail grocery, retail, banking, quick service restaurant, car rental, distribution, travel and leisure, postal, security, healthcare, and public sectors. The company was formerly known as The Men's Wearhouse, Inc. and changed its name to Tailored Brands, Inc. in February 2016. Tailored Brands, Inc. was founded in 1973 and is based in Houston, Texas."

JANA Partners Buys Bloomin' Brands, FIles 13D

Barry Rosenstein's hedge fund firm JANA Partners has filed a 13D on shares of Bloomin' Brands (BLMN).  Per the filing, JANA now owns 9% of the company with over 7.81 million shares.  This is a brand new stake for the firm.

JANA was buying throughout August at with the bulk of their recent purchases coming at prices of around $16.08 and $16.21. 

The 13D contains the standard boilerplate:

"The Reporting Person acquired the Shares because it believes the Shares are undervalued and represent an attractive investment opportunity. The Reporting Person intends to have discussions with the Issuer’s board of directors and management regarding a sale of the Issuer, divestitures, capital allocation, operations and board composition. The Reporting Person expects to have discussions with the Issuer’s management and board of directors, shareholders and other interested parties relating to such matters."

Per Yahoo Finance, Bloomin' Brands, Inc., "through its subsidiaries, owns and operates casual, upscale casual, and fine dining restaurants in the United States and internationally. The company operates through two segments, U.S. and International. Its restaurant portfolio has four concepts, including Outback Steakhouse, a casual steakhouse restaurant; Carrabba's Italian Grill, a casual Italian restaurant; Bonefish Grill, an upscale casual seafood restaurant; and Fleming's Prime Steakhouse & Wine Bar, a contemporary steakhouse. As of December 30, 2018, the company owned and operated 1,068 restaurants and franchised 164 restaurants across 48 states; and owned and operated 125 restaurants and franchised 131 restaurants across 20 countries, Puerto Rico and Guam. Bloomin' Brands, Inc. was incorporated in 2006 and is headquartered in Tampa, Florida."

Dr. Michael Burry Long Gamestop: Sends Letter to Board

Dr. Michael Burry of Scion Asset Management and of The Big Short fame has recently re-surfaced in shares of Gamestop (GME).  He previously owned shares earlier this year but sold out in the second quarter per his latest 13F filing as of June 30th.    However, he has re-established a stake in the company as shares plunged, now owning around 3.05% of the company with approximately 3 million shares.

Burry argues the company should buyback a ton of stock given the limited float.  This has been a popular short among hedge funds which view it as 'Blockbuster 2.0' and recently, as much as 60% of GME's shares have been sold short.

Tae Kim over at Barron's scored a rare interview with Burry on his GME long, which you can check out here.  Burry noted that the new gaming console cycle "is going to extend GameStop's life significantly. The streaming narrative dovetailing with the cycle is creating a perfect storm where things look terrible.  [But] it looks worse than it really is."


Scion's Letter to Gamestop Board

Below is the full text of the letter Dr. Burry sent Gamestop:

"August 16, 2019

Dear Members of the Board,Scion Asset Management, LLC and its affiliates (“Scion”) own approximately 2,750,000 shares, or about 3.05%, of GameStop, Inc. (“GameStop”) common stock.

As mentioned in our previous letter to the board, we have concerns regarding capital management at GameStop. Given recent GameStop common stock prices under $4 per share, we must re-state that GameStop complete the remaining $237,600,000 share repurchase at once and with urgency.

Given the market capitalization of GameStop at $290 million at the close on August 15th, completing the authorization would retire over 80% of GameStop’s outstanding shares. Depending on the timing and quality of execution, such a repurchase would increase earnings per share dramatically - far more than any other possible action on a per share basis.

The numbers are striking and demand action. We estimate that GameStop now has in excess of $480 million of cash, more than enough to complete the share repurchase authorization and still invest in the business and pay down debt.

Through August 15th, a total of 11 trading days, 50,399,534 shares have traded. At this rate, for the month of August and for the third month in a row, the number of shares traded will exceed the total number of shares outstanding. Because of such high volume, we maintain that GameStop could pull off perhaps the most consequential and shareholder-friendly buyback in stock market history with elegance and stealth.

Shareholders staring at all-time lows in GameStop stock see little evidence that GameStop has effectively leveraged its elite position in the gaming universe as the new paradigm came into clear view over the last five years.

The unfortunate reality is that Amazon, not GameStop, bought Twitch in 2014. Instead, in 2014, GameStop started buying wireless store assets. And in 2017, Amazon, not GameStop, bought GameSparks - while less than a year ago GameStop reversed course and sold its wireless store assets. Shareholders are right to worry.

We expect GameStop’s business will perk up a bit during 2020 and 2021 as the new console cycle, with associated software updates and introductions, finally gets underway. But what is happening now in the stock is about more than late cycle doldrums or even the streaming paradigm – shareholders do not have faith in current management, and have not been inspired by new leadership policies.

Notably, as of July 31st, 2019, Bloomberg reports short interest in GameStop stock at 57,226,706 shares – this is about 63% of the 90,268,940 outstanding GameStop shares at last report.

We submit that when share prices are at or near all-time lows and more than 60% of the shares are shorted despite cash levels much higher than the current market capitalization, lack of faith in management’s capital allocation is the default conclusion.

All of this creates the opportunity to enter 2020 with a dramatically reduced share count along with multi-fold greater impact per share for every single other achievement of management. Consider as just one example that if the turnaround is successful, and if GameStop were able to shrink its shares outstanding to 30 million through the share repurchase, the $157 million dividend that was just eliminated would pay out around $5.25 per share.

The Board deemed up to $6.00 per share a good price for a buyback less than two months ago, and the price of the stock today is nearly half that amount.

We again advise the Board to represent shareholders well, and to ensure the execution of the remaining repurchase authorization in full.

Sincerely,

Dr. Michael J. Burry"

Jeff Smith Long Marvell Technology Group: Capitalize For Kids Conference 2018

We're posting up notes from the Capitalize For Kids 2018 investment conference.  Next up is Jeff Smith of Starboard Value who pitched a long of Marvell Technology Group (MRVL).  They added to the position recently and filed.


Jeff Smith's Capitalize For Kids Presentation: Long Marvell Technology Group

•    Semi co. Acquired Cavium in July 2018
•    Half their biz in storage, half in networking
•    Both are growing, both are well positioned
•    #1, or #2 in almost every key market
•    What SB has done with Marvell
•    114% underperformance vs peers over 5 years pre-SB
•    Options backdating, 8 CFOs 8 years. Accounting investigation, auditor resignation
•    Loved the business was great, Marvell’s customers wanted them to succeed
•    Entire board and management changed since 2016. Just a settlement, not a proxy. More than half the board replaced via settlement, rest turned over after
•    New management and CFO
•    Revenue shrunk, now its growing
•    Gross margins shrunk, now record highs
•    Op margins shrunk dramatically, now op margins at record highs
•    Stock has 2x’d since first 13D filing
•    Only partially closed underinvestment gap, still below index returns, gap is widening in underperformance
•    Why now? The acquisition positions it well for 5G and internet megatrend.
•    Now has complete solution in enterprise Cloud data centre and service provider. Now Marvell can compete with Broadcom, who was the only complete solution. Customers want them to compete and be strong against Broadcom
•    Trades below unaffected deal price

•    What’s changed?
o    Concerns around Cavium’s growth trajectory and inventory destocking
o    Fear related to Marvell’s end markets
o    Macro concerns, tariffs etc
o    10%+ FCF yield

•    Inventory sell down and 4G lag before 5G buildup has temporarily impacted growth rate
•    Cavium taking share in these end markets
•    Went from consumer products biz, now infrastructure end markets (data centres, etc)
•    Storage concern - Hard disk drives secular declines.
o    Great profitable biz in slow declineo    Hard drive for notebooks only 7% of Marvell’s revs
o    Storage biz as a whole now focused more datacentres and Edge / Other internet
o    Desktop / notebook is only 20% today
o    Data centre still a share gainer

•    Networking biz - all are share gainers in high growth markets
o    Wi-fi
o    ARM
o    EDGE
o    Ethernet
o    Data centre
o    5G

•    Not included in LT Financial Model
o    Not included 5G, Revenue synergies on deal, or ARM server processors. So not accounting for the revenue growth for the above
o    However, they are accounting for all the costs

•    Thinks management is credible, killed their guidance. Implying that they sandbag guidance very hard.
•    Goes through earnings guidance and earnings and were all big beats
•    R&D is higher than their peers. Still thinks it is a solid investment in product that will payoff
•    Put managers in place, thinks they are making very responsible investments, that should allow them to continue to beat earnings

•    Either get that revenue, or those R&D costs will come out.
o    —> earnings $2+/shr. 8x earnings today
o    Trades dramatically below their peers on most metrics.
•    Company in the market buying stock, $1b+ buyback program
•    Still excited about this idea


Be sure to check out the rest of the presentations from Capitalize For Kids 2018. 

Third Point's Campbells Video: Empty the Can

As we've detailed previously, Dan Loeb's hedge fund firm Third Point is long Campbells (CPB) and has an activist position as they seek to replace the entire board.  We've posted their presentation on Campbells before. 

Now, Third Point has released a short 4-minute video regarding their campaign and the problems at Campbells and they continue to use the hashtag: #RefreshTheRecipe.

Embedded below is Third Point's video: "Empty the Can"

Carl Icahn Buys Dell Technologies Tracking Stock, Opposes Merger, Sends Letter

Activist investor Carl Icahn today unveiled a new 8.3% ownership stake in Dell Technologies tracking stock (DVMT) with over 16.5 million shares.  He opposes the DVMT merger and released a very detailed lettering outlining his thesis and thoughts (all emphasis his):


Icahn's Letter to DVMT Shareholders

"Fellow DVMT Stockholders:

Over the decades I’ve spent much of my time searching for undervalued companies.  We are very proud of our record.  In fact, an investment in Icahn Enterprises depositary units made at the beginning of 2000 (when Icahn Enterprises began to fully embrace the activist strategy) has increased by approximately 1,514%, or an annualized return of 16%, through October 11, 2018 (assuming reinvestment of dividends).  We have also made hundreds of billions of dollars for stockholders in companies in which we have been activist investors.  However, we freely admit that many of the companies we have invested in were identified to us by stockholders who sought our assistance against mediocre management who were attempting to profit at stockholder expense.  As you know, even the worst management and boards in this country are extremely difficult to dislodge.

A few months ago, several large holders of Dell Technologies Inc.’s tracking stock (“DVMT” or the “Tracker”) contacted me to express their concerns regarding, and their opposition to, Michael Dell’s and Silver Lake’s machinations and activities related to the Tracker, as well as stressing that the Tracker was, and is, deeply undervalued.  (Five years ago, I vehemently fought Michael Dell who many stockholders believed was severely underpaying for the company in a going-private transaction).  After researching the current situation, I quickly realized that while we have unearthed many undervalued opportunities in the past, very few companies compare to the current opportunity and the massive undervaluation of DVMT — which exists in plain sight for all to see.

We Don't Say This Lightly: 

Over The Past Few Months We Have Acquired Beneficial Ownership Of Over 16.5 Million, or 8.3%, DVMT Shares.

We Will Vote AGAINST.

And Will File A Proxy Statement To Solicit Your Vote AGAINST, Dell's Proposed DVMT Merger!

The Dell Tracker currently sells for approximately $92 per share but is worth on a pure mathematical basis approximately $144 per share[1].  In my opinion, this massive distortion exists because (i) as a result of the 2013 going-private transaction, we believe the market does not trust Michael Dell or Silver Lake; (ii) the Tracker has basically zero governance rights and is trapped within a capital structure that has some of the worst corporate governance in America (at Dell, the Certificate of Incorporation even requires that the CEO has to agree to replace the CEO!), however, investor fear of this poor governance is overdone and we believe strong activism combined with litigation, if necessary, can mitigate the governance risks; and (iii) for the better part of the past year, Dell and Silver Lake worked to destroy the value of the Tracker by (1) raising the possibility of a Dell IPO, (2) floating the idea of a merger with VMware and (3) threatening a forced conversion of the Tracker into Dell common stock, among other tactics. These scare tactics are reminiscent of the tactics Machiavelli advised the Borgia rulers to use centuries ago.

The Facts

Several years ago, I believe Dell and Silver Lake realized that Dell Technologies was simply a highly-leveraged hardware company facing great secular challenges and would never enjoy the growth and success of Apple and Microsoft. Therefore, they levered up dramatically to purchase EMC Corporation (“EMC”), a better positioned hybrid hardware and software company, whose crown jewel was its 82% ownership interest in VMware, Inc. (“VMware” or “VMW”).  But, to purchase EMC, Dell needed $10 billion more than its bankers could possibly arrange, and they also needed to convince EMC stockholders that Dell’s offer was worth accepting.  They accomplished this by engineering the DVMT Tracker that they said would allow EMC stockholders to continue to participate in VMware’s upside.

Because a tracking stock is unusual and rarely included as merger consideration, Dell and its bankers had to convince EMC stockholders that the Tracker would efficiently “track” the economic value of VMware shares.  To that end, one of Dell’s bankers at the time delivered a fairness opinion that assumed the Tracker would trade at a range of +/- 5% to VMware shares; while another banker assumed the Tracker would not trade at more than a 0-10% discount to VMware shares.[2]  Dell sold EMC stockholders the Tracker assuming, at most, no more than a 10% discount, yet today, Dell and some of those same bankers are now soliciting your vote to agree to exchange your DVMT shares at a 36% discount![3]

It seems clear that Dell has long-planned to repurchase the Tracker at bargain basement prices.  For two years, Dell management have publicly boasted about Dell’s “…opportunistic opportunities in the market to take advantage of the discount between the two securities”[4] and have repurchased over 23 million DVMT shares at substantial discounts.  This plan significantly benefits Michael Dell and Silver Lake, but at a huge cost to the DVMT stockholders.  Why hasn’t the Dell Board been exercising its fiduciary duties owed to the DVMT stockholders, as opposed to just the controlling stockholders?  Make no mistake, if the current “opportunistic” deal succeeds, 100% of the discount, approximately $11 billion, will be an economic windfall mostly attributable to Michael Dell and his Silver Lake partners.  It is clear to me that Dell and Silver Lake have followed Machiavelli’s advice to the letter:  It is better to be respected than loved, but better still to be feared than respected.

Creating the Fear

In January 2018, Dell commenced its fear campaign by telling stockholders that Dell was evaluating potential business combinations between Dell and VMware, Inc.  DVMT stockholders and the market generally feared that this meant a possible reverse-merger with VMware which would result in a significant multiple contraction for the combined companies which would mean a much lower combined company stock price for the former VMware stockholders.  This obviously would also result in a lower value for the DVMT stock.  For good reason, these disclosures sowed fear and uncertainty that resulted in a precipitous fall in price for both VMW shares and DVMT shares.  In a two-week period both stocks dropped over 25%.  It is very hard to believe that Michael Dell and Silver Lake did not fully anticipate this drop and we believe this was a carefully calculated (and successful) attempt to frighten VMW and DVMT stockholders.  It appears to us that VMW management and the VMW independent board members wanted no part of a merger with Dell.  Instead, they agreed to dividend $9 billion to Dell to obtain some relief from, and at least postpone, a merger with Dell.  Once the threat of a merger was effectively off the table, VMW and DVMT shares recovered a good part of their lost value and the discount narrowed modestly, but it continues to persist.

But, Michael Dell’s and Silver Lake’s ultimate objective was, and still is, to purchase the Tracker at a large discount and they would not be deterred.  They therefore successfully struck a deal with Dell’s independent directors to exchange DVMT shares for cash and Dell stock, at a ridiculously low valuation.  Instead of paying the mathematical value of $144 per share for the Tracker, they are currently offering to pay what we estimate is only $94 per share.[5]  Although I know and respect one of the Dell independent directors, by agreeing to this deal, I can only conclude the independent directors must have been misinformed by advisors working for Dell and Silver Lake or by Michael Dell and Silver Lake themselves.  Otherwise, it is unquestionable, in my opinion, that the independent directors breached their fiduciary duties to the DVMT stockholders.  How else can one explain an agreement that so obviously transfers $11 billion in value to the controlling stockholders at the expense of the minority stockholders?  The one thing these independent directors did get right, however, was to condition the deal on DVMT stockholder approval.  I believe the Dell independent directors must take their fiduciary duties to the DVMT stockholders seriously.  Any future transactions proposed by the controlling stockholders must always be assumed to be at the expense of the DVMT stockholders and the independent directors must always demand robust protections for the DVMT stockholders. The Board’s fiduciary duty to all stockholders demands nothing less, especially after this fiasco!

Dell now appears to be realizing that DVMT stockholders are uniformly and stubbornly against the proposed DVMT merger and is now moving into the next phase of its fear-mongering campaign.  By using the scare tactic of disclosing that they have met with investment bankers to explore a potential IPO of Dell’s Class C common stock, Dell is effectively telling its public stockholders that if we, the DVMT stockholders, do not approve their proposed DVMT merger, they will invoke a draconian provision in their Charter and force us to convert our DVMT shares into Dell stock following a Dell IPO.  Fortunately, in my opinion, their threat to “cram down” a forced IPO conversion is another empty one, if we stand together.  

An Empty and Ridiculous IPO Threat 

We believe that a Dell IPO would face significant challenges and trade very poorly given the possibility of the issuance of a tsunami of stock in connection with a forced conversion.  I believe Dell’s IPO valuation would be severely penalized with: 1) a larger than average IPO discount for its abominable corporate governance, 2) a conglomerate discount for the myriad of partially owned assets and complex structure and 3) a large and incalculable discount for the up to $20 billion of backflowing shares that could hit the market following a forced conversion of DVMT stock.  It would also be one of the most closely watched and scrutinized IPOs in history – the spotlight’s glare would be blinding!  In short, we are not intimidated by Dell’s threat of a forced IPO conversion, and ultimately, we ask ourselves: “Who would ever buy Dell stock knowing that a tsunami of stock may hit the market?” And, given these chaotic dynamics and uncertainties, as well my and other DVMT stockholders strong opposition to a forced IPO conversion, can you imagine the required disclosures or the roadshow?  Could you even find an investment bank willing to risk its reputation (not to mention the potential liability) with a Dell IPO under such circumstances?  

Even in the almost impossible event that Dell overcomes these massive execution challenges of the IPO “cram down,” we believe applicable law will suffocate Dell’s ability to achieve the draconian outcome they so desire.  The Delaware courts are clear that controlling stockholder transactions must be reviewed under the stringent entire fairness standard, not business judgment, unless certain procedural safeguards are satisfied.  If Dell invokes the forced IPO conversion, we believe the Board must treat such a transaction as a conflicted controlling stockholder transaction and obtain protections for the DVMT stockholders, otherwise the Board’s decisions will be reviewed under the entire fairness standard.  Particularly because a forced IPO conversion would result in irreparable harm to DVMT stockholders, we also believe that any transaction that fails to include minority stockholder safeguards will be exposed to an injunction and/or substantial damages.

Importantly, against the backdrop of DVMT stockholders rejecting the proposed DVMT merger transaction, it will be very difficult not to conclude that the forced IPO conversion was pursued in retaliation against DVMT stockholders. Given the fact that in one recent discussion, a very reputable stockholder told us that Goldman Sachs, one of Dell’s advisors, has been telling stockholders that (and I paraphrase) “…the IPO could be for a small number of shares and who knows how that will trade…”, Dell’s and Silver Lake’s current vote solicitation activities already appear to be tainted by coercion.  In my view, this is obviously another threat to take advantage of DVMT stockholders who do not understand that an IPO is nearly impossible!  Dell, Silver Lake and Goldman Sachs should all absolutely understand that Delaware jurisprudence has developed to protect minority stockholders from coercive controlling stockholders, and I strongly believe, as do my lawyers, that the Delaware courts will protect DVMT stockholders from Dell’s and Silver Lake’s coercive actions. Even if we fail to obtain an injunction, we believe we would have valid claims for substantial damages, which Dell would have to defend under entire fairness, for many years, which is not something either Dell or the Board will want to do.  Suffice it to say, we believe it is obvious that the threat of a forced IPO conversion is empty, no matter what they say.

Continuing the "Status Quo" - Another Empty Threat

Another threat Dell has made is that they will do nothing and will continue with the “status quo”.  But this is ridiculous!  Time is Dell’s enemy and our friend!  As time goes on, we expect Dell’s very cyclical business to be basically stagnant or to decline, while VMware’s business should continue to grow and become more profitable.  This dynamic will largely put our 50% economic ownership in VMware out of their reach.  We therefore believe that Dell purchasing the Tracker is a “must have” for Dell.  Today Dell, ex-VMware, is a mundane highly-levered hardware company that will only face greater disruption and competition.  The combination of high leverage and the cyclicality of Dell’s business means that it is possible that Dell’s cash flow may be severely impaired by any downturn in its business, making it very important for them to get control of VMware’s more stable recurring cash flow.  Dell has over $46 billion in gross debt, and its recent debt paydown has substantially relied on cash generation from asset sales and working capital, instead of operating income.  To continue paying down debt, we believe that Dell has a more pressing need for VMware’s cash flow than management would have you believe.

It is our strong opinion that capturing the discount is only the first step in Dell’s grand expropriation of value.  As astute technology investors, we believe that Michael Dell and Silver Lake perceive that VMware is right at the beginning of a multi-year inflection point.  As its fast-growing network and cloud solutions gain scale, we believe VMware is likely to experience the business nirvana of both accelerating growth and expanding margins.  We believe this could result in over $12 per share of free-cash flow generation in a few years, and a stock price of potentially over $250 per share.[6]  Clearly Michael Dell and Silver Lake take us for fools if they think that we would exchange this future value potential for only $94 per share.

THE Next Steps

We believe Dell’s next step will be to modestly increase the deal price in an attempt to receive voting commitments from those willing to sell at a discount, just not as large as the current 36% discount.  We strongly believe that DVMT stockholders should not consider accepting any discount, but if they do, in no event should that discount be greater than the 0 to 10% discount that was assumed when the DVMT Tracker was first issued.  Even then, note, I merely say “consider.”

Despite the numerous arguments I have made to explain why DVMT stockholders should not accept Dell’s proposed deal, or for that matter, even a new deal unless it contains a very, very substantial increase, I understand that some DVMT stockholders may want to exit their investment and accept an improved offer.  For that reason, and in preparation for the possible announcement of an improved offer, I am considering several options.  I believe that if Dell does raise the offer, it will be important to provide liquidity to the DVMT stockholders that want to sell, while also protecting the DVMT stockholders that do not want to sell from being forced out in a merger.  In my opinion the best way to balance these competing interests would be to offer a competing partial bid that provides partial liquidity without forcing a merger.  As such, I intend to continue evaluating this idea and determine whether other interested parties, including financing sources, may want to participate in, or finance, a transaction of this nature.

VOTE AGAINST THE PROPOSED DVMT MERGER!

In conclusion, I firmly believe Dell and Silver Lake are trying to capture $11 billion of value that rightly belongs to us, the DVMT stockholders.  As such, I intend to do everything in my power to STOP this proposed DVMT merger. In my opinion, it is better to have peace than war, but be assured, I still enjoy a good fight for the right reasons, and in the current situation, I do not see peace arriving quickly!  Stay tuned!

Sincerely,

Carl C. Icahn"



[1] Based on DVMT share price of $91.74 and VMware stock price of $141.49, as of October 11, 2018.  Assumes Class V Common Stock interest in 61.1% of the 331 million VMW shares attributable to the Class V Group, per Dell Technologies Inc.’s Form S-4/A, filed with the Securities and Exchange Commission, on October 4, 2018.

[2] As disclosed in the EMC Definitive Proxy Statement, dated June 6, 2016.

[3] Based on the value of 199 million outstanding DVMT shares, at $91.74 per share, compared to the value of 61.1% of Class V Group’s interest in 331 million VMware shares, at $141.29 per share.

[4] Dell Chief Financial Officer comments made during Dell’s earnings call on March 30, 2017.

[5] Based on a 5.0x multiple of FY2019E “Core Dell” EBITDA of $7 billion and market prices as of October 11, 2018 for VMware, Pivotal and SecureWorks. Assumes DVMT shares exchanged for $9 billion of cash and 1.3665 subject to proration.

[6] Cash flow projections based on Bank of America Merrill Lynch report, dated July 16, 2018.  FCF valuation multiple based on comparable company analysis, including MSFT, RHT and CTXS.

Bill Ackman Long Starbucks: Pershing Square Presentation

At the Grant's Interest Rate Observer Conference, Bill Ackman of Pershing Square unveiled a new long position: Starbucks (SBUX).  The presentation is entitled 'Doppio' and Pershing now owns over 15 million shares with a cost basis of $51 and they've used forward contracts.  It's around a $900 million stake.

Pershing notes SBUX is trading at 22x, a discount to the average of 26x and they feel premium coffee is a secularly growth category.  If same store sales and valuation can return to average levels, SBUX shares can double in three years.

Pershing's thesis is that this is a rare opportunity to own one of the world's best franchises at a discount.  They're encouraged by actions of the new leadership team, as they've streamlined the portfolio (sold Tazo, closed Teavana stores, sold the consumer packaged goods business to Nestle).  They're also initiating cost savings and a significant share buyback plan (~$19bn three year target).

Pershing Square: Long Starbucks Presentation

Embedded below is the .pdf of the presentation:



You can download a copy here.

For other recent hedge fund commentary, we also posted up David Einhorn & Greenlight Capital's Q3 letter.

Senator Investment Group Files 13D on Gogo

Alex Klabin and Doug Silverman's hedge fund firm Senator Investment Group has filed a 13D with the SEC regarding shares of Gogo (GOGO).  Per the filing, Senator now owns 6.5% of the company with 5.64 million shares.

This is up from the 4.96 million shares they owned at the end of 2017, as they originally built a position in the third quarter of 2017 and continued buying in the fourth quarter.  The 13D notes they've talked with management and may do so in the future.

It also discloses their recent trading activity in the stock.  They were bought in late January and late February, with primary purchases coming between $9.0251 and $9.2546.  In total, they bought over 681,000 shares.

Per Google Finance, Gogo is "s a provider of in-flight broadband Internet service and other connectivity services for commercial and business aircraft, headquartered in Chicago, Illinois"

Carl Icahn Files 13D on Newell Brands

Carl Icahn has filed an amended 13D with the SEC regarding his stake in Newell Brands (NWL).  Per the filing, Icahn now owns 6.96% of the company with 33.79 million shares (including shares underlying forward contracts).  The filing notes they've now formed a group with Brett Icahn and include his ownership stake.

The forward contracts have a forward price of $23 per share and expiration of January 28th, 2020 and includes exposure to just over 3.01 million shares.  The rest of Carl Icahn's position is common stock.  Brett Icahn owns 500,000 NWL shares.

The filing notes that Icahn started buying on January 25th and was buying as recently as March 16th.

In a previous CNBC interview, Icahn noted that, "I believe Newell itself is undervalued and that's why I bought it."  He said he originally bought NWL around $25

We've highlighted previously that activist firm Starboard Value has also been involved in Newell Brands.

TCI Fund Goes Activist on Altaba, Calls For Liquidation

Sir Christopher Hohn's investment firm TCI Fund Management has filed a 13D with the SEC regarding its position in Altaba (AABA).  They now own 9.7% of the company with 79.77 million shares.

They've been slowly selling shares throughout the first three months of the year, presumably to stay below the 10% ownership cap as AABA has been buying back stock.


TCI Goes Activist on Altaba

The big development here, is that they've converted their 13G into a 13D and gone activist.  They're calling for a liquidation of the company, which owns big stakes in Alibaba (BABA) and Yahoo Japan.

Hohn sent a letter to Altaba, detailed below:

"As you know TCI is the largest shareholder of Altaba owning close to 10% of the company. We have very much appreciated your efforts to create shareholder value. We fully agree with your explicit goal of narrowing the wide discount to net asset value at which Altaba continues to trade.However, we believe that the current strategy of Altaba is unlikely to materially reduce this discount. A clear plan of liquidation is now necessary. This should involve a complete distribution or sale of all of Altaba’s Alibaba and Yahoo Japan shares.We attach a presentation for the Board and shareholders of Altaba laying out in summary our proposed plan of liquidation. We strongly believe that the vast majority of Altaba’s shareholders would be supportive of this plan.We have today converted our SEC filing to a 13D so that we may engage actively with you, the Board of Altaba and all shareholders to create the best outcome for all parties. We look forward to engaging with you constructively as you consider our proposal."

TCI's Presentation on Altaba

Hohn's firm also published a presentation on AABA and we've embedded it below.

Paulson & Co Buys More International Tower Hill Mines

John Paulson's hedge fund firm Paulson & Co has filed a 13D and Form 4 with the SEC regarding its stake in International Tower Hill Mines (THM).  Per the filing, Paulson now owns 31.97% of the company with 59.59 million shares. 

The Form 4 notes they bought over 4.1 million shares on March 13th at a price of $0.50 per share.  The 13D notes this transaction was a private placement.

Per Yahoo Finance, International Tower Hill Mines is "a mineral exploration company, acquires and explores for mineral properties in Canada and the United States. It holds or has rights to acquire ownership or leasehold interests in the Livengood Gold Project that covers approximately 19,546 hectares located to the northwest of Fairbanks, Alaska. The company was formerly known as Tower Hill Mines Ltd. and changed its name to International Tower Hill Mines Ltd. in March 1991. International Tower Hill Mines Ltd. was founded in 1978 and is headquartered in Vancouver, Canada."

ValueAct Capital Reduces Armstrong World Industries Exposure

Jeff Ubben's activist investment firm ValueAct Capital has filed a 13D and a Form 4 with the SEC regarding its stake in Armstrong World Industries (AWI).  Per the filing, ValueAct now owns 12.9% of the company with 6.85 million shares. 

The Form 4 notes they sold 2.35 million shares on March 12th at $59.60 per share.  We've also highlighted other recent portfolio activity from ValueAct here.

Per Google Finance, Armstrong World Industries is "a global producer of ceiling systems. The Company owns and operates the Building Products (Ceilings) segment. The Company designs, manufactures and sells ceiling systems (primarily mineral fiber, fiberglass wool and metal) around the world. Its products are used in commercial and institutional buildings. Its geographical segments include Americas (including Canada); Europe, Middle East and Africa (including Russia) (EMEA), and Pacific Rim. As of December 31, 2016, it had 15 manufacturing plants in eight countries, including six plants located throughout the United States. Its Americas segment sells products for use in single and multi-family housing. It sells commercial products to building materials distributors re-selling its products to contractors, subcontractors' alliances, architect and design firms, and facility owners. Residential ceiling products are sold in the Americas primarily to wholesalers and retailers."