Archive for the ‘William A. Ackman’ Category

Bill Ackman’s Pershing Square Capital Management has opened up an 11% stake in Fortune Brands, Inc. (NYSE:FO). The 13D filed 4 October doesn’t disclose much about the position, but the NYTimes has a great REUTERS BREAKINGVIEWS article Fortune’s Links discussing the position:

After a round of golf with his Titleist clubs, a guy pops into the clubhouse for a Maker’s Mark neat before rinsing off under a Moen showerhead. That’s about the closest Fortune Brands comes to synergies. No wonder the conglomerate makes such a tempting target for an activist investor.

Shareholders won’t be alone rooting for Bill Ackman, whose Pershing Square Capital Management hedge fund revealed an 11 percent stake last week, to break Fortune up. Diageo, the big alcohol company, may one day toast him. The company has long wanted a major bourbon brand. Fortune has two: Maker’s Mark and Jim Beam.

Hypothetical examples aside, Fortune’s three main divisions — spirits, golf equipment and home products — don’t hang together naturally. And there are potentially better, more motivated owners for them. But drinks, accounting for some two-thirds of Fortune’s profit, deserves the primary focus.

The group — which also sells Hornitos tequila, Courvoisier Cognac and Canadian Club whisky — is expected to generate earnings before interest, taxes, depreciation and amortization, a business measure known as Ebitda, of $635 million this year, according to Longbow Research. At 15 times — less than the 20 times Pernod Ricard paid for Sweden’s Absolut vodka — Diageo’s price tag could come to about $9.5 billion.

Subtract that from Fortune’s enterprise value of $12 billion (an $8.4 billion market cap plus $3.6 billion of debt) and the remaining two divisions would be trading at around four times Ebitda, as estimated by Longbow. Citigroup notes that the sporting goods maker Adidas and home products manufacturers like Masco fetch valuations of eight to nine times Ebitda.

Diageo would scramble to pay a top-shelf price for a portfolio that includes some less attractive brands, a few in categories it already dominates. But a handful of smaller players like Gruppo Campari have shown an interest in what insiders call “tail brands.” That would allow Diageo to finance part of a deal with divestitures.

It’s too soon to say for sure whether Mr. Ackman wants to carve up Fortune. But with a thirsty buyer waiting, and a corporate strategy best exemplified by a tipsy golfer in need of a shower, the odds are good.

No position.

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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.

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Bill Ackman’s Pershing Square has filed the presentation to be delivered to the shareholders of Target Corporation (NYSE: TGT) at TGT’s 2009 Annual Meeting of Shareholders. See our post TGT archive here.

See Bloomberg’s interview with Bill Ackman about his slate (via The Manual of Ideas):

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Portfolio has a profile on Bill Ackman by

On starting Gotham Partners:

Ackman entertained the notion that he and Berkowitz might be able to raise tens of millions of dollars for Gotham’s launch-and he managed to talk his way into meeting with many of the wealthy and powerful moguls that he’d set his sights on. He pitched real estate scion Tom Durst and proposed three investment ideas to demonstrate Gotham’s research capacity. Durst declined to invest with the firm but then, according to Ackman, put his own money to work in the companies that Ackman and Berkowitz had recommended. After each had big gains in a matter of months, Durst came back to them and agreed to put money into their fund.

Gotham didn’t come up with anything close to Ackman’s hoped-for sum, mustering only $3.1 million. But in 1993, he and Berkowitz went ahead and launched the fund anyway. In time, Gotham gathered in millions. The Ziff family came in early; legendary investors such as Jack Nash, Leon Levy, Michael Steinhardt, and Seth Klarman also put money in.

In 1994, Gotham bought shares in a real estate investment trust poised to take control of Rockefeller Center, effectively becoming the largest holder of the real estate complex. At the time, the New York commercial real estate market was in a devastating slump. Thrusting himself into a highly publicized takeover battle, Ackman scored huge returns on his investment when the REIT was bought. He was on the map.

On his Farmer Mac investment:

Over the next three years, his fund averaged returns of 40 percent annually after fees. Gotham hardly ever shorted or bet against companies. But one day in early 2002, Whitney Tilson, a friend of Ackman’s since their days at Harvard College, called him at home to recommend that he buy a stake in a company called Farmer Mac, the Fannie Mae of farm mortgages. Ackman printed the annual report and started reading it around 9 that night. Riveted, he continued past midnight. He called Tilson first thing the next morning, excited. Farmer Mac was indeed an opportunity, but Tilson had it wrong. Ackman didn’t want to buy the stock; he wanted to short it.

Gotham placed its bearish bets. Then Ackman confronted a problem-how to get his negative message out. He began by talking to a reporter at the New York Times but didn’t think the resulting story made the case strongly enough, so he set up a website for the express purpose of displaying a report he wrote, with disclosures that his fund was short Farmer Mac’s stock. Going public on a short is an invitation to be attacked by companies and investors.

Ackman relished the frenzy that ensued. He’s still proud of the report’s title, “Buying the Farm.” And he profited spectacularly from the results: By fall, Farmer Mac’s stock had collapsed.

The first confrontation with MBIA:

Fresh from the Farmer Mac success, Ackman launched an audacious assault on MBIA, a company at the center of both Wall Street and state and local finance across the country. This move would prove remarkably insightful once the financial crisis hit, but vindication would be years in coming. First, Ackman was forced to undergo a remarkable battle with the company and its regulators.

MBIA dominated a sleepy, safe, and wonderful business: insuring municipal bonds from default. Since muni bonds almost never defaulted, MBIA almost never had to pay off the insurance. But when Ackman surveyed the company’s filings, he realized that MBIA had, to a degree utterly unrecognized by Wall Street, shifted into the business of insuring a vast array of much more dangerous paper: collateralized-debt obligations, or CDOs, which were constructed by the big banks to combine the bonds of multiple companies.

Expecting MBIA to default, Gotham began buying credit-default swaps, a form of short-selling in the unregulated derivatives market. If other investors became worried that MBIA would default, Ackman could sell the credit-default swaps for a gain; if MBIA actually did default, he would make a king’s ransom.

MBIA got wind of Ackman’s research and asked to meet with him. On November 21, 2002, Gotham representatives sat down with top MBIA executives. As people who were there recall the meeting, Jay Brown, the CEO of MBIA, began by saying how long he had been in the insurance business. “No one has ever questioned my reputation or my company’s,” he said. “You are using an unregulated market to manipulate a regulated market,” referring to MBIA’s insurance business. “You’re a young guy. It’s early in your career. You want to think very hard before you release that report,” Brown said, pointing out that MBIA was the largest guarantor of municipal bonds in New York State and the country.

“Is there anything you disagree with or that’s factually inaccurate?” Ackman asked.

“This is not about the facts,” Brown replied. “Let’s put it this way: We have friends in high places.” (An MBIA spokesperson says that the purpose of the meeting was to learn Ackman’s intentions and to request an early copy of his report to be able to point out any inaccuracies.)

The tense encounter lasted less than a half-hour. As they walked out, Ackman’s analyst shook Brown’s hand. Ackman then held his hand out to the CEO. Brown looked at it, lifted his arm up, and said, “I don’t think so.”

The article is worth a look. See it quick before Portfolio goes the way of the Dodo.

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In Ackman and Target Tangle in Ballot Brawl, The New York Times’ Dealbook has coverage of the “universal ballot” spat between William A. Ackman’s Pershing Square Capital and Target Corporation (NYSE:TGT).  A candidate on Pershing Square’s ticket, Ronald J. Gilson, who is a law professor at Stanford University and an expert in corporate governance, has proposed that TGT place all the nominees running for election to the board on a single ballot, the so-called “universal ballot.” Presently, shareholders in most proxy fights receive two proxy cards and can vote only for one slate of candidates. Gilson’s proposal would give TGT’s shareholders the chance to pick candidates from both management and Pershing Square’s proxies.

Dealbook reports that the shareholder advisory firm RickMetrics Group support the universal ballot proposal:

“Pershing appears to be astutely exploiting the current pro-(shareholder)-choice zeitgeist, and puts Target on its back foot,” RiskMetrics said in a research note issued Tuesday. “It will be challenging for Target, absent some sort of unwaivable legal impediment, to argue against Pershing’s proposal without coming across as anti-shareholder.”

Here is Gilson’s letter to the board:


Charles J. Meyers Professor
of Law and Business

April 21, 2009

Mr. Gregg Steinhafel
Chairman of the Board
Chief Executive Officer and President
Mr. Timothy R. Baer
Executive Vice President
Corporate Secretary and General Counsel
Target Corporation
1000 Nicollet Mall
Minneapolis, Minnesota 55403

Re: Proposal to Use a Universal Proxy at the2009 Annual Meeting of Shareholders

Dear Messrs. Steinhafel and Baer:

On March 17, 2009, Pershing Square Capital Management, L.P. publicly announced that its affiliates had delivered a Notice of Nomination to you proposing to nominate five individuals for election as directors of Target at the company’s 2009 Annual Meeting of Shareholders. I am one of those nominees.

Both Target and Pershing Square have a unique opportunity to make this election historic from a corporate governance perspective. As you may know, the press has reported that SEC chair Mary Schapiro has directed the Commission’s staff to draft proposals for rules governing shareholder proxy access by mid-May 2009. I expect those proposed rules will provide the opportunity for the use of a universal proxy card whereby shareholders can choose – on one proxy card – from among the candidates nominated both by the company and by shareholders. The benefit to shareholders, who may want to choose members from both slates, would be substantial.

I first wrote about the need to remove the barriers to non-control proxy contests some 19 years ago.1 The occasion then was to recommend a change in the bona fide nominee rule to allow a shareholder running a short slate to include the names of the company’s nominees on the shareholder’s proxy card. That recommendation was accepted by the SEC, as I recall at the urging of Mary Schapiro, who was then a Commissioner.

Target and Pershing Square now have the opportunity to proactively provide good corporate governance to the Target shareholders by making it convenient for them to make a choice in what, in the end, is their election. This is not a control contest. The qualifications of the candidates will be fully vetted by the time of the May 28th election, and Target shareholders are entirely capable of assessing the candidates and making a choice. There is simply no excuse to deny shareholders the benefit of the use of a universal proxy card. The alternative will make it procedurally more difficult for Target shareholders to exercise their franchise. This is a problem that we, together, have the power to solve.

I have received assurance from Pershing Square that they would support a universal proxy card for Target’s upcoming Annual Meeting. I now seek the same from you. In the alterative, I ask that you consider allowing the company’s nominees to be named on the Pershing Square Gold proxy card. In either instance, shareholders would have the benefit of being able to choose the best nominees for the job. Target now has the opportunity to hold an election that will be a credit to the company’s corporate governance. I urge you to carefully consider this proposal and do the right thing for Target shareholders.

Very truly yours,

/s/ Ronald J. Gilson

1 Ronald J. Gilson, Lilli A. Gordon & John Pound, How the Proxy Rules Discourage Constructive Engagement: Regulatory Barriers to Electing a Minority of Directors, 17 Journal of Corporate Law 29 (with L. Gordon & J. Pound) (1992).

Here is TGT’s response:


MINNEAPOLIS, April 21, 2009 – Target Corporation (NYSE:TGT) today commented on the letter from Pershing Square nominee, Professor Ronald J. Gilson, that Pershing Square filed with the Securities and Exchange Commission (“SEC”). In the letter, Professor Gilson references possible future SEC changes to the federal proxy rules and proposes the use of a universal proxy card by Target and Pershing Square. Pershing Square has initiated a proxy contest to elect its own nominees, including Professor Gilson, to Target’s Board of Directors.

The company said, “We believe Professor Gilson’s proposal, coming at this stage of the proxy contest, would cause delay and confusion. Shareholders have a clear choice between our independent nominees on our WHITE proxy card and Bill Ackman’s slate on Pershing Square’s gold proxy card. We note, as does Professor Gilson, that the SEC may be considering a proxy access proposal. Any such proposal should be allowed to proceed on an appropriate timetable allowing for careful review and consideration by the SEC of a number of issues, including whether proxy access should be available to an entity, like Pershing Square, which has initiated its own proxy contest. In the meantime, the current proxy rules provide a framework for the conduct of the proxy voting process that is perfectly adequate for resolving the issues that Pershing Square is raising.

“With Target’s Annual Meeting only five weeks away, we believe our shareholders clearly understand the choice between our independent directors and the Pershing Square slate. We will be mailing our proxy materials shortly and encourage our shareholders to use our WHITE proxy card to support the reelection of the directors nominated by our Board.”

Shareholders who have questions about voting or the matters to be voted upon at the Annual Meeting are encouraged to call MacKenzie Partners, Inc. at 800-322-2885 Toll-Free or Georgeson at 866-295-8105 Toll-Free. The company will hold the 2009 Annual Meeting of Shareholders on Thursday, May 28, 2009. Target will be distributing proxy materials to shareholders of record as of March 30, 2009.

And Pershing Square’s response:

Pershing Square Comments on
Target’s Objection to Universal Ballot Proposal

New York – Pershing Square Capital Management, L.P., and Professor Ronald J. Gilson, who has been nominated by Pershing Square to serve as an independent director of Target Corporation (NYSE: TGT), expressed disappointment with Target’s response to Professor Gilson’s letter seeking the use of a universal proxy card, naming both Target’s and Pershing Square’s nominees, for use in connection with Target’s upcoming Annual Meeting of Shareholders.

“Rather than causing confusion, the proposal would eliminate confusion by giving shareholders something they would otherwise lack – the simple chance to choose the best among all of the candidates, rather than between two slates of candidates.” commented Professor Gilson. Pershing Square believes that the adoption by both Target and Pershing Square of a universal proxy card would reflect best-in-class corporate governance, and would result in the most qualified directors being elected, regardless of which proxy card a shareholder returned.

On the universal proxy card proposal, Bill Ackman of Pershing Square said, “it’s important for shareholders to have a choice so that they can vote for whichever candidates they prefer, regardless of which proxy card they submit. Pershing Square wants to provide shareholders with that freedom of choice. We are hoping Target will as well.”

Because proxy cards have not yet been mailed, and because new proxy cards are easy to print from the company’s or Pershing Square’s website, Pershing Square does not believe that adopting a universal proxy card would add any material expense to the proxy contest. Pershing Square also noted that it would be willing to bear the additional printing costs of the universal proxy cards.

Furthermore, Target’s public explanation for its refusal to use a universal proxy card does not address why Target would not permit its nominees to be named on Pershing Square’s Gold proxy card. Indeed, based on the timing of Target’s public response, Pershing Square questions how the matter could have been raised with its Board of Directors and whether Target’s nominees were given the opportunity to consent to being named on a universal proxy card or Pershing Square’s Gold proxy card.

Pershing Square requests Target’s nominees for permission to be included on the Gold proxy card in the event that the company will not consent to a universal proxy card.

[Full Disclosure:  We do not have a holding in TGT. 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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Pershing Square Capital Management hosted its Annual Investor Dinner in late January (Dealbreaker has a copy of the presentation (.pdf).) We’ve previously written about Pershing Square in relation to its position in Borders Group Inc (NYSE:BGP). It was not one of our better calls.

Pershing Square’s investment strategy makes for interesting reading:

We seek simple, predictable, free-cash-flow-generative businesses that trade at a large discount to intrinsic value

  • Mid-and large-cap companies
  • Typically not controlled
  • Minimal capital markets dependency
  • Typically low financial leverage and modest economic sensitivity
  • Often hidden value in asset base
  • Catalyst for value creation which we can often effectuate

At the right price, we may waive one or more of the above criteria
Our selection process is designed to help avoid permanent loss of capital while generating attractive long-term returns.

Pershing Square’s investment strategy is more Buffett than Graham (or more Fisher than Graham), but note that they do seek value that may be hidden in assets. Pershing Square’s returns have been extraordinary, as this slide attests:


Although not all Pershing Square’s positions were winners:


(via Dealbreaker)

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Borders Group, Inc. (NYSE:BGP) has released its 10Q for the third quarter. We’ve previously posted about BGP here. When we first looked at it, we said that it presented a rare opportunity to invest in a stock with a well-known brand alongside one of the best activist investors in the US, William A. Ackman of Pershing Square Capital Management, L.P. At that time, BGP’s market capitalization was $39.4M (at the previous day’s close of $0.65) and we estimated that its liquidation value was some 250% higher at $135M or $2.23 per share. Well, we’ve now had an opportunity to review the 10Q for the third quarter and the results aren’t pretty. In fact, we now believe that there is a risk that the assets may have no value in a liquidation and we’re out.

The updated value proposition

BGP has made a $175M loss for the quarter, operating cash flow was negative in the amount of $51M and the company has taken on $55M in new debt. By way of contrast, in the last quarter to August, while the company made a loss of $9M, operating cash flow was positive in the amount of $77M and the company retired $129M in debt. Our summary analysis of the balance she

et is set out below (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

bgp-q3-summaryBGP’s value remains concentrated in its inventory and property, plant and equipment, both of which are up slightly on the last quarter. Compared to $18.01 per share in Q2, inventory is now $20.75 per share, which we’ve written down by two-thirds to $13.91 per share (written down value of $12.07 in Q2). Property, plant and equipment is now carried at $27.18 per share compared to $27.04 per share in Q2. We have written it down the by half to $13.59 per share (slightly higher than the written down value of $13.52 per share in Q2). While its assets have increased slightly, the real problem for BGP is the growth in its substantial liabilities. Total liabilities now stand at $29.83 per share, up from $25.92 per share, the debt portion of which is up from $7.69 per share to $8.68 per share.

Our previous estimate for the liquidating value of BGP was around $2.23 per share. We now estimate that its liquidating value is -$9.6M or $-0.16 per share. This is on the basis of a very conservative treatment of its tangible assets and does not take into account BGP’s intangibles, like consumer brand recognition, which must have some residual value. We also note that BGP has a seasonal business, and this most recent quarter sees BGP in a much better position than the same quarter last year, at which time we estimate that its liquidating value was closer to -$4.87 per share. We think there’s a good chance that BGP will have some substantial asset value next year, and that it’s worth more than its liquidation value, but on our very conservative treatment of its assets, it has a negative liquidating value at this point in time.

As a brief diversion, set out below is a summary financial analysis of BGP without any discount applied to the assets (both the “Carrying” and “Liquidating” columns shows the assets as they are carried in the financial statements):

bgp-q3-summary-carrying-valueIn this analysis, with no discount applied to the carrying value of the assets, BGP appears wildly undervalued. We prefer our much more conservative estimate of liquidating value for two reasons:

  1. We think the discounted values are more likely to be right; and
  2. If we’re wrong in our estimate, we hope that we’ve applied a sufficient discount that we’re wrong on the upside, and not the down side. Valuing assets in liquidation is not an exact science. Prior to the actual sale, we don’t know with any certainty how much any given asset might yield. If we were to value assets at close to their carrying values, we think that more often than not we’d be disappointed.

You can read more about our undervalued asset situations philosophy on our About Greenbackd page and our rationale and method for calculating values on our About liquidation value investing page.


Our overly optimistic conclusion when we first wrote about BGP deserves repeating here (if only to stop us doing it again). We said, “It’s not often that the stars align like this: a stock with a well-known brand selling at less than a third of its value in a liquidation with one of the best activist investors in the US controlling almost a third of its outstanding stock. BGP has already embarked on its value enhancing transformation. We believe that, given time, BGP will be worth more than its liquidation value, but, if we’re wrong, it’s still trading at a third of that value, which is a bargain.” We even bolded that last part, which, in retrospect, we regret. While we still agree that BGP has a well-known brand, Will Ackman is one of the best activist investors in the US, and BGP will be worth much more than its liquidation value, it’s no longer trading at a third of its liquidation value, so the downside protection is gone. Our focus here is undervalued asset situations, and BGP is not an undervalued asset situation at this time. So that mean we’re out for now. We are, however, going to keep an eye on it for its next few quarters to see if the value returns.

BGP closed yesterday at $0.58. We liked it at $0.65, so we’re down 9.83% on an absolute basis.

The S&P 500 closed yesterday at 904.42 and closed at 816.21 (+10.81%) when we liked BGP, so we’re down 20.64% on a relative basis.

[Disclosure: We have a holding in BGP but we plan to exit it soon. We may acquire it again in the future. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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Warning: We updated this post on December 18, 2008.

Borders Group, Inc. (NYSE:BGP) presents a rare opportunity to invest in a stock with a well-known brand alongside one of the best activist investors in the US, William A. Ackman of Pershing Square Capital Management, L.P. Want more? With a market capitalization of $39.4M at today’s close ($0.65) and a liquidation value we estimate at $135M, BGP is available right now at an astonishing 61% discount to that value.

About BGP

According to its website, BGP “operates over 509 Borders superstores in the U.S.; 32 Borders stores outside the U.S., in Australia, New Zealand, Singapore and Puerto Rico; and approximately 485 stores in the Waldenbooks Specialty Retail segment, including Waldenbooks, Borders Express, Borders airport stores, and Borders Outlet. Borders Group owns London-based Paperchase Products Limited, a retailer of stationery, cards and gifts with approximately 120 locations outside the U.S., including stand-alone stores and concessions. There are also more than 317 Paperchase shops located within U.S. Borders superstores and the company opened its first stand-alone Paperchase shop in the U.S. on Boston’s Newbury Street in 2007.”

The value proposition

While the company has been loss making for the last few years it maintained positive Cash Flow from Operating Activities of $94.1M last year, $46.9M in the 2007 year and, encouragingly, $76.6M in the most recent quarter to August 2008 (see the most recent 10Q here). There real value is in the balance sheet.  Set out below is our summary analysis (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):


BGP’s value is concentrated in its Inventory ($18.01 per share) and Property, Plant and Equipment ($27.04 per share). We have written down the Inventory by two-thirds to $12.07 per share and the Property, Plant and Equipment by half to $13.52 per share. The company has substantial liabilities of $25.92 per share, of which $7.69 is debt. We estimate the liquidating value of BGP to be around $2.23 per share. With the stock at $0.65, BGP is at an astonishing 29% of its liquidating value. Note that the liquidating value does not take into account BGP’s intangibles, like consumer brand recognition, which must have some residual value. At $0.65, we think BGP is a bargain.

The catalyst

William A. Ackman of Pershing Square Capital Management is perhaps one of the best – and best known – activist investors in the US. Pershing Square first disclosed its holding in BGP in a 13D notice filed October 9, 2007 and now controls around 33.6% of BGP’s stock (see the most recent 13D here).

Pershing Square has pushed the company to undertake certain strategies to enhance the value of its investment and BGP seems to be making progress in executing these measures.  According to the 10Q, on March 20, 2008, the company announced that it would “undergo a strategic alternative review process.”

“J.P. Morgan Securities Inc. and Merrill Lynch & Co. have been retained as the Company’s financial advisors to assist in this process. The review will include the investigation of a wide range of alternatives including the sale of the Company and/or certain divisions for the purpose of maximizing shareholder value.”

On April 9, 2008, the company completed a financing agreement with Pershing Square, which “will allow the Company to be fully funded during fiscal 2008, where absent these measures, liquidity issues may otherwise have arisen during the year.” According to the company’s most recent quarterly report, the financing agreement with Pershing Square consists of three main components:

“1. A $42.5 senior secured term loan maturing January 15, 2009 with an interest rate of 9.8% per annum. The term loan is secured by an indirect pledge of approximately 65% of the stock of Paperchase pursuant to a Deed of Charge Over Shares. In the event that Paperchase is sold, all proceeds from the sale are required to be used to prepay the term loan. The representations, covenants and events of default therein are otherwise substantially identical to the Company’s existing Multicurrency Revolving Credit Agreement (as amended, the “Credit Agreement”), other than some relating to Paperchase. Such exceptions are not expected to interfere with the operations of Paperchase or the Company in the ordinary course of business.

2. A backstop purchase offer that gave the Company the right but not the obligation, until January 15, 2009, to require Pershing Square to purchase its Paperchase, Australia, New Zealand and Singapore subsidiaries, as well as its interest in Bookshop Acquisitions, Inc. (Borders U.K.) after the Company has pursued a sale process to maximize the value of those assets. Pursuant to this sale process, the Company sold its Australia, New Zealand and Singapore subsidiaries during the second quarter of 2008 to companies affiliated with A&R Whitcoulls Group Holdings Pty Limited. Pershing Square’s remaining obligation to purchase the Company’s remaining U.K. subsidiaries remains in effect until January 15, 2009. Pershing Square’s purchase obligation for the U.K. subsidiaries is at a price of $65.0 (less any debt attributable to those assets) and on customary terms to be negotiated. Proceeds of any such purchase by Pershing Square are to be first applied to repay amounts outstanding under the $42.5 term loan. Although the Company believes that these businesses are worth substantially more than the backstop purchase offer price, the relative certainty of this arrangement provides the Company with valuable flexibility to pursue strategic alternatives. The Company has retained the right, in its sole discretion, to forego the sale of these assets or to require Pershing Square to consummate the transaction. Pershing Square has no right of first refusal or other preemptive right with respect to the sale of these businesses by the Company to other parties.

3. The issuance to Pershing Square of 9.55 million warrants to purchase the Company’s common stock at $7.00 per share. The Company is also required to issue an additional 5.15 million warrants to Pershing Square if any of the following three conditions occurs: the Company requires Pershing Square to purchase its international subsidiaries as described in (2) above, a definitive agreement relating to certain business combinations involving the Company is not signed by October 1, 2008, or the Company terminates the strategic alternatives process. The warrants will be cash-settled in certain circumstances and have a term of 6.5 years.

The warrants feature full anti-dilution protection, including preservation of the right to convert into the same percentage of the fully-diluted shares of the Company’s common stock that would be outstanding on a pro forma basis giving effect to the issuance of the shares underlying the warrants at all times, and “full-ratchet” adjustment to the exercise price for future issuances (in each case, subject to certain exceptions), and adjustments to compensate for all dividends and distributions.”

On October 1, 2008, Pershing Square exercised the right in paragraph 3 above to require the company to issue further warrants to purchase 5.15M shares at $7.00 per share, which means Pershing Square controls warrants covering an additional 14,700,000 shares.


It seems to us that this is one of the better opportunities out there at the moment. It’s not often that the stars align like this: a stock with a well-known brand selling at less than a third of its value in a liquidation with one of the best activist investors in the US controlling almost a third of its outstanding stock. BGP has already embarked on its value enhancing transformation. We believe that, given time, BGP will be worth more than its liquidation value, but, if we’re wrong, it’s still trading at a third of that value, which is a bargain.

BGP closed yesterday at $0.65.

The S&P 500 closed yesterday at 816.21.

[Disclosure: We do not presently have a holding in BGP. UPDATE: We have now acquired a holding in BGP. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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