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