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Archive for the ‘Carl Icahn’ Category

Forbes has a great article on Carl Icahn’s activist campaign at Oshkosh Corporation(NYSE:OSK) called Is Icahn Trying To Nickel And Dime Oshkosh? Sum Of The Parts Worth Way More, BofA Says. Icahn, who, according to the article, holds 9.5 percent of the outstanding stock, is pushing to takeover the company and possible split it up. Icahn has offered $32.50 per share for the stock he doesn’t own. Bank of America’s analysts argue that the value of OSK is between $35 and $38 per share:

Their view, they noted, is supported by the average price target analysts have on the stock, which is approximately $32. Data from Thomson One shows that out of the 14 analysts that cover Oshkosh, 8 have a “buy” or “strong buy” for the stock, with a mean price target of $32.91 and a median of $34.

That valuation excludes a change of control premium, which Bank of America estimates should be between 20% and 30% over their estimate. That would take their sum of the parts valuation to between $42 to $49 per share. “While we believe that it would be very hard to get a bidder without significant synergies at levels greater than $42/share, the current offer of $32.50 while representing a 21% premium to closing price on October 11, 2012 [sic] seems indeed too low,” they added.

Read the article.

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Carl Icahn has plowed $1 billion into energy stocks over the last 6 months according to his latest SEC filing. Says The NYTimes Dealbook column:

Yet speculation is rife given the activist investor’s history with energy companies and his reputation for focusing on companies that he believes are undervalued and ripe for a shake-up in some way — with a restructuring or a sale among the possibilities.

One company that may have attracted his interest is one he already knows:  Anadarko Petroleum. Shares of Anadarko, a Texas-based Independent oil company, tumbled in the spring after the explosion and spill at a BP-operated well in the Gulf of Mexico. Anadarko owns a 25 percent stake in the well.

Anadarko’s stock price fell below $35, wiping $19 billion off its market capitalization. (The stock has since recovered, closing at $56.35 on Monday.)

Mr. Icahn goes back several years with Anadarko.  In 2005, Mr. Icahn and a fellow activist investor, Jana Partners, accumulated a 7 percent stake in Kerr-McGee, an Oklahoma-based energy exploration and production company. The Icahn group demanded the company sell off certain units and commence a big stock buyback.  Kerr-McGee did, and then sold itself to Anadarko for $16.4 billion, representing a rich premium of 40 percent.

Mr. Icahn built his stake in the combined company, and by the beginning of 2008 he had 14.8 million Anadarko shares worth around $971 million.

“Investors who bought Kerr McGee stock on the same date I invested and profited from the acquisition by Anadarko realized an approximate 234 percent return,” Mr. Icahn wrote on his blog, the Icahn Report, in 2008.

He rode Anadarko up to its high price of around $80 a share in May of 2008 as oil prices  headed to $147 a barrel.  But Mr. Icahn appeared to be focusing more of his attention and money on his campaign against Yahoo. Oil prices slid to under $35 a barrel as the financial crisis took hold.  Mr. Icahn began selling off his stake and was completely out of Anadarko by May 2009.

Read the article.

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In September last year I picked up a small position in Cadus Corporation (OTC:KDUS). The idea was as follows:

Cadus Corporation (OTC:KDUS) is an interesting play, but not without hairs on it. First, the good news: It’s trading at a discount to net cash with Carl Icahn disclosing an activist holding in 2002, and Moab Capital Partners disclosing an activist holding more recently. At its $1.51 close yesterday, the company has a market capitalization of $19.9M. The valuation is straight-forward. We estimate the net cash value to be around $20.6M or $1.57 per share and the liquidation value to be around $23.2M or $1.77 per share. The liquidation value excludes the potential value of federal and New York State and City net operating loss carry-forwards. It’s not a huge upside but it’s reasonably certain, and we think that’s a good thing in this market. The problem with the position is the catalyst. It’s a relatively tiny position for Icahn, so he’s got no real incentive to do anything with it. He’s been in the position since 2002, so he’s clearly in no hurry. That said, he’s not ignoring the position. He last updated his 13D filing in March this year, disclosing an increased 40% stake. He’s also got Moab Capital Partners to contend with. Moab holds 9.8% of the stock and says that it “has had good interaction with the CEO of Cadus, David Blitz, and feels comfortable that he will structure a transaction with an operating business that will generate significant long-term value for Cadus holders.” KDUS could end up being a classic value trap, but we think it’s worth a look at a discount to net cash, and two interested shareholders.

Fast forward to Friday’s close, and the stock is at $1.44. I got out a little while ago as I was liquidating holdings outside of my fund, breaking even on the position. In For Investors, Shaking Up Is Hard to Do (subscription required) Jason Zweig of the WSJ’s The Intelligent Investor column has some background on the goings on in KDUS:

Just ask Matthew Crouse of Salt Lake City. Starting in 2002, he sank roughly $190,000 into Cadus Corp., a classic “value” stock. The tiny company was selling for less than the amount of its cash minus debt.

In February 2009, Mr. Crouse wrote to Cadus, requesting that the board sell the company and return the cash proceeds to investors. He drafted a resolution to that effect, which he asked the board to include in Cadus’ proxy statement when shareholders were next asked to vote.

Yet Cadus didn’t hold an annual meeting last year. One large shareholder says that “time and again, we have brought opportunities [for mergers or acquisitions] to the attention of the board.” Each time, he says, the suggestion was rebuffed or ignored. “It’s been a decade of complete nonaction,” he says.

A little over a week ago—17 months after Mr. Crouse’s letter—Cadus informed him that it will hold its annual meeting on Oct. 6, that his resolution will be included and that the board will recommend that shareholders reject it.

“My goal is to get it on Icahn’s radar screen so that he’ll need to deal with us, not just ignore us,” Mr. Crouse says. “If you push for shareholder activism in other companies, I’d think you’d want to take care of your own.”

It isn’t that simple, Mr. Icahn counters. “We’ve been looking assiduously for three years for opportunities,” he told me this week. “But I don’t want to make a bad acquisition and lose the cash.” He added, “I strongly believe that in today’s type of market we will find a company [to buy] fairly soon.”

Furthermore, Mr. Icahn says, if Cadus distributed its cash to shareholders, it would have no money for an acquisition, losing the opportunity to use its tax benefits directly. “I don’t want to waste $25 million,” he says. Of course, Cadus could still be acquired by another firm that could make use of the tax break.

Cadus is less a company than a publicly traded checking account with a tax perk attached. The insiders are the only ones who can write checks. The minority shareholders can always vote with their feet by selling the stock—although they would have little to show for it.

For the proposal to pass, nearly 90% of all the minority shareholders would have to vote for it, since Mr. Icahn controls 40% of the stock.

I still think KDUS is good value, but the stock doesn’t trade, so good luck getting any. I don’t see Icahn just wasting the tax shelter, some of which starts rolling off in the next few years, but it’s all academic to me.

[Full Disclosure:  No position. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Whitney Tilson of T2 Partners has been making the rounds in the media talking up his position in BP Plc (LSE:BP). Here’s Tilson on Fast Money late last week:

Market Folly has a great summary of Tilson’s rationale here. In short, it’s a case of being greedy while others are fearful. Tilson compares BP to the Texaco v Pennzoil litigation in the 80s. Tilson makes the point that shareholders in Texaco “weren’t harmed” when Texaco filed for bankruptcy protection following Joe Jamail’s $12 billion judgement against the company. Here’s Icahn describing the negotiations to settle the litigation:

Icahn made out like a bandit on his holding in Texaco. One wrinkle to this comparison is that BP is a British stock, and so it’s not subject to the same bankruptcy regime as Texaco. The Texaco matter also wasn’t as politically sensitive as the BP spill.

The Wall Street Journal has an interesting analysis discussing various scenarios for BP (subscription required).

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The New York Times has a fantastic profile on Carl Icahn called Does Icahn Still Make Them Tremble?

He is one of Wall Street’s most colorful, controversial and complicated characters.

Wearing slightly rumpled khakis and waving his eyeglasses to punctuate key points, Mr. Icahn is constantly jumping from one topic to another in an endless stream of dialogue. In that respect, he more closely resembles an absent-minded professor than a master of the universe.

Corporate executives visiting his offices walk through hallways adorned with paintings of battle scenes and sculptures of cowboys on bucking broncos. One large painting in the conference room features a lion gazing at the bones of an animal in a desert.

Yet he bristles at being labeled a “raider,” despite the fact that he is widely viewed as a founding member of the clan that roamed Wall Street in the 1980s, occasionally pursuing hostile takeovers with ruthless abandon.

He prefers to paint his role in those years with the same “activist investor” brush he holds today, arguing that he has created tens of billions of dollars of value for shareholders in companies in which he invested. (In conversations, he declares that he has created $30 billion, $40 billion and even $50 billion worth of value for shareholders. What is a few billion among friends?)

This is Icahn’s thesis for his investments in the biotechnology sector:

“The biotechs have been his big winners recently,” particularly investments in ImClone Systems and MedImmune, said Mr. Young at Institutional Shareholder Services. “His thesis, which is no secret, is that biotech firms should be purchased by Big Pharma, which is always in need of new products. In his mind, that’s a match made in heaven.”

I love this story:

Mr. Icahn does not seem to let anything, including a very close friendship, get in the way of protecting his and his investors’ profits. Late in 2008, through his hedge fund, he sued Realogy, a real estate company controlled by Leon Black, the head of the private equity firm Apollo Management. Mr. Black was trying to reduce Realogy’s hefty debt load by offering to exchange some of the debt with bondholders.

Mr. Icahn, a bondholder who has known and been friends with Mr. Black for decades — the two have been longtime tennis partners — objected to some terms of the exchange and sued.

“Carl and I have been good friends for over 25 years,” Mr. Black said in an e-mail message. “Occasionally we skirmish as couples are wont to do, but I believe we both feel that when the chips are down that the friendship is paramount.”

How, exactly, does one sue and still be good friends with someone on Wall Street? Mr. Icahn smiles sagely over his cup of coffee: “The two of us have a saying that we always use whenever there is friction in our business dealings. We always say, ‘there’s only one Maltese Falcon.’ ”

At one point in that classic 1941 film, a character chasing a valuable figurine says to a close associate, “You’ve been like a son to me,” Mr. Icahn explains, paraphrasing from the movie.

Then, lowering his voice with mock intensity, Mr. Icahn adds that the character says that if you lose a son, it’s possible to get another — “but there’s only one Maltese Falcon.’ ”

Click here to see the rest of the article.

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Greenbackd is dedicated to unearthing undervalued asset situations where a catalyst exists likely to remove the discount or unlock the value. My favorite stocks are those trading at a substantial discount to net current assets or liquidation value, with an activist pushing for a catalyst to unlock the value. Those opportunities, however, are few and far between. I can frequently find deeply undervalued asset situations with no obvious catalyst. I can often also find activists in stocks that are not undervalued on a Graham asset basis.

A little over a year ago in a post titled Net Net vs Activist Legend I started a thought experiment pitting Dataram Corporation (NASDAQ:DRAM), a little Graham net net, against activist investing legend Carl Icahn and his position in Yahoo! Inc. (NASDAQ: YHOO) (click on the links to laugh at how rudimentary Greenbackd looked then). The idea was simple: Compare the performance of two stocks, one a net net / net cash stock lacking a catalyst, and the other a stock not obviously undervalued on an asset basis, but nonetheless pursued by an activist investor, Carl Icahn.

In the blue corner, YHOO, the super heavyweight

Here’s what I had to say about YHOO at the time:

YHOO is a stock that is not cheap on an asset basis but it does have a prominent activist investor with a 5.5% stake and two seats on the board. At its Friday close of $11.66, which is around two-thirds lower than Microsoft’s May 2008 $33 bid, YHOO still trades at a 70% premium to our $6.82 per share estimate of its asset value. Activist investor Carl Icahn’s presence on the register, however, indicates that he believes YHOO is worth more. Icahn has paid an average of $23.59 per share to accumulate his 5.5 percent stake. At $11.66, YHOO must more than double before Icahn will see a profit. He’s unlikely to sit idly by to see if that happens.

YHOO is not cheap on any theory of value we care to employ. It is trading at a substantial premium to its asset backing, which means the market is still generously valuing its future earnings. It is generating substantial operating cash flow and earnings, which in a better market might be worth more, but it’s not obviously cheap to us.

The best thing about YHOO from our perspective is the presence of Carl Icahn on the register. His holdings were purchased at much higher prices than are presently available and he is unlikely to sit idly by while the stock stagnates.

Buying YHOO at these prices is a bet that Icahn can engineer a deal for the company. Given his legendary status as an activist investor earned through canny acquisitions over many years, we think that’s a good bet. But a bet is what it is – it’s speculation and not investment. If speculation is your game, then we wish you the best of luck but know that the price might fall a long way if he sells out. If you’re an investor, the price is too high.

YHOO closed Friday at $11.66 and the S&P 500 Index closed at 876.07.

And in the red corner, DRAM, a light flyweight

Here’s my take on DRAM’s chances:

DRAM, at 58% of its liquidating value and 76% of its cash backing, is very cheap. We believe that it is worth watching but, with no obvious catalysts and a high cash burn rate, probably one to avoid unless you are willing to bet that its remaining cash might attract an activist or the business will turn around before it runs out of money.

The risk with DRAM, as it is with any net net or net cash stock, is that the company might not make a profit any time soon and won’t liquidate before it dissipates its remaining cash. As we said above, we’ve got no insight into DRAM’s business and don’t know whether it can trade out of its present difficulties and back to at least a positive operating cash flow. According to the 10Q, the company is authorized to repurchase 172,196 shares under a stock repurchase plan but this is an immaterial amount in the context of the 8.9M shares on issue and the plan has been in existence since 2002. The best hope for the stockholders is that the company re-institutes its dividend, which, given its $16M in cash, it certainly seems able to do. No noted activists have disclosed a holding in the company, which means management have no incentive to do anything so stockholder friendly.

Let’s get ready to rumbllllllllllllllllllllllllle…..

Here’s the call of the fight:

The first 10 rounds were to YHOO, but DRAM landed a crushing blow at the end of the 10th. From there, DRAM pounded away while YHOO got the staggers. At the final bell, YHOO managed a respectable 34.2%, but it wasn’t in DRAM’s league, up an incredible 192.8%.

Post mortem

There’s nothing statistically significant about this little experiment, but, regardless, I think it’s interesting. As I’ve discussed in previous posts, small investors have a huge advantage over larger, professional investors. There is nothing easier to analyse than a Graham net net or liquidation play (here’s my post on Graham’s liquidation value methodology), and, as Professor Henry Oppenheimer demonstrated, the returns to a very simple buy-and-hold-for-a-year-and-repeat strategy will put investment professionals to shame. Graham’s methodology is robust and has withstood the test of time. With a little patience, investing like Graham did provides a tailwind that forgives many investing sins. Here’s to the little guys.

Gonna fly now

Go. Go. Go. Go. Go. Goooooooooo…..

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Carl Icahn recently gave a guest lecture to Professor Robert Shiller’s Yale Financial Markets class.

In the lecture, Icahn talks about how he started out in finance and evolved into a shareholder activist. He trots out a few of his old saws: the biggest challenge facing corporate America is weak management and today’s CEOs, with exceptions, might not be the most capable of leading global companies. He also discusses the economy and slaps down an undergrad Yalie who has the temerity to have him repeat an answer, which is fun to watch. There are a few gems, including this one:

I was borrowing money and bought all these convertibles and I thought I was a genius and Jack Dreyfus said, you’re going to lose all your money. I had made a few bucks playing poker and that’s how I started with about eight, ten thousand dollars and I made all this money by borrowing at 90%. I would go out and I was making a lot more in two weeks than my father made in two years. My father said, well you know, put the money away. I said, no Dad, I’m really going to make a fortune here. So, I went out–I remember once–and bought a Galaxy convertible. It was a beautiful car. I had a beautiful girlfriend; she was a model–it was just pretty nice.

What happened? The crash came in 1962. I was wiped out in one day; I didn’t even have the poker winnings left. I tell you, I can’t recall if the car left first or the girl left first, but it was pretty close–maybe the same day actually. After that, I learned you have to learn something and I became an expert in options.

Here’s Icahn on his investment strategy:

What I do today still is pretty much the same idea. You buy stocks in a company that is cheap and you look at the asset value of the companies that you buy the stocks in and it becomes a little more complex. Basically, you look for the reason that they’re really cheap and the major reason is often–and usually–very poor management. In a sense, it’s like an arbitrage. You go in; you buy a lot of stock in a company; and you then try to make changes at the company. Today, if you read the newspapers tomorrow, you’ll read–we’re trying to do the same thing at Motorola and if you bother to read The Wall Street Journal tomorrow–or maybe The Times, I don’t know–you’ll see a little bit of what we’re trying to do there. We’re trying to get them to change the structure of the company. We think the board is a very poor board there and we’re trying to change what happens.

And, finally, Icahn responding to a question about activism:

Student: Hi, Mr. Icahn. One major criticism that one CEO against corporate activist that they think activists don’t think long-term interest of the corporation; they just want to get money and get out. How do you answer to that?

Icahn: I would just say that the facts don’t bear that out as far as I’m concerned. I mean, if you–I own quite a few companies. Any company we got control of I put literally hundreds of millions of dollars into them. I mean, I bought a company in 1985–a rail car company–we put hundreds of millions; we still have the fleet. I bought casinos and energy companies and over the years kept them; sold them now, but that’s after ten years. So, any company that we’ve been able to get control of I actually kept. Because getting control is a great thing. If you really believe that management’s not doing well, you can go and clean them up and put a good guy in, So, we–I know they criticize you like that, but that’s part of the propaganda machine; but it’s just not the facts.

Student: A related question is that, what do you do when your activist spirit is not appreciated, as in the case of Motorola when you asked for a seat on the board but just get declined? What’s your next step?

Icahn: Alright, you have patience and now it’s a year later and we’ll see what happens now. Motorola is a good example of what I’m talking about. People don’t like it; they don’t like the cell phone business, but I really think that that business, if you look at Motorola and study it, you’re buying that whole business for nothing. It’s not reflected in the stock price, but they have to do it. As I said publicly, take that business out of Motorola; spin it off and give it to the shareholders. I think, then, you’ve got a real good value. What I’m saying is, nobody likes it now, but hopefully I’m correct on that. I really think by being an activist and putting pressure on that board that has done nothing, really–I think eventually that will happen, hopefully.

Hat tip Mark.

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Cadus Corporation (OTC:KDUS) is an interesting play, but not without hairs on it. First, the good news: It’s trading at a discount to net cash with Carl Icahn disclosing an activist holding in 2002, and Moab Capital Partners disclosing an activist holding more recently. At its $1.51 close yesterday, the company has a market capitalization of $19.9M. The valuation is straight-forward. We estimate the net cash value to be around $20.6M or $1.57 per share and the liquidation value to be around $23.2M or $1.77 per share. The liquidation value excludes the potential value of federal and New York State and City net operating loss carry-forwards. It’s not a huge upside but it’s reasonably certain, and we think that’s a good thing in this market. The problem with the position is the catalyst. It’s a relatively tiny position for Icahn, so he’s got no real incentive to do anything with it. He’s been in the position since 2002, so he’s clearly in no hurry. That said, he’s not ignoring the position. He last updated his 13D filing in March this year, disclosing an increased 40% stake. He’s also got Moab Capital Partners to contend with. Moab holds 9.8% of the stock and says that it “has had good interaction with the CEO of Cadus, David Blitz, and feels comfortable that he will structure a transaction with an operating business that will generate significant long-term value for Cadus holders.” KDUS could end up being a classic value trap, but we think it’s worth a look at a discount to net cash, and two interested shareholders.

About KDUS

From the most recent 10Q:

The Company was incorporated in 1992 and until July 30, 1999, devoted substantially all of its resources to the development and application of novel yeast-based and other drug discovery technologies. On July 30, 1999, the Company sold its drug discovery assets and ceased its internal drug discovery operations and research efforts for collaborative partners.

At June 30, 2009, the Company had an accumulated deficit of approximately $34.9 million. The Company’s losses have resulted principally from costs incurred in connection with its research and development activities and from general and administrative costs associated with the Company’s operations. These costs have exceeded the Company’s revenues and interest income. As a result of the sale of its drug discovery assets and the cessation of its internal drug discovery operations and research efforts for collaborative partners, the Company ceased to have research funding revenues and substantially reduced its operating expenses. The Company expects to generate revenues in the future only if it is able to license its technologies.

The value proposition

KDUS is a relatively simple value proposition. It’s $21M of cash, and $3.1M in Bank of America Columbia Strategic Cash Portfolio (more on this below) against total liabilities of around $0.03M (that’s ~$27,000). We’ve set out the valuation below in the usual manner (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

KDUS Summary

Bank of America Columbia Strategic Cash Portfolio

We are not treating the Bank of America Columbia Strategic Cash Portfolio as cash. The asset has some issues, best described by this passage from the 10Q:

On December 10, 2007, the Fund notified the Company that conditions in the short-term credit markets had created a broad based perception of risk in non subprime asset-backed securities causing illiquidity across the market which led to extreme pricing pressure in those securities. The Fund also notified the Company that it is primarily invested in such securities, that it will begin an orderly liquidation of such securities, that unitholders would no longer be able to redeem their units in the Fund and that the Fund would redeem its units as it liquidated its investments. The Fund also began to value its securities based on market value rather than amortized value for purposes of determining net asset value per unit. The Fund has continued to pay interest monthly. The Company reclassified its investment in the Fund from cash equivalents to short-term investments. Through December 31, 2008, the Fund redeemed 19,445,459 units held by the Company for $18,787,142, which redemption was $658,317 in the aggregate less than the cost of such units. From January 1, 2009 to June 30, 2009, the Fund has redeemed an additional 2,314,849 units in the Fund for $1,934,798 which redemption was $380,051 in the aggregate less than the original $2,314,849 cost of such units. At June 30, 2009, the Company still owned 3,793,032 units in the Fund which was recorded on the balance sheet at $3,135,321. Such 3,793,032 units had a net asset value of $3,306,385 at June 30, 2009. The Fund has advised the Company that the balance or most of the balance, of the Company’s investment in the Fund will be redeemed by December 31, 2009. However, there can be no assurance as to when the redemption will take place or as to the net asset value at which the Company’s investment in the Fund will be redeemed.

We’ve applied a 20% discount to the Strategic Cash Portfolio, which is an additional discount to that applied by KDUS. This may be too conservative, but that is the only way that we feel comfortable.

The catalyst

Carl Icahn filed an amended 13D notice on March 12 this year, indicating an increased 40% holding in KDUS. Moab Capital Partners also holds around 9.8% of KDUS. Said Moab of its KDUS position in the August 16, 2007 13D:

The Reporting Persons have purchased the Shares in open market transactions because in their opinion, the market has not given full appreciation to Cadus’ cash balance, net operating loss carry-forwards and future prospects. Based on publically available information, as of 8/16/07, the company currently holds cash, equivalents and investments in marketable securities of $25.4 million and has significant federal and New York State and City net operating loss carry-forwards. The current market capitalization stands at $23.1 million, a 9% discount to the cash and investments on Cadus’ balance sheet. Moab feels the loss carry-forwards should also be ascribed market value. Cadus is cash flow positive and the share count has not increased in over five years. Moab has had good interaction with the CEO of Cadus, David Blitz, and feels comfortable that he will structure a transaction with an operating business that will generate significant long-term value for Cadus holders.

Moab’s purchase prices – between $1.86 and $1.76 – are higher than the current trading price of KDUS.

Despite these promising sentiments, a catalyst in KDUS is probably not imminent. We believe the position will require some patience for the following reasons: First, KDUS is controlled by Icahn and represents a very small part of his empire. He’s got no real immediate impetus to unlock the value. The play is probably Icahn selling his stake to another investor looking for a shell, or Icahn vending into KDUS some other business. You’d have to be brave / insane / a little of both to buy from Icahn usually, and doubly so in this instance given that he’s got no reason to sell. Second, it’s illiquid. Average volume is close to nada: 900 shares were traded on Friday and 6,500 were traded on Thursday. Even a small retail investor could make the entire market for a day or so. Finally, KDUS is a fairly well known position in the industry. It’s viewed as a stock that has been stagnant for years and unlikely to go anywhere because Icahn is too rich to care. We’ve heard that investing in KDUS is a “right of passage for would-be shell buyers.” Consider yourself warned.

Conclusion

Despite the foregoing misgivings, we’re reasonably comfortable with a position in KDUS for several reasons:

  1. The value. We’re primarily attracted to KDUS’s cash and liquidation values. While it’s not a huge upside from here, it’s downside is very limited. With slightly higher interest rates, KDUS will also likely return to cash flow positive territory.
  2. While Icahn is obviously not seeking an immediate resolution of the position, he controls an asset with a value not yet fully recognised by the market. If a worthwhile transaction materializes like Marley’s ghost before Scrooge’s eyes, we’re prepared to bet that Scrooge will buy us the biggest turkey in the poulterer’s shop. But it won’t happen this Christmas.

KDUS won’t ever be a 10 bagger, or even a double, but it’s got 20 – 30% in it. In an overheated market, that’s good enough for us. For these reasons, we’re adding it to the Greenbackd Portfolio.

KDUS closed Friday at $1.51.

The S&P500 closed Friday at 1,044.38.

[Full Disclosure:  We have a holding in KDUS. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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In Now a baker’s dozen in North Dakota, footnoted.org’s Michelle Leder tracks the small, but growing number of companies whose shareholders are requesting via the annual proxy process that their companies relocate to North Dakota:

Last week, 11 companies, including Exxon Mobil (EOM), Southwest (LUV), and Amgen (AMGN), were on the list. But since Friday, two more companies have been targeted, which makes it a baker’s dozen. Over the past two days, shareholder activist John Chevedden, who has introduced proposals at Southwest and two others, added Continental Airlines (CAL) and Staples (SPLS) to his list.

The rush is on because the corporations law in North Dakota is intended to be much friendlier to shareholders. Shareholders in North Dakota can expect the following (from the 2007 press release announcing the bill):

· Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.

· Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.

· Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.

· Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.

· Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.

As we’ve discussed previously, Carl Icahn is a supporter of North Dakota’s initiative, and has even proposed a federal law that allows shareholders to vote by simple majority to migrate a company from its state of incorporation to more shareholder-friendly states, including North Dakota. At present, that power is vested in boards, which means that even if the proposal passes, the boards must embrace the proposal before it is binding on the company. Leder thinks this means it’s unlikely that the companies will up stakes for North Dakota, but it’s interesting to watch.

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Business Week has an article, Fighting takeovers by playing the debt card, describing Amylin Pharmaceuticals Inc.’s (NASDAQ:AMLN) attempts to fend off Carl Icahn through the use of a “Poison Put.” A poison put is a change-of-control debt covenant the effect of which is to require the borrower to pay back an outstanding loan if investors buy a sufficiently large stake in the company or elect a slate of directors. In this case, AMLN says it would be forced to pay back a $125M loan if Icahn’s slate gets control of its board, which could in turn cause it to default on up to $900M in debt. That makes AMLN an unpalatable activist target.

Business Week says the covenant is the “choice du jour” for an increasing number of companies seeking to avoid the attention of activists and raiders:

Many companies have such change of control covenants in their bond or loan agreements, among them J.C. Penney (JCP), Kroger (KR), Ingersoll-Rand (IR), and Dell (DELL). That’s not to say they would use them to ward off an Icahn. Nor is it clear how many companies are using these covenants to do so. But shareholder activists have little doubt that they have become a takeover defense. “[These change of control provisions] are designed to deter a proxy fight,” says Chris Young, director of mergers and acquisitions research for the shareholder advisory firm RiskMetrics Group (RMG).

Change in control provisions are nothing new. In fact they are a standard condition in most loan agreements:

Change of control provisions first began appearing in 1980 when corporate raiders started taking over companies and loading them up with debt. Concerned that these companies would be unable to pay back their loans, lenders insisted on covenants requiring them to repay their original lenders. These provisions became fashionable again during the private equity boom of recent years. Now, with credit tight, they have become a potent deterrent to corporate raiders leery of being forced to repay a company’s debt and then refinance the loans at higher rates.

What is new, however, is companies actively seeking the inclusion of such a covenant as a device to fend off a suitor, as Lions Gate Entertainment Corp. (USA) (NYSE:LGF) and Exelon Corporation (NYSE:EXC) seemed to do recently:

When JPMorgan Chase (JPM) extended Lions Gate’s revolving line of credit last year, the terms included a provision that triggers instant repayment if an investor buys more than 20% of the company’s stock. Since then Icahn has acquired 14% of Lions Gate. In late March, Lions Gate “strongly urged” investors-while taking no formal position-to scrutinize an offer by Icahn to buy $316 million in debt. (He could convert it into stock and boost his ownership stake.) In the same letter, Lions Gate, without mentioning Icahn, said it could be forced to repay both its bank debt and notes.

In another case, the giant electric utility Exelon (EXC) wants to buy rival NRG Energy (NRG) for $5 billion and is waging a proxy battle to elect nine members to NRG’s board. In a letter to shareholders, NRG warned that such an outcome would trigger “an acceleration” of its $8 billion of debt. Exelon General Counsel William A. Von Hoene Jr. counters that NRG is “using the debt issue as a threat” to scare off NRG’s shareholders from considering its bid.

AMLN shareholders aren’t taking it lying down. The San Antonio Fire & Police Pension Fund, an AMLN investor, has sued the company for agreeing to the poison put about the time takeover speculation began in 2007. For its part, AMLN says it has since tried unsuccessfully to get bondholders to waive a provision blocking outsiders from taking over the board and has asked its bankers for a similar waiver. Steven M. Davidoff, The Deal Professor, has a superb analysis of the issues in his NYTimes.com DealBook column, Icahn, Amylin and the New Nuances of Activist Investing. Says Davidoff:

The pension fund’s claim is mainly that these poison put provisions are void. In support of this claim, the plaintiff appears to be arguing that the provision violates the Unocal standard in Delaware, which requires that director action in response to a threat to the corporation not be coercive vis-à-vis stockholders.

In addition, the plaintiff claims that the poison put provisions violate Section 141(a) of the Delaware General Corporation Law which requires that the business and affairs of a Delaware corporation be run by the board. Here, the plaintiff claims that the poison put provisions hinder the board’s exercise of its fiduciary duties to ensure a free and fair election, since the directors cannot approve all nominees for election.

The more problematic issue is with the language in the credit agreement for the term loan. … [If] in a two-year period the board changes control due to a proxy contest, the provision is triggered. The actions of Mr. Icahn and Eastbourne, if successful, would do the trick.

So, we are left with the issue of whether this provision violates Unocal. The answer is likely no. Delaware has broadly interpreted the doctrine, and here there is an opening for a change of control to occur – it will just take two years. This conceivably could be only two proxy contests, and therefore I suspect will likely not be found coercive. After all if Delaware tolerates staggered boards, why wouldn’t it tolerate a provision which has a similar effect?

Shareholder activist Nell Minow says companies shouldn’t use the poison put if their object is to disenfranchise stockholders:

These are shareholder rights that can’t be negotiated away by someone else.

We agree. Unfortunately, as Davidoff points out, lenders do have legitimate reasons for asking for such a provisions: they want to know who they are dealing with. This means that lenders will keep proposing poison puts and boards will “avoid resisting” them because they deter shareholder activism.

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