Feeds:
Posts
Comments

Archive for the ‘Activist Investors’ Category

Former Icahn lieutenant Rachesky takes position in HAWK

Posted in Activist Investors, Liquidation Value, Seahawk Drilling (NASDAQ: HAWK), Stocks, tagged , , on August 19, 2010| 7 Comments »

Carl Icahn’s former lieutenant Mark Rachesky has opened a position in Seahawk Drilling Inc (NASDAQ:HAWK), a stock I’ve covered in some detail (see the post archive here). Rachesky holds the position in his investment vehicle, MHR Fund Management LLC. Rachesky’s most recent 13F filing indicates he picked up around 1.2M shares for around $11.4M, which implies an average purchase price of about $9.72 per share. According to Business Insider:

Rachesky, 49, spent six years working for Icahn, including serving as a senior investment officer and chief investment advisor for his last three years at Icahn Holding Corporation. He left Icahn in 1996 and opened his own New York-based firm, MHR Fund Management, for which he still serves as president.

Rachesky is perhaps best known for his position in Lions Gate:

He first took a 5.9% stake in Lionsgate in August 2005, but he boosted his ownership to 14.1% as of last July and has rapidly increased the size of his position over the past two months—at the same time Icahn enhanced his own stake—after Lionsgate reported its disastrous third-quarter earnings. Up until last week, Rachesky’s investment in Lionsgate was passive, meaning he didn’t seek to influence the company’s operations. But now he’s an active investor in the studio.

The $11.4M holding in HAWK represents around 0.8% of Rachesky’s $1.4B fund.

Hat tip JG.

Long HAWK.

Read Full Post »

Ackman piles into Citi (C), increases position in Kraft (KFT) while Peltz sells out

Posted in Activist Investors, Pershing Square Capital Management, William A. Ackman, tagged , on August 17, 2010| 1 Comment »

Zero Hedge has a post on Pershing Square’s most recent 13F.  The most notable change is a big position in Citigroup:

He’s also increased his position in Kraft, which is interesting because Nelson Peltz has completely sold out of Trian’s position:

Trian has been whittling down its stake in Kraft since last year, when Kraft made a hostile bid for Cadbury. Kraft later acquired Cadbury for roughly $19 billion in February. Warren Buffett, Kraft’s largest shareholder, was not a big fan of the deal.

In 2007, Peltz pushed for changes at Kraft when he first reported owning a large stake in the world’s No. 2 food company. He eventually won two seats on its board.

Kraft reported Aug. 5 second-quarter profit rose 13% to $937 million as it reaped the benefit of Cadbury and overhead costs savings.

The profit topped the consensus analysts’ estimate. But Kraft softened its sales outlook, citing higher Cadbury inventories and aggressive discounting at U.S. food retailers.

Kraft shares closed Friday at $29.50. Shares are up more than 8% for 2010.

No positions.

Read Full Post »

Icahn in energy

Posted in About, Activist Investors, Carl Icahn, Stocks, tagged , on August 13, 2010| Leave a Comment »

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.

Read Full Post »

Classic Value Investors on NSACAR stocks ISCA and DVD

Posted in About, Activist Investors, Stocks, tagged , on August 6, 2010| 1 Comment »

I’m a huge fan of Mariusz Skonieczny’s work at Classic Value Investors, LLC. He’s recently written up the value proposition for International Speedway Corporation (NASDAQ:ISCA), Speedway Motorsports (TRK), and Dover Motorsports (NYSE:DVD). I think NASCAR is a great business. I’ve previously covered an activist filing for DVD, and I think ISCA is one of the cheapest genuine business franchises available in the market right now. I had been mulling my own post on ISCA, but Mariusz beat me to the punch, and I don’t think I can add anything else to his excellent post on NASCAR:

Famous drivers race against each other all over the United States and they only race at events sanctioned by NASCAR. Huge crowds attend these races and pay for admission tickets, food, and drinks. Advertisers pay big bucks to reach these crowds and television stations fight over the rights to broadcast NASCAR races.

Unfortunately, you cannot directly own NASCAR (National Association for Stock Car Auto Racing) because it is a private company controlled by the France family. However, you can own it indirectly through International Speedway Corporation (ISCA), Speedway Motorsports (TRK), or Dover Motorsports (DVD). I have written reports about International Speedway Corporation and Dover Motorsports.

NASCAR is a sanctioning body that controls who gets what race dates and when. For example, there are 38 Sprint Cup races, and NASCAR decides which facility gets which race. Companies like International Speedway Corporation, Speedway Motorsports, and Dover Motorsports own speedway facilities and are assigned Sprint Cup dates on an annual basis. While NASCAR can change these dates, it rarely does so. International Speedway Corporation has 21 out of 38 Sprint Cup races. One of them, LifeLock 400, is in the Chicago market, and I recently attended it.

While the experience was incredible, I went to the race to see why people go to these events and why sponsors and advertisers want to be part of the sport. While we were pulling in to our parking spot, it became clear that NASCAR is not just about racing. People attend races for the entire experience. Yes, they want to cheer on their favorite drivers, but also they want to tailgate and grill hamburgers and hot dogs, eat pizza, drink beer, throw a football, and get together with their friends. It’s not just a race; it’s family entertainment. Race fans are very loyal to the sport and they show it by the clothes they wear, the flags on their trucks, and even the tattoos on their bodies. When someone is willing to tattoo the symbol of the sport on his or her body, as this woman was (see left photo), you know you have something special. As of now, I have never met anyone with a tattoo of my name or my company’s logo. The day that I see it, I will know that I have made it big.

The enthusiasm of the fans is not the only thing that draws advertisers – race fans are extremely brand-oriented. They know exactly who sponsors the race series and the teams of their favorite drivers. They buy products from the companies that sponsor the sport because they know that operating a race team is expensive and racing teams rely on sponsors to keep them afloat. Race fans don’t mind being exposed to advertising. NASCAR is advertiser’s paradise, and as a result, cars, drivers’ uniforms, and speedway facilities are covered with advertising. Television stations want to broadcast events because they know that they can sell advertising spots to businesses wanting to reach home viewers.

What is interesting about companies such as International Speedway Corporation is that even though they own many speedway facilities, each of these facilities act almost as a separate business because they are located in different markets. For example, LifeLock 400 takes place in the Chicago market and doesn’t really compete against Daytona 500. As the owner of LifeLock 400, International Speedway Corporation has the exclusive rights to host a NASCAR race in the Chicago market. There is no one else who has this right. There is no competitor. You and I could build a race track in this area but it would be a big waste of money because we could not host a NASCAR race without having a race date, and getting one is not like applying for a drivers’ license. If we wanted to host a Sprint Cup race, which is the most popular NASCAR series, we are out of luck because as I mentioned before, there are only 38 of them and they all are already assigned to other tracks. We could buy one from someone but there are only five left that do not belong to International Speedway Corporation or Speedway Motorsports. The price tag for one Sprint Cup date is about $150 million, based some historical transactions.

Read the post at Classic Value Investors.

No position at the time of writing, but I am considering a long position in ISCA or DVD.

Read Full Post »

Wilbur Ross on Charlie Rose

Posted in About, Activist Investors, Contrarian investment, Liquidation, Liquidation Value, Net Current Asset Value, Stocks, tagged on August 4, 2010| 5 Comments »

Charlie Rose has a fantastic interview with Wilbur Ross, who played Willy Tanner (the dad) on Alf before becoming an investor in distressed businesses, most notably in the coal, steel and auto parts industries. This profile describes Ross’s start thus:

In 2001, when LTV, a bankrupt steel company based in Cleveland, decided to liquidate, Ross was the only bidder. Ross suspected that President Bush, a free trader, would soon enact steel tariffs on foreign steel, the better to appeal to prospective voters in midwestern swing states. So in February 2002, Ross organized International Steel Group and agreed to buy LTV’s remnants for $325 million. A few weeks later, Bush slapped a 30 percent tariff on many types of imported steel—a huge gift. “I had read the International Trade Commission report, and it seemed like it was going to happen,” said Ross. “We talked to everyone in Washington.” (Ross is on the board of News Communications, which publishes The Hill in Washington, D.C.)

With the furnaces rekindled, LTV’s employees returned to the job, but under new work rules and with 401(k)s instead of pensions. A year later, Ross performed the same drill on busted behemoth Bethlehem Steel. Meanwhile, between the tariffs, China’s suddenly insatiable demand for steel, and the U.S. automakers’ zero-percent financing push, American steel was suddenly red hot. The price per ton of rolled steel soared, and in a career-making turnaround, Ross took ISG public in December 2003.

…

After pulling off a quick turnaround in the twentieth century’s iconic business—steel—Ross set about doing the same with the troubled iconic industry of the nineteenth century. In October 2003, he outdueled Warren Buffett for control of Burlington Industries, a large textile company that failed in late 2001. In March 2004, he snapped up Cone Mills, which, like Burlington, was based in Greensboro, North Carolina, and bankrupt. As with the steel companies, the PBGC took over some of the pensions, the unions made concessions, and thousands of laid-off workers were recalled. Most important, debt was slashed. Today, International Textile Group has just about $50 million in debt, less than the two companies were paying in interest a few years ago.

In the Charlie Rose interview Ross discusses his analysis of LTV, which is basically a classic Graham net current asset value analysis:

Ross: We’re in the business not so much of being contrarians deliberately, but rather we like to take perceived risk instead of actual risk. And what I mean by that is that you get paid for taking a risk that people think is risky, you particularly don’t get paid for taking actual risk. So what we had done we analysed the bid we made, we paid the money partly for fixed assets, we basically spent $90 million for assets on which LTV had spent $2.5 billion in the prior 5 years, and our assessment of the values was that if worst came to worst we could knock it down and sell it to the Chinese. Then we also bought accounts receivable and inventory for 50c on the dollar. So between those combination of things, we frankly felt we had no risk.

Charlie Rose: And then next year you bought Bethlehem.

Ross: Yes, but before that even, what happened, out came BusinessWeek asking, “Is Wilbur Ross crazy?”

…

The joke was, right when everybody was saying, “This is too risky. It’ll never work,” the big debate in our shop was, “Should we just liquidate it and take the profit or should we try to start it up?” That’s how sure we were that we weren’t actually taking a risk, but I wanted to start it up because if you liquidate it you make some money, but you wouldn’t change the whole industry and you wouldn’t make a large sum as we turned out to do.

Watch the interview.

Read Full Post »

Peltz files 13D for Family Dollar Stores Inc (NYSE:FDO)

Posted in About, Activist Investors, Value Investment, tagged , on July 30, 2010| Leave a Comment »

Nelson Peltz’s Trian Fund Management has disclosed a 6.6% stake in Family Dollar Stores Inc (NYSE:FDO). The Purpose of Transaction item on the 13D discloses fairly standard boilerplate, although a buyback seems to be in the plans:

The Filing Persons acquired the Shares and Options (collectively, “Issuer Securities”) because they believe that the Shares are currently undervalued in the market place and represent an attractive investment opportunity. The Trian Group has met with Howard R. Levine, Chairman of the Board and Chief Executive Officer of the Issuer and members of senior management of the Issuer to discuss the Issuer’s business and strategies to enhance value for the Issuer’s shareholders. During these discussions, the Trian Group communicated its view that there is an opportunity to enhance shareholder value by improving the Issuer’s operational performance. The Filing Persons look forward to working with the Issuer on operating initiatives such as increasing sales per square foot to peer levels, improving the Issuer’s operating leverage and optimizing the number of new store openings. The Trian Group also discussed how the Issuer could utilize its capital structure and significant free-cash flow, including by considering the use of prudent amounts of leverage to increase the size of the Issuer’s stock repurchase program. In addition, the Trian Group provided examples of previous investments they (and/or entities affiliated with them) made in which they had helped create significant value by working together with management teams and boards of directors to improve operations and cash flows and enhance shareholder value.

Says the NYTimes.com in an article:

Family Dollar has been one of the retailers to benefit from the recession as more consumers come into its stores hunting for bargains. Family Dollar has seized on the opportunity, expanding its food offerings, lengthening store hours and accepting food stamps in all its stores. Peltz’s investment arm, Trian Fund Management LP, owns large stakes in a variety of major American businesses including upscale jeweler Tiffany’s & Co., food company H.J. Heinz Co. and fast-food chain Wendy’s/Arby’s Group Inc., of which Peltz serves as chairman.

FDO has been an extraordinary stock since the late 70s. It’s up around 24,000% excluding regular dividends. The last 5 years have not been as kind to the stock price, but it hasn’t been a disaster for shareholders either – the stock’s up 55% and the company has paid an increasing, regular quarterly dividend. It’s a situation worth watching.

No position.

Read Full Post »

S&P’s list of LBO candidates

Posted in Activist Investors, Stocks, Value Investment, tagged , on July 27, 2010| Leave a Comment »

The WSJ has an article on Standard & Poor’s Valuation & Risk Strategies list of 10 publicly traded companies that could be LBO targets:

Analysts at S&P Valuation & Risk Strategies chose companies in the consumer discretionary and industrial sectors, because these sectors, along with financials, have been especially active for buyouts. Also, they picked companies that have market values of $1 billion to $4 billion, in keeping with the size of recent top LBOs. And finally, they picked companies trading at less than their respective industry’s coming year-end price-to-earnings ratio, which would indicate that the market currently undervalues them.

S&P’s top pick for an LBO is Eastman Kodak, with a market capitalization of roughly $1.2 billion. Private-equity firm KKR already owns a stake in Eastman Kodak. Here is the rest of the list:

  • Eastman Kodak ($1.2 billion)
  • Oshkosh ($2.8 billion)
  • GameStop ($2.9 billion)
  • EMCOR Group ($1.6 billion)
  • Cooper Tire & Rubber Co ($1.3 billion)
  • DSW ($1 billion)
  • TRW Automotive ($3.6 billion)
  • Dillard’s ($1.4 billion)
  • Alaska Air Group ($1.7 billion)
  • Gymboree ($1.2 billion)

Read the article.

No positions.

Read Full Post »

RDI Update: Settles tax matter with IRS and to receive debt forgiveness

Posted in Activist Investors, Lawndale Capital Management, Reading International Inc (NASDAQ:RDI), Stocks, tagged , , on July 21, 2010| 1 Comment »

Andrew Shapiro, President of Lawndale Capital Management, has provided a further update on Reading International Inc (NASDAQ:RDI) (see the RDI post archive here):

In Reading’s 2008 Consolidated Entertainment/Pacific Theaters acquisition of 181 movie screens in California and Hawaii, there were three contingent purchase price reduction tests, each forgiving a portion of the acquisition’s seller note PLUS interest RETROACTIVE back to the Feb 2008 acquisition date. Two of those tests have already taken place and have reduced the seller note (“US Nationwide Loan 1” on Reading’s 3/31/10 schedule of Notes Payable) to $15.3 million.

This article notes the first anniversary of a competitive theater in Bakersfield California, within the competitive radius of Reading’s Valley Plaza 16, triggering the last contingent purchase price reduction test.

A multiple of the cash flow reduction experienced by Reading’s theater over this PAST year (that is lower EBITDA which RDI shareholders have already “suffered” from) is to be returned to Reading in the form of forgiveness on the seller note. The measurement will take place this current quarter.  Reading’s lowered debt from forgiveness of a portion or all of the US Nationwide Loan 1 and recovery of accrued interest expense on the forgiven principal RETROACTIVE to the Feb 2008 acquisition date is likely to occur during Q4, after Pacific Theater’s audit of Reading’s claim.

RDI has also announced that it has settled its tax dispute with the IRS. Here’s the release:

Reading International Settles Tax Case with IRS

Los Angeles, California, – (BUSINESS WIRE) – July 16, 2010 – Reading International, Inc. (Reading) (NASDAQ:RDI) announced today that its wholly owned subsidiary, Craig Corporation (Craig), has reached an agreement in principle to settle its tax dispute with the Internal Revenue Service (IRS) related to Craig’s tax year ended June 30, 1997. Craig and the IRS are currently in the process of documenting this settlement. The settlement resulted in a 70% concession by the government and will lead to the previously issued IRS Notice of Deficiency, dated June 29, 2006, in the amount of $20.9 million, $47.2 million inclusive of interest, being set aside by agreement of the parties. Reading estimates that, as of the date of this release, Craig’s liability under this settlement is approximately $15.0 million inclusive of interest, although final calculations have yet to be agreed. As of March 31, 2010, Craig had reserved $4.5 million against this liability.

The impact of this settlement with the IRS on Reading is approximately $14.0 million, resulting in a charge against earnings of $9.5 million for the second quarter.

[Full Disclosure:  I hold RDI. 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.]

Read Full Post »

Cadus Corporation (OTC:KDUS) in the WSJ

Posted in About, Activist Investors, Cadus Corporation (OTC:KDUS), Carl Icahn, Stocks, Value Investment, tagged , on July 19, 2010| 1 Comment »

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.]

Read Full Post »

Ramius Capital files 13D for Aviat Networks Inc (NASDAQ:AVNW)

Posted in Activist Investors, tagged , on July 13, 2010| 2 Comments »

Ramius Capital has disclosed an activist holding in Aviat Networks, Inc. (NASDAQ:AVNW) (Hat tip Oozing Alpha). I covered Ramius Capital’s white paper The case for activist strategies around 18 months ago. I think the AVNW position, as described by Ramius in the letter annexed to the 13D, is compelling.

Ramius’s “Purpose” set out in the 13D is as follows:

On July 7, 2010, Ramius delivered a letter to the Issuer’s Chairman and CEO, Charles Kissner, the Issuer’s Board of Directors (the “Board”) and the Issuer’s Chief Financial Officer, Thomas L. Cronan III (the “July 7 Letter”). In the July 7 Letter, Ramius expressed its belief that the Issuer’s Shares are deeply undervalued and significant opportunities exist to improve the Issuer’s operating performance based on actions within the control of management and the Board. Ramius stated that the Issuer’s current market price clearly indicates that the public market is attributing essentially no value for the Issuer’s operating business and reflects a lack of confidence in the Issuer’s business strategy. Ramius also expressed its concern that the Issuer has taken little action, to date, to adjust the cost structure in-line with current business prospects, specifically noting that, while revenues have declined since fiscal year 2008, operating expenses have actually increased over the same period. Ramius further stated it believes a significant opportunity exists to adjust the cost structure of the Issuer to achieve acceptable operating margins, even at the current revenue run rate, and urged management and the Board to focus its attention on driving cost improvements by re-focusing on the Company’s core businesses and de-emphasizing growth investments in non-core product lines such as WiMAX. Ramius concluded the July 7 letter by stating it has a strong vested interest in the performance of the Issuer as one of the largest shareholders and hopes to work constructively with management and the Board to unlock value for all shareholders. A copy of the July 7 Letter is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

The July 7 letter is as follows:

July 7, 2010

Mr. Charles D. Kissner
Chairman and Chief Executive Officer
Aviat Networks Inc.
5200 Great America Parkway
Santa Clara, CA 95054
CC: Aviat Networks Board of Directors
Thomas L. Cronan III, Chief Financial Officer

Dear Chuck:

As reported this morning in a 13D filing with the Securities and Exchange Commission, Ramius Value and Opportunity Advisors LLC, a subsidiary of Ramius LLC, and certain of its affiliates (collectively, “Ramius”) owns approximately 6.2% of the shares outstanding of Aviat Networks Inc. (“Aviat” or the “Company”), making us one of the Company’s largest shareholders. As we have outlined below, we believe that Aviat is deeply undervalued and significant opportunities exist to improve the operating performance of the Company based on actions within the control of management and the Board of Directors (the “Board”). Over the past several months, we have had in-depth discussions with the Company’s former Chief Executive Officer, Harald Braun, as well as the Company’s Chief Financial Officer, Tom Cronan, regarding our concerns about the deteriorating financial performance of the Company and the lack of action to adjust operating expenses in-line with the Company’s current business prospects. We look forward to continuing these discussions with you and expect that swift actions will be taken to address these concerns and unlock shareholder value.

At the current time, the public market is attributing almost no value for the operating business at Aviat. As depicted in the table below, the Company ended the last quarter with approximately $390 million of current assets including assets such as cash and cash equivalents, accounts receivables, and inventory. After subtracting the total liabilities of the Company from this amount, the Company is left with nearly $200 million of net current assets, or $3.35 per share. We believe this methodology provides for a fair assessment of the potential liquidation value of the Company’s balance sheet. The current stock price of $3.46 represents a mere 3.3% premium to this value clearly indicating that the public market is attributing essentially no value for the Company’s operating business. This analysis does not even take into account the value of Aviat’s long-term assets of $61 million, or $1.02 per share, which, when added to net current assets of $3.35 per share, equates to tangible book value of $4.37 per share.

We believe the current market price reflects a lack of confidence in the business strategy at Aviat. Over the past two years since FY 2008, revenues have declined by over $200 million. Yet, as shown in the table below, operating expenses have actually increased over the period by approximately $3 million. This has resulted in nearly a 70% decline in Adjusted EBITDA in just the past two years.

Aviat has taken little action, to date, to adjust the cost structure in-line with current business prospects. In fact, the Company has publicly stated that the current cost structure is designed to achieve a target operating margin of 10% only if quarterly revenues reach $150 million. For each of the past three quarters, revenues have been approximately $120 million and revenue guidance for 4Q 2010 is in a range of $120 million to $130 million.

Based on our research and analysis, we believe a significant opportunity exists to adjust the cost structure of Aviat to achieve acceptable operating margins even at the current revenue run rate. This can be achieved by re-focusing the Company on its core wireless backhaul and private network businesses and de-emphasizing growth investments in non-core product lines such as WiMAX. Our estimates indicate that the Company is currently spending between $15 million and $20 million per year on the WiMAX initiative. To date, the Company has recognized negligible revenues from this business making it a substantial drain on Company resources.

Additionally, the Company has made substantial investments in sales and marketing and research and development to drive penetration into new geographic markets. We believe the Company should focus its resources on markets where it has substantial penetration, a large installed base, and a stable pricing environment. In other non-core markets the Company should look for opportunities to utilize distribution partners or exit.

Even if you assume that the Company can only reach 50% to 75% of its target operating margin of 10% due to lower revenue levels and less absorption of overhead costs, the results still imply that Aviat is significantly undervalued. As demonstrated in the table below, at an annualized revenue run rate of $120 million per quarter and a 5.0% to 7.5% operating margin, Aviat would be trading at an Enterprise Value / EBITDA multiple of between 1.3x and 1.6x. The two closest public competitors, Ceragon Networks Ltd. (CRNT) and DragonWave Inc. (DRWI), currently trade at Enterprise Value / forward EBITDA multiples of 6.5x and 3.5x, respectively.

We believe this analysis clearly demonstrates that with prudent cost management, Aviat has the potential to generate substantial earnings and cash flow implying an extremely low valuation both on an absolute basis and relative to its peers. To that end, we urge management and the Board to focus its attention on driving cost improvements by re-focusing on the Company’s core businesses.

We greatly appreciate the time that Mr. Braun and Mr. Cronan have spent with us over the past several months and look forward to having an active and productive dialogue with you going forward. As one of the largest shareholders of Aviat, we have a strong vested interest in the performance of the Company and hope to work constructively with management and the Board to unlock value for all shareholders.

Best Regards,

Peter A. Feld

Jeffrey C. Smith

Ramius LLC

[Full Disclosure:  I hold AVNW. 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.]

Read Full Post »

« Newer Posts - Older Posts »