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Nelson Peltz Revives "Highly Contingent Letter" Acquisition Gimmick With Family Dollar

Tyler Durden's picture




 

After close today, Trian Fund Management, Nelson Peltz' asset management company, filed a 13D indicating the fund had amassed a 10 million (7.9%) share stake in FDO, and more importantly, expressed a vague, preliminary, non-binding and highly-contingent interest in acquiring discount retailer Family Dollar (closing regular hours at $44). As the proposed price indicated in the letter is $55-60, the shares are expectedly surging, meaning the letter alone resulted in nearly a 20% ($13) gain for Peltz 10 million share investment: $130 million for a few minutes worth of work: not bad. Yet is this anything more than a red herring? After all these kinds of fully contingent letters were all the rage during the bubble years, when funds would "express a purchase interest" with so many contingencies Arnold could drive his Hummer through all the "outs." As soon as the stock surged, the letter writer (and more often than not, the cabal of silent co-investors) would cash out, and slowly the buying interest would evaporate, with the price slowly dropping back to historical levels. In fact, for Trian this is not the first time - the company did an almost identical thing with Chemtura back in 2008, only to completely leave the company in March of 2009, months ahead of CEM's filing for bankruptcy (resulting in major losses for Trian). Which is why we urge readers to be very careful before chasing into FDO stock here: we are very concerned that this is nothing more than simply another attempt on behalf of Trian to stir up buying interest in which to sell its 10mm holdings with no real acquisition interest, since with all the non-binding clauses it is extremely difficult to take this letter seriously.

Key section from 13D below:

On February 15, 2011, the Trian Group contacted Howard Levine, Chairman of the Board and Chief Executive Officer of the Issuer, and advised him that it beneficially owned approximately 8% of the outstanding Shares and believed that it was the largest beneficial owner of Shares. The Trian Group also advised Mr. Levine that it proposed that the Trian Group or one of its affiliates acquire the Issuer at a price in the range of $55 to $60 per Share in cash. Any such transaction would be subject to customary conditions, including completion of a satisfactory due diligence review, execution and delivery of definitive documentation, approval of the Board of Directors of the Issuer, receipt of financing and receipt of regulatory and third-party approvals, including expiration or termination of the Hart-Scott-Rodino waiting period. The Trian Group also offered Mr. Levine the opportunity to participate as an investor alongside the Trian Group. Furthermore, the Trian Group urged Mr. Levine to have the Issuer’s Board of Directors form a committee of independent directors to consider the Trian Group’s proposal. The Trian Group also advised Mr. Levine that in their view, the ultimate decision of whether the Issuer should be sold should be determined by the Issuer’s shareholders.

The Trian Group intends to have discussions with the Issuer’s Board of Directors and management. In addition, the Trian Group has communicated and may continue to communicate with other shareholders, industry participants, potential equity and/or debt financing sources and/or other interested parties concerning the Issuer and a possible acquisition transaction involving the Trian Group or an affiliate. Furthermore, the Trian Group may engage one or more financial advisors in connection with a proposed transaction involving the Issuer. There can be no assurance that the Trian Group will consummate the acquisition or that it will acquire any additional Shares.

The Filing Persons intend to review their investment in the Issuer on a continuing basis. Depending on various factors including, without limitation, the Issuer’s financial position, results and strategic direction, price levels of the Shares, the Issuer’s response to the actions suggested by the Filing Persons, actions taken by management and the Board of Directors of the Issuer, other investment opportunities available to the Filing Persons and capital availability and applicable regulatory and legal constraints, conditions in the securities and capital markets, and general economic and industry conditions, the Filing Persons may, from time to time and at any time, in the future take such actions with respect to their investment in the Issuer as they deem appropriate including, but not limited to: communicating with management, the Board, other stockholders, industry participants and other interested or relevant parties (including financing sources and financial advisors) about the Issuer  or proposing a potential or other transaction involving the Issuer and about various other matters, including the operations, business, strategic plans, assets and capital structure of the Issuer or one or more of the other items described in subparagraphs (a)-(j) of Item 4 of Schedule 13D; requesting or proposing one or more nominees to the Board of Directors of the Issuer; purchasing additional securities of the Issuer in the open market or otherwise; entering into financial instruments or other agreements that increase or decrease the Filing Persons’ economic exposure with respect to their investment in the Issuer; and/or engaging in any hedging or similar transactions with respect to such holdings. The Filing Persons reserve the right to change their current plans and intentions with respect to any and all matters referred to in Item 4 of Schedule 13D based on any of the foregoing factors or otherwise or to sell or distribute some or all of their respective holdings in the Issuer, at any time and from time to time, in the open market, in private transactions or otherwise.

In other words, this is nothing more than the weakest form of a "highly confident" purchase letter with 1001 outs. Yet for Trian the mission has been accomplished: $130 million in minutes without any operational or balance sheet risk. The question is what happens to everyone else who blindly follows the wily manager into this quote unquote deal.

And lastly, for those who wonder where else Peltz may pursue a comparable "red herring" strategy, here is a summary of the fund's most recent holdings:

 

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Tue, 02/15/2011 - 19:02 | 965190 Hedgetard55
Hedgetard55's picture

I heard Hamy and Harry were buying hand over fist!

Tue, 02/15/2011 - 19:11 | 965210 Canaduh
Canaduh's picture

Ahaha the first time I watched CNBC in weeks, and I see that slimeball on Fast Money recommending FDO. Praise Jebus.

Tue, 02/15/2011 - 19:13 | 965213 ZeroPower
ZeroPower's picture

Yes, quite interesting indeed, except i dont see him cashing out his whole 10mm position with 1 simple stroke of the sell button - ADV is about 2.5MM shares, so asking for 4x regular volume on your single position...you'd get killed. 

Tue, 02/15/2011 - 19:23 | 965235 Sutton
Sutton's picture

Nelson Peltz=Shyster

Tue, 02/15/2011 - 19:30 | 965244 ghostfaceinvestah
ghostfaceinvestah's picture

sorry, off topic, but in case no one has linked this yet - Zimbabwe, here we come, thanks Benocide.

http://finance.yahoo.com/news/Companies-Raise-Prices-as-nytimes-40517303...

 

A package of Oscar Mayer cold cuts. A pair of Nine West boots. A Whirlpool washing machine.

By the fall, people will most likely be paying more for each of them, as rising prices hit most consumer goods, say retailers, food companies and manufacturers of consumer products.

Cotton prices are near their highest level in more than a decade, after adjusting for inflation, and leather and polyester costs are jumping as well. Copper recently hit its highest level in about 40 years, and iron ore, used for steel, is fetching extremely high prices. Prices for corn, sugar, wheat, beef, pork and coffee are soaring. Labor overseas is becoming more expensive, meanwhile, and so are the utility bills to keep a factory running.

“There are cost pressures from virtually everywhere,” said Wesley R. Card, the chief executive of the Jones Group, whose brands include Nine West and Anne Klein. After trying to keep retail prices flat or even lower during the recession, Jones says prices for its brands will climb 15 to 20 percent by autumn.

Tue, 02/15/2011 - 19:37 | 965269 Seasmoke
Seasmoke's picture

if i had the bankroll, i always thought this was the best way to play

Tue, 02/15/2011 - 20:02 | 965315 topcallingtroll
topcallingtroll's picture

This kinda stuff, plus good articles on foreblindness, hedging, chinese fraud ipo, will hopefully get zero hedge to the point you could make a living doing this TD. Going on populist rants and conspiracy theorizing may diminish your respectability and keeps you fringy, especially if your long term macro calls.dont.come true. But you.could be the financial policeman we.dont have, an educator, and even a moralizer, plus many love the inside the game gossip and arcane news of a speculator/investor oriented blog. Cnbc clearly checks in on you, but if you are still.fighting the last war long after it is over then it would be hard to recover.

Tue, 02/15/2011 - 21:41 | 965538 Tyler Durden
Tyler Durden's picture

Two years ago, HFT was a conspiracy.

One and a half years ago, the Fed propping up the stock market was a conspiracy.

One year ago, prop trading commingled with flow was a conspiracy.

Half a year ago, the JPM manipulation of the silver market was a conspiracy.

If we, and anyone else in the media, listened to people like you, there would never be any progress in the realm of journalism, and uncovering that behind most conspiracies, there is actually concrete truth.

We appreciate your editorial suggestions. However, next time please forward them to the New York Times, or any other cash flow negative legacy media, which will agree with your advice wholeheartedly just as it retains its restructuring advisor.

Tue, 02/15/2011 - 23:08 | 965729 Westley Gray
Westley Gray's picture

Having a hard time deciding if you're completely clueless or simply not funny or interesting. 

Tue, 02/15/2011 - 22:04 | 965593 Johnny Lawrence
Johnny Lawrence's picture

I actually own FDO.  I bought it in May 09 for how it fit into the macro theme of a more frugal consumer. 

So basically, the point is that anyone can say they're interesting in buying a company, watch the stock ramp up on the rumor, and then sell it?

Tue, 02/15/2011 - 23:40 | 965805 topcallingtroll
topcallingtroll's picture

Hmmm.  I guess I am wrong.  You had more hits when you put zimbabwe in the title.  The only thing I mention as conspiracy theory is that the market can be played like a fiddle by the banks and that third world starvation is a product of the fed rather than failure of the third world central banks to conduct independent monetary policy.  You have been right on the nose about HFT, but it appears to be frontrunning which is still illegal.  I shall forthwith never "concern troll" again. 

But banging on the genocide Ben drum is a little farfetched.  Even TD realizes that the United States has a right to conduct monetary policy that it deems appropriate for itself (even if one thinks the policy is wrong). 

You just seem too sophisticated to really believe that high food prices in the third world is really the fault of Ben rather than all the other factors out there including a secular increase in demand, speculation, fear and hoarding, thin reserves, and a failure of third world countries to conduct independent monetary policy (as well as tariffs on food?  How crazy is that?)

 That is the issue I meant when I said you may start sounding fringy.  But I still have a mancrush on you and love the other articles.

Wed, 02/16/2011 - 00:24 | 965858 Population Bubble
Population Bubble's picture

We certainly do have a right to conduct our monetary policy.  We have our seats in the lifeboat.  But the boat is full; we can not help those in the water.

Unfortunately this could still be considered genocide.  But what are you to do?  Don't you have to protect your own?

Tue, 02/15/2011 - 23:58 | 965827 Bitter Bob
Bitter Bob's picture

Two years ago the S&P down to 300 seemed an interesting possibility.

Today it seems pretty stupid.

Wed, 02/16/2011 - 00:25 | 965859 anonnn
anonnn's picture

What did you expect?

Composing an announcement in order to move a stock, up or down, is ordinary, garden variety, everyday insider activity to make profit without risk.

The creator of such information becomes, by definition, an insider. He knows what effect his story will cause, precisely because he created story to cause the effect.

Why take risk to make money, when being an insider carries no risk?

Working definition: an insider is s/o who knows something before others know it and can act to profit in that time lag.

So if you  create the something, you make yourself an insider. Why screw around with risk or gambling?

Without effective system of fairness or justice, clever schemes are a hoot, and anti-social ones are the winningest.  Banking, for example..

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