Schulte Roth's 2012 Shareholder Activism Insight Report

In the second quarter of 2012 SRZ commissioned mergermarket to interview senior corporate executives and activist investors regarding their views with respect to shareholder activism and their expectations for the upcoming 12 to 24 months.  The result is a report that provides an in-depth review of emerging trends in shareholder activism, as well as insights into the changing corporate landscape investors and executives will face in the coming years.

Respondents were asked questions on key sectors for activism, primary drivers of activism, the most effective defensive tactics a company can use, attitudes toward shareholders in the boardroom and much more.  SRZ partners Marc Weingarten and David Rosewater were instrumental in providing commentary and insight throughout the report.

CLICK HERE TO READ THE FULL REPORT

Murphy Oil Takes Cue from Activist Third Point

Murphy Oil Corp. (Ticker: MUR) announced a reorganization of its business units, a special dividend and a stock buyback.  The actions can be viewed, at least partly, in anticipation of an activist push from Daniel Loeb's Third Point. 

The company said in a press release yesterday that it will spin off its downstream subsidiary Murphy Oil USA as a publicly traded company operating gas stations and distribution terminals.

The separation of the two units would allow each to focus its capabilities and capital on specific markets, while investors will be able to value each company separately and invest accordingly.

Shareholders will also receive a $2.50 per share dividend (amounting to $500 million), and the company plans to buy back as much as $1 billion in common stock.

These measures correspond fairly closely to suggestions Third Point made about Murphy in their third quarter letter to investors which mentioned discussions they've had recently with management regarding broad changes to the company's operating structure.

The letter said that Murphy's shares could rise around 60% if the company takes four steps. These comprise spinning off  the retail business, selling Canadian natural gas holdings, unloading a stake in Syncrude, and finishing a move out of U.K. refining activity.

These four steps, the letter said, could generate $8.4 billion to $8.9 billion pre-tax:

"Assuming 20% tax leakage on the two Canadian asset sales, we arrive at $7.3 - $7.8 billion in after-tax proceeds, or roughly $37 - $40 per share. Third Point estimates that the associated EBITDA with the assets sales is $750 million or ~20% of our 2013 EBITDA forecast for Murphy. Based on a current enterprise valuation of $10.4 billion, our analysis suggests investors are paying only $2.6 - 3.1 billion for the balance of Murphy’s assets, which we estimate could generate $2.9 billion in EBITDA in 2013."

On October 4 MUR issued a press release stating that they had recently met with Third Point and that, “The Board and management have been working to evaluate opportunities to illuminate the value in our stock price for the benefit of all of our shareholders.”

While Murphy did not mention Third Point in its release on the spin-off, it clearly fulfilled the first of the activist hedge fund's recommendations. At the same time, the release said it is considering actions that comport with Third Point's other suggestions: "Murphy also reaffirmed the plan to divest the U.K. downstream operations and stated that it is continuing to review possible options with respect to selected assets."

Third Point also revealed in its investor letter that it was seeking Hart-Scott-Rodino clearance from the Federal Trade Commission in order to provide them with the flexibility to augment their 1.5 million share position.  On October 10 Third Point was granted "early termination" from the FTC, clearing the way for Third Point to add to its position.

Posted by Paul Springer

Activist Investors Are Cautioned on Passive vs. Active Filings (with the FTC and the SEC)

Biglari Holdings (Ticker: BH), which has been an investor in Cracker Barrel Old Country Store (Ticker: CBRL) since last year agreed to pay an $850,000 fine to resolve allegations that it continued to file as a “passive” investor under Hart-Scott-Rodino (HSR) when BH had in fact intended to become actively involved in the management of the Company. (Note: BH is currently seeking two seats on CBRL’s board for a second year in a row and now owns 17.5% of CBRL at an average cost of $48.59 per share.  Read our recent activist research report on CBRL.)

BH’s settlement made it clear investors need to stay on top of not only Securities and Exchange Commission filings but also Federal Trade Commission HSR filings as well.

BACKGROUND

BH changed its filing status from “passive” (13G) investor to “active” (13D) investor with the SEC on June 13 last year disclosing a 9.7% ownership in CBRL, but neglected to file with the FTC or observe the HSR waiting period, which is intended to provide the FTC enough time to examine the competitive (i.e. antitrust) dynamics of any large investment.

The sanction hinges on a complaint the FTC filed alleging BH’s abuse of the HSR's passive investor exemption.

According to a press release issued by the FTC on September 25:

“The Hart-Scott-Rodino Act contains an exemption for acquisitions of up to ten percent of voting securities if the acquisition is made solely for the purpose of investment.  The HSR Rules state that such transactions are exempt from premerger filings, if ‘the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.’  However, if the buyer intends to be actively involved in the management of the acquired asset, the exemption does not apply and an HSR filing may be required.”

The Department of Justice confirmed that the issue was indeed related to the passive investor exemption:

According to the complaint, “…in May and June 2011, Biglari Holdings acquired approximately 8.7 percent of the outstanding voting securities of Cracker Barrel.  On June 8, 2011, Biglari Holdings exceeded the then-$66 million threshold for HSR filings, and continued to acquire additional voting securities through June 13, 2011.  The complaint alleges that, at the time of its acquisitions, Biglari Holdings intended to actively participate in the management of Cracker Barrel, including seeking a seat on the company’s board of directors.  As a result, Biglari Holdings was ineligible for the passive investor exemption and was required to submit an HSR notification before acquiring shares of Cracker Barrel in excess of $66 million.”

VARIOUS PERSPECTIVES

BH took a different view of the situation. According to a company press release BH argued its plans were never “active”, stating, "Biglari Holdings has made clear in all of its public filings that it has no intention of becoming actively involved in day-to-day management or in seeking control of the Board of Cracker Barrel."

Obviously, HSR's opinion of the passive investor exemption is very much at odds with BH’s interpretation.  BH’s effort to seek representation on the Cracker Barrel board alone appears to be enough to make the FTC see it as a move towards seizing control of the company, regardless of BH’s claims to the contrary.  In addition, since BH operates in the restaurant business, the FTC considers it a competitor - which will strip an investor of its passive status, as does (i) submitting a proposal for shareholder approval, (ii) soliciting proxies, or (iii) investing when a company creates a shareholder rights plan (which CBRL did after BH began acquiring shares last year).

Analysis from the law firm of Wachtell Lipton highlights the FTC's view: "The FTC’s complaint and press release allege that Biglari Holdings’ actions, including the request for two board seats, were inconsistent with investment-only intent . . . ."

Another assessment from Proskauer Rose notes a variety of actions likely to raise eyebrows at the FTC and focuses on one particular issue in the case of Biglari and Cracker Barrel: "According to the agency, seeking representation on the target company's board of directors, as Biglari did, creates an irrebuttable presumption of intent inconsistent with a passive investment."

In another view, Schulte Roth & Zabel advises investors to talk to their attorneys about anything that could signal a change from passive to active investing: "While the Agencies acknowledge that investors’ intent may change over time from passive to active, the allegations in this matter show the Agencies' willingness to question and challenge an investor's reliance on the passive investment exemption."

Posted by Paul Springer

Keith Gottfried Joins Alston + Bird LLP

Alston & Bird Strengthens M&A and Corporate Governance Practices in Washington, D.C.

In a press release issued by Alston & Bird on April 3, 2012, the law firm announced that highly regarded M&A attorney Keith E. Gottfried has joined the Washington, D.C. office of the firm as a partner in its Corporate Transactions & Securities Group. Gottfried concentrates his practice primarily on M&A transactions, shareholder activism, contested control transactions, corporate governance, SEC reporting issues, NYSE and NASDAQ compliance, and general corporate matters.

Gottfried has worked on a number of high-profile M&A transactions, representing private and public companies across a broad range of industries and sectors, in negotiated and unsolicited M&A transactions, cash and stock-for-stock mergers, tender offers, exchange offers, cross-border transactions, special committee representations and takeover defense assignments.

Gottfried left the New York office of Skadden, Arps, Slate, Meagher & Flom LLP, in 2000 to serve as the general counsel and chief legal officer for Borland Software Corporation, a publicly-held company that was one of the early pioneers in desktop productivity and database software in Silicon Valley. Gottfried subsequently served as general counsel of the U.S. Department of Housing and Urban Development (HUD), where he oversaw approximately 400 attorneys throughout the country.

“The firm is very pleased to have an attorney of Keith’s reputation, caliber and extensive experience come aboard,” said Richard Hays, managing partner of Alston & Bird. “His experiences serving as outside counsel and as a general counsel in both the private and public sectors provide him with a broad and diverse perspective on how best to serve the interests of our clients. He is the perfect complement to our strong corporate team.”

About Keith E. Gottfried

Gottfried has extensive experience in structuring, negotiating and advising clients on M&A transactions. He also has extensive experience counseling boards of directors with respect to their fiduciary duties under applicable law in connection with M&A and other fundamental transactions and, when necessary or appropriate, in the establishment of special negotiating and other board committees.

Gottfried is well known in the areas of shareholder activism and advises clients in connection with proxy contests, consent solicitations and activist campaigns or contests for corporate control, as well as the implementation of stockholder rights plans and other types of defensive strategies. Gottfried has written, and/or been quoted in, numerous articles discussing the challenges presented by shareholder activism and what steps companies and their boards of directors should take to prepare themselves. He is also a frequent panelist or presenter at conferences, webinars and seminars focused on shareholder activism issues.

Gottfried earned his J.D., cum laude, from Boston University's School of Law in 1992, where he was named an Edward F. Hennessey Distinguished Scholar of Law and a G. Joseph Tauro Scholar of Law. He earned an M.B.A., with high honors, from Boston University's Graduate School of Management and a B.S. in economics, concentrated in accounting, from the University of Pennsylvania's Wharton School in 1995. Gottfried is also a certified public accountant.

The New Activist Investor: John Paulson

On February 14 John Paulson sent a letter to Liam McGee - the Chairman, President and CEO of The Hartford Financial Services Group (Ticker: HIG).  In the letter Paulson states that a spin-off of the property and casualty insurance business would increase shareholder value by 40-60%.

Extracted from Paulson's letter:

Dear Liam:


We appreciate the opportunity to have a dialogue with you on the significant benefits to be achieved through a tax-free spinoff of Hartford’s P&C business. As the largest investor in the Company for the past year, we have done exhaustive research on the challenges and opportunities of The Hartford and believe that a spinoff would produce an increase in value for Hartford shareholders of 40 – 60%+ above the unaffected share price. This valuation range is also consistent with Goldman Sachs’ estimate of a valuation enhancement on the order of 70%.

Stated simply, the spin-off would:

• Create two pure play insurance companies – one in life and one in P&C – whose management is focused solely on each companies’ own strategies, distribution channels and capital requirements.
• Enable each of the respective companies to achieve a multiple consistent with its industry, which, for the property casualty business, would mean a multiple of approximately 1.1x book value versus Hartford’s current multiple of 0.4x — the lowest of any major US insurance company.
• Reduce complexity, which limits sell-side coverage and investor interest.

Given the extremely poor performance of Hartford’s stock and the fact that Hartford trades at lower valuation multiples than any of its US insurance peers, addressing these issues should be Hartford’s highest priority. That is why we were disappointed that management, on the February 8th earnings call, only addressed the potential “challenges” of a separation. Not only do we believe that you underestimate the potential value that would be created by a spin, the “challenges” you describe are both over-rated and readily manageable.

We shared our view regarding the benefits of a tax-free P&C spinoff initially in November 2011 and again in December 2011. As part of our analysis, we considered all other strategic alternatives including share buybacks, the sales of individual businesses, the sale or IPO of minority stakes in Life and/or P&C, and others, but none of these came close to the dramatic increase in shareholder value to be created by a spinoff. For your reference, we have updated and attached the slides we previously sent to your Board.

Click here to read the entire letter and presentation filed with the SEC.