Having received many emails to discuss the off-topic Footstar posts from this afternoon, I just wanted to clarify that I am market neutral on this stock. When I saw the link I just read it and laughed.
By my math, the hedge fund owns 1,430,609 shares at a cost basis of about $3.63 each. (didn't double check it, but it's close to the numbers in the report.) I'm not raining on anyone's parade here. But I didn't rush out and try to capture shares in the pink sheets market - just laughed. Maybe the laugh will be on me for not reacting, but again to answer any questions - and I enjoy your emails - I remain market neutral, having covered my final short position around $5.00 before it was delisted from the NYSE.
"who is running things changes IV."
Near as I can tall, the way to value the company is:
1) determine the value of the shoe stores, from sales figures, etc.
2) determine the deals Meldisco has with WMT and K-Mart (their equity interests, leases, etc.)
3) apply some theoretical profit margin to the Meldisco operations
Since there are no financials, this becomes somewhat of a game, but there is some information to go on, from the last estimates they published in October/November I believe. Links:
As to whether they have filed reports in a timely manner or not, to me this may not be the most critical thing. For one, Chapman's filings offer some conjecture as to why not (but that's all it is - conjecture from a biased source). Also, as an example, BMY also filed late, but the company was also probably worth more than $20, just based on what was generally accepted as being close to the truth.
A bank is the major holder of the debt, and recently raised the interest rate to 15% (?), which is not good, but as another example, BRK put it to WMB with an exorbitant interest rate last year, but this didn't mean WMB was going under. I only wish I had bought more for $1.75.
I dunno and not taking any position on this stuff absent data. I'm not sure what the 15% thing was with USG. Was it a reg, or a shareholder rights provision?
OT, Did anybody happen to catch a different but also amusing case a few months back re a fish-oil company called Omega Protein? Management filed a press release describing what eventually turned out to be a crude forgery of a far-above-market offer, apparently forwarded to the company by somebody who found it literally on a message board.
(No tender materialized in that case. )
"I don't know what a Form 4 is, but that's why I'm asking. But I'm really wondering about is that mechanism which stops accumulation at 15%, per Buffett's purchase of USG."
Buffet was limited his purchase of USG to 15% due to a poison pill USG has in place. I don't know if FTS has any such. Even if it did the threshold may or may not be 15%.
As I said in the last mail, it is not strange for him to stop accumulating before the max. As his position is not without risk. If there are serious problems with the books or if the management is too stubborn to change it's way he may still end up loosing.
In general, his style is not one of taking over companies and running them, turning them around or selling them. That takes a different level of commitment. Guys like Barrington Capital and Steel Partners might attempt something like that but doubt if Chapman would.
The only thing that block Berkshire from buying more than 15% in both USG or DNB is the poison pill (shareholders' right plan) that gives shareholders the right to purchase more shares at substantial discount (for continuous dilution). The poison pill will be triggered if somebody buys more than 15% of the company.
I have an idea why.
Most people we pay more for control. You dont know what they value control at.
Maybe they dont want more shares at $5 if current management is staying.
If they can own the whole thing, then they will pay $8.
Seems dumb at first, but who is running things changes IV.
"I'm also wondering well how come he says he'll offer $8 yet won't pay $5"
Some skepticism is warranted but the situation is not that strange. First of all he said that he would acquire the shares at $8 after DD which can't be done at this time.
Secondly, of even greater import is control. If he can control what he can do with the company he estimates that by persuing strategic alternatives he can extract a value greater than $8. You can't be sure about what happens to the company and the stock price unless you can take over the board. If just continues to buy shares in the open market (even at cheaper prices), he will be taking a bigger risk if in the end he doesn't get control of the board.
Moreover, all this noise in addition to putting the management on notice, announces to other arbs that there is an opportunity here and that he needs their support should there be a proxy contest. In this way he can get the necessary votes without putting all his funds at risk.
I don't know what a Form 4 is, but that's why I'm asking. But I'm really wondering about is that mechanism which stops accumulation at 15%, per Buffett's purchase of USG.
To my mind, this whole Fraudstar situation is nothing but a shell game. No one can show us "where's the money" and perhaps Chapman has just taken it to a new level: greenmail. Not getting all jiggy with it (I did plenty of that on the FTS board, where the target message and link I posted yesterday has been pulled by yahoo) just reflecting.
Nothing about this situation has passed the smell test. Smoke, mirrors, sliding glass doors, and empty shells are the props of this show.
But back to the 15% rule ... why would Chapman go public with his intentions and demands with only 7.1%. Makes you wonder about the 4 million shares trading hands yesterday on mostly up volume. Maybe it wasn't buy but rather sell the rumor. Who knows? - those hedge funds are wily.
Thanks for sharing the SEC filing. Chapman is a colorful character. He always makes a lot of noise and is effective most of the time. But, it is just a game for him. He can change the tone quite quickly, I had seen him do that. His $8 bid is a stalking horse bid. My guess is he is trying to have the books opened to see how bad the real numbers are. The last stated book value was $283 mil or around $13 per share (as of June 2002) and they may be restated. Ofcourse the liquidation value will be lot less. If he sees that the liquidation value is less than $8 he will quickly withdraw the offer. Unless there is massive fraud, with the price he paid he is likely to come out ahead eventually.
I was involved in Cysive that was trading well below its liquidation value when I bought it. CEO was burning through the cash eventhough there was no revenue or even hope for it in the future. Strange thing was that the CEO owned a good chunk of the company. Ofcourse he paid very little to get that stake -- came via IPO and stock options. It was not going to be easy for an outsider oust him. After Chapman made some noise, the CEO agreed to buyout the company and take it private by offering a price somewhat lower than the liquidation value. Chapman said that was too low and even started a lawsuit. Once he saw that he was not going to get a better price and the lawsuit might actually decrease the value of the company, he backed off and voted for the buyout. He ended up with a nice profit in a short period.
He was succesful effecting change at some other companies in the past. I don't have their names off hand. I think he is also currently involved with APO.
If you enjoyed his SEC filing you will get a kick out a similar filing about a year or two ago for MVC when the current management fought to get rid of John Grillos who stacked the board with his buddies and was destroying the fund. One of the filings had a complete telephone conversation translated verbatim with 'Hmm's and pauses and bleeped out unmentionable words.
Again thanks for your post. Apart from some easy money these arb situations provide a great deal of entertainment.
Am I correct in understanding that if they don't file all their missing 10-K's and 10-Q's (a whole slew of them) by the end of January, the banks are going to call in their loans?
Seems like your margin of safety would have to be a liquidation event, in which case you're left holding a boatload of imitation leather.
Scratch this statement...
"The last stated book value was $283 mil or around $13 per share (as of June 2002) and they may be restated. Of course the liquidation value will be lot less. If he sees that the liquidation value is less than $8 he will quickly withdraw the offer."
In my last post, I was going to just make a comment about the flexibility of Chapman and even though, I hadn't looked at Footstar in any detail to make a point I had thrown in a couple figures out there. Out of habit I picked the terms like book value and liquidation value as they are relevant to most of the discount to net current asset situations I look into. Most of these companies have no real business.
If you are actually looking at Footstar, as I may, it would be a mistake to concentrate on these figures as it is real business whose value is better estimated looking at cash flows, competitive positioning, margins, price to sales multiples etc...