Tag Archives: company news

a J C Penney (JCP) stock issue post-mortem

October 3, 2013 By in green shoe, overallotment, Stock ideas Tags: , , , , , Leave a comment

More strangeness from JCP.

the final offering price (only mildly strange)

Last Friday, JCP filed a final prospectus with the SEC indicating that it had sold 84 million shares of its common stock to underwriter Goldman Sachs after the close the night before.  JCP received $9.36 for each.  Goldman intended to (and presumably did) sell the shares to the public for $9.65 before the market opened on Friday, netting a fee of $.29/ share.

Goldman retained a 30-day option to purchase another 12.6 million JCP shares on the same terms (the “overallotment” (or “green shoe”)–more about this below).

What’s strange?  The offering price is higher than initially thought–suggesting GS found eager buyers.

the stranger stuff

1.  Mike Ullman, the CEO of JCP was reported by CNBC a couple of days earlier to have assured investors that no fund raising was in the offing.  The stock rallied sharply on this.

Didn’t he know?  If the CNBC news is correct, apparently not.

JCP denies CNBC got the story right, however.

2.  Goldman was the underwriter even though the offering comes right on the heels of a GS report warning investors to be wary of JCP because of declining liquidity and lackluster sales.

Note:  in a separate SEC filing, JCP said its online business was up “double digits,” year over year.  It also stated it expected positive comp store sales for 3Q13 and 4Q13.  If the entire JCP business were growing in double digits, I presume JCP would have said so.  So I take the statement as meaning that the in-store business is up, but not by a lot.  In theory, but highly unlikely in my view, the online business could be going through the roof and in-store sales could be down.

3.  Goldman apparently was able to find institutions willing to buy all those JCP shares.

4.  post-issue trading  

There are two (related) aspects to this:

–hedge fund Perry Corp, which had just recently raised its stake in JCP dumped out 9 million shares on Friday.  Seems to me the issue took them by surprise, too–and they didn’t like it.

–the “overallotment.”  (Even though I stuck this in last place, it’s the real reason I wanted to write this post.)

The way the overallotment works is this:

JCP announced an offering of 84 million shares, with an overallotment of 12.6 million.  The underwriter has the right, but no obligation, to buy an extra 12.6 million shares of JCP within the 30 days following the offering.

In reality, GS sells all 96.6 million shares, including the overallotment, to the public.  In this case, that gets GS an extra $121.6 million.  It does so in order have money at hand to “stabilize” the price of the stock in the initial hours after the offering It does so by standing in the market and offering to buy JCP at $9.65.  Normally, trying to influence the stock price like this is illegal, but there’s an exception for a short post-issue stabilization period.

Stabilization is a no-lose situation for the underwriter, provided he doesn’t get carried away and start using his own money to do this (fat chance of that).  If the stock goes up, he buys nothing in the market.  He exercises his overallotment option with the issuing company and delivers those shares to the client.  If the stock is flat to down, he takes the shares he buys in the market at the issue price or lower and delivers them to the client.  The overallotment option lapses without being used.

Two points:

a.  Unless it’s completely clueless, Perry Corp was well aware of the stabilization period.  Its best exit strategy would have been to sell aggressively while GS was stabilizing the price.

b.  The $9.65 line didn’t hold for a nanosecond in regular trading.  Volume in JCP for the day was a whopping 256.3 million shares.  Yahoo Finance shows an open of $9.53 and a high of $9.67–but I don’t see anything on either Yahoo or Google charts to suggest the price got close to the $9.60s.  In any event, stabilization was a lost cause.

the strangest stuff

Many third-party analysts foresaw JCP’s need for extra cash a long time ago.  Like most things in business, the calculations are relatively simple.  It’s odd the JCP couldn’t make them.

I also find it very odd that JCP generously stepped aside and allowed former large holders Pershing Square and Vornado to sell their shares at much higher prices–and using up potential demand for JCP stock–over the past six weeks before testing the market itself.

J C Penney (JCP) issues stock

September 27, 2013 By in Current Market Thoughts, hedge funds, Stock ideas Tags: , , , , , , , , 2 Comments

the JCP offering

JCP filed a preliminary prospectus with the SEC indicating it is selling 84 million shares of common stock to the public at $9.52 a share through Goldman Sachs.  (In a typical provision of any offering called the “overallotment,” Goldman has permission to sell another 12.8 million shares if it can.)

Let’s say Goldman gets a commission of $.22 a share.  That would mean proceeds to JCP of $781 million – $900 million.

business stabilizing

Just in advance of the red herring, JCP filed an 8-K in which it said it expected comparable store sales to be positive during both 3Q13 and 4Q13.  The reason?  …merchandise that JCP customers want to buy is now in stock, and in the sizes that JCP customers fit.

three aspects of the offering

I hadn’t intended to write so much about JCP, but I think there are three interesting aspects to the offering.

1.  the size

This is a big offering, amounting to over a third of the shares already outstanding.

2.  why a stock offering?

For companies like JCP that want to raise a lot of capital, their first thought is to borrow.  It’s easier to do.  Transaction costs are lower.  Also, Americans firmly believe that debt is a lower-cost form of capital than debt, so borrowing is more beneficial for shareholders.

There comes a point, however, when lenders perceive the capital structure of a firm has become too lopsided.  When that happens, they will refuse to lend any more until the firm demonstrates Wall Street’s confidence in it by raising equity capital.

I assume we’re at that point for JCP.

why not six weeks ago?

After all, the sales projections JCP made in the 8-K are better, I think, than Wall Street had been assuming.  So it’s unlikely that JCP’s need for cash is greater now than it was a few weeks ago.

It’s also hard to think that a big company like JCP would not do continuous financial forecasting of its future cash flows that would indicate when it would need fresh funds, and in what amounts.

I don’t know the answer.

One obvious difference between now and the end of August, however, is that in the meantime two insiders, Pershing Square and Vornado, have unloaded their entire stakes, 52 million shares (!!), at a reported price of about $13 each.  That’s 36% higher than JCP itself is getting today.

I guess you might argue that everyone knew the two activists would be selling, and that this overhang would be enough to scupper a potential offering by JCP.  Seems pretty lame, though.

Me, I’m nonplussed (the first time I’ve used that word in my life).  If I were a JCP shareholder, I’d be stunned.  Maybe we just chalk this up as one of the perils of riding the coattails of latter-day robber barons.  But if I were a shareholder, I’d want to know how the board allowed this to happen.

On September 20th, JCP’s controller left the company.  Is this connected?

two lessons for analysts from JCP

September 26, 2013 By in Current Market Thoughts, hedge funds, Retail, Stock ideas Tags: , , , , , Leave a comment

JCP  in the press again over the past two days.

I’ve only seen the headlines, which assert that:

–JCP is trying to sever the 10-year $200 million agreement the previous CEO, Ron Johnson arranged with Martha Stewart.  Why?   …the MS merchandise isn’t selling

–JCP is looking to raise new funds

–a Goldman analyst has used the “B” word (bankruptcy) in warning clients to avoid JCP stock.

I want to make two relatively narrow points:

1.  Analysts are extremely reluctant to speculate on a possible corporate bankruptcy in writing.  They may mention the possibility on the phone or in meetings, but not in print.

A boss of mine years ago at Value Line did this once.  He wrote about a small-cap magazine company that if weak advertising trends continued for the following twelve months, there was a risk the firm would have to close its doors.  Advertising dried up almost immediately on publication of the report.  The company was out of business in three months.

Raising the prospect of bankruptcy is like shouting “Fire!!” in a crowded theater.  It has consequences.

Also, if the firm survives it will never forgive the analyst who made the call.  The Goldman analyst who wrote the report must either be very young or extremely confident that the prediction won’t come back to haunt him/her.

 

2.  In graduate school I spent a year at the university in Tübingen in southwest Germany.  For a while I lived with a family where we all went mushroom hunting on weekends.  What we found made up at least one or two meals the following week.  That’s where I learned about the deaths head mushroom.  Eating it is most often fatal; symptoms only emerge after it’s too late to get treatment.

The obvious course of action–learn what the deaths head looks like, and don’t eat it.

There’s an analogy here.

In the case of JCP, the symptoms we’re seeing now are the direct result of corporate decisions made two or more years ago by ex-CEO Ron Johnson and defended for a long time by Bill Ackman.  Oddly, both seem to have been thinking–contrary to all experience–that falling sales could be remedied by applying a double does of what was causing them.  What’s equally surprising is the the JCP board let the situation go unaddressed until it had reached crisis proportions.

 

My second point:  many times corporate strategies, once put in motion, are difficult or impossible to reverse.  So we, as investors, have to be constantly scanning the horizon for indications of possible weakness. Normally, the early signs of deterioration are found on the balance sheet (rising receivables and inventories) and the cash flow statement.

For JCP, though, there was nothing subtle about its difficulties.  Sales fell apart almost as soon as Ron Johnson took the controls.  Another reason it”s so hard to understand why the board let the situation get so out of control.

 

securities analysis in the 21st century: where the companies stand

September 20, 2013 By in Constructing a Portfolio, Current Market Thoughts, Getting financial advice, Portfolio management, Securities regulation Tags: , , , , , , Leave a comment

two communication theories

1.  When I entered the business in the late 1970s, the attitude of publicly traded companies toward their actual and potential investors was personified by a Mobil Oil public relations executive named Herb Schmertz.

Herb’s view was that brokerage house securities analysts were a specialized kind of newspaper reporter.  If his company wanted to tell the financial community some tidbit without the information hitting the press, Schmertz would call in/call up favored analysts and let them know.  Their obligation, in his view, was to faithfully relay the company’s information–spun the way the company wanted–to their clients.  No actual analysis, no contrary conclusions, needed.

That’s not quite today’s view, though.

2.  I remember vividly a time in the mid-1990s when I held a large position in Sony (embarrassing but true–although I’m one of the few portfolio managers who can truthfully say he made money holding Sony).  I went to E3 in Los Angeles that year, where Sony Computer Entertainment was having a briefing for securities analysts.  I arrived at the meeting room and sat down.  A SCE official came up to me and told me to leave.  Why?  that Sony (Kaz Hirai) was going to be discussing sensitive information about strategy and upcoming products.  Only sell-side analysts were allowed to participate.  Everyone else, including shareholders (i.e., company owners!!!) , were barred.  I refused to leave and the guy left me alone.

Blend #1 with #2 and you get the way most companies act today.

what’s wrong with this picture?

Post Regulation FD (Fair Disclosure), the company behavior I just described is, to me, clearly illegal.

It seems a little crazy to me, as a shareholder, that a company may refuse to communicate with me directly, but will give information to a brokerage house analyst from whom I have to buy it.

Most important in a practical sense, the old system is broken–and most companies don’t realize it.  It’s broken in two ways:

–most brokerage houses have gutted their research departments because they believe research loses them money.

–I think the equity market swoon that accompanies the Great Recession has marked a key turning point in the way individual investors behave.  I think that as a group they’ve soured on mutual funds and have begun again to invest in a blend of index products plus individual stocks that they research themselves.  They instinctively know that active managers generally have no edge any more, and that brokerage research is threadbare.

clueless in Delaware

(that’s where most publicly traded companies are incorporated)

My experience over the past few years in dealing with investor relations departments is that they exhibit what one might call an “emperor’s new clothes” attitude.  They don’t want to acknowledge that the world has changed, and that the communications protocol they’ve used for decades no longer works.

what to do?

For companies, it seems to me a basic rethink of communication strategy is in order:

–previously analyst-only meetings should have a provision for individual shareholder participation.  This might be at the same physical location.  The very least should be a webcast with interactive chat and ability to participate in Q&A sessions.

–same thing for appearances at broker-sponsored conferences, including breakout sessions.

–investor relations departments should become more responsive to queries from individual shareholders, or potential shareholders.  This isn’t as glamorous as coast-to-coast travel to talk with big institutions and brokers, but both of those constituencies are withering on the vine.

For our part, if/when a phone call (or several) to a company isn’t returned, a letter to the chairman is in order–explaining why we think the policy of not responding to shareholder inquiries is misguided.  I think the key points are that it isn’t fair to give information to non-owners but not to owners, and that it’s doubly unfair to give it to brokerage intermediaries who then force us to pay for information about our own companies.  (A word about how the world has changed may be in order;  pointing out that current practices violate Reg FD will probably get you, at best, a form letter from the legal department (i.e., nowhere).)

 

 

Verizon Wireless: who’s getting the better of the deal, Verizon (VZ) or Vodafone (VOD)?

September 13, 2013 By in Current Market Thoughts, Stock ideas, Strategy, Technology, Wireless Tags: , , , , , , , , , Leave a comment

I think it’s VZ.  The company says that even at a cost of $130 billion the buy-in of VOD’s 45% minority interest will add 10% to VZ’s earnings.  But VZ is also adding a significant amount of risk in leveraging itself financially.

a simplified history

In 1982 the federal government forced the breakup of the monopoly telephone service provider, ATT.  It separated the parts into a national long-distance provider, which retained the ATT name, and a bunch of regional local service providers, nicknamed the “Baby Bells.”  Each Baby Bell contained its area’s nascent mobile services.

Soon enough, the Baby Bells began to merge with one another, ultimately forming into a Western US group (which subsequently acquired “new” ATT and took on the ATT name) and an Eastern group, which subsequently renamed itself Verizon.  Proto-VZ wanted to keep its mobile assets.  Proto-ATT didn’t.  To keep the mobile assets out of the clutches of prot0-VZ, Airtouch, the proto-ATT mobile operation, sold itself to VOD in 2000.

VOD promptly struck a deal with VZ in which it merged Airtouch with the VZ mobile operations to form Verizon Wireless.  VZ had operating control and a 55% interest.  VOD had veto power over some decisions and held the other 45% of Verizon Wireless.

Got all that?

culture clash

VOD is a British company.  It apparently believed in the old-style colonial European way of doing business, according to which a firm with global pretensions could get more bang for a buck (or quid, in this case) of capital by taking large minority interests in important foreign  firms.  Through superior intellect/management technique, or force of will, or sheer European-ness, it would dominate the board of directors.  It would thereby get the benefits of 100% ownership without the capital outlay.   The resulting network of companies would move in lockstep with its European leader, buying the capital equipment suggested (getting discounts for all) and perhaps paying management fees to the European company for its advice.

VZ, an American firm, would have thought that no one in his right mind would accept a minority stake.  If would have figured that VOD would soon see the light and be persuaded to sell.

Or maybe that’s just how the two parties rationalized the unhappy partnership that they entered into.

what each party gets from the deal

Verizon

–when the deal closes early next year, VZ will have access to the cash flow from Verizon Wireless for the first time.  US tax law   requires that a parent have an 80% interest in a subsidiary before cash can flow tax-free from it to the parent

–VOD will no longer have an operational say in Verizon Wireless

–the very mature fixed-line telephone business will be a significantly smaller proportion of the whole

–the deal is accretive to earnings by 10%

Vodafone

–VOD extracts itself from its awkward minority position

–ir gets a big payday, even after distributing the bulk of the proceeds to shareholders, which it will presumably use for EU acquisitions

–VOD believes it can use a provision in UK tax law regarding transactions between conglomerates to pay only about $8 billion it taxes on this deal