The following is a section from my 2007 letter to partners. It examines the buyout of the Tribune Company, an arbitrage situation we took part in last year. Tomorrow I will post another section that discusses risk arbitrage. (Please note that I have removed some of the non-public information that was included the actual letter). Enjoy!

On April 2, 2007 Tribune Co. announced that Sam Zell prevailed in his bid for the struggling newspaper company. The final $34 per share offer was chosen over another eleventh-hour bid from Los Angeles billionaires Eli Broad and Ron Burkle. Sam “The Grave Dancer” Zell—contrarian real estate magnate—had just completed the sale of Equity Office Properties, his real estate holding company. With the cash he received from the sale (the largest leveraged buyout in history), Zell jumped back into business with his offer for Tribune. The company owns coveted newspapers such as the Chicago Tribune and the Los Angeles Times. Other assets include a string of TV stations and the Chicago Cubs baseball team.

Under the terms of the agreement, each share of Tribune would eventually be exchanged for $34 in cash. The deal would be subject to shareholder approval and regulatory clearance from the FCC. Sounds simple, right? The end result of the transaction was easy to understand, but the mechanics of the deal were anything but. It was especially unique because the shares would initially be owned not by Zell, but by an Employee Stock Ownership Plan (ESOP) where Tribune employees would share in the company’s upside.

Immediately after the announcement, the ESOP would purchase $250 million of newly issued stock for $28 a share. Zell’s initial investment consisted of a $200 million promissory note and $50 million in new stock. In May, Tribune would borrow $4.2 billion to finance the purchase of about half of the company from public shareholders.

Continue reading… »

I find it useful to know as much as possible about any potential investment, especially if it may become a large position down the road. Why is Company X where it’s at today? Knowing their history, philosophy, and information about current/past management teams can help you solve that question. In turn, it will help when you estimate where they’ll be 10 years from now.

Sometimes I like to take the activist investor approach: For large long-term holdings, you’re ultimate goal should be to know the company better than the management team running it. Nine months ago, there was a story on activist investor Nelson Peltz in Fortune magazine. Commenting on his research methods, the author wrote: “Peltz prides himself on knowing businesses so intimately, from factory floor to supermarket shelf, that he can systematically break down any management’s rationale for mediocre results.”

Below are 6 useful sources for researching individual companies.

Continue reading… »

ValueVision Media (VVTV) – $5.58

Although I planned on writing up my entire thesis for VVTV, things got a little busy and I never ended up finishing it. Thankfully, someone over at Value Investors Club has done my job for me. Click here to see david101′s writeup on ValueVision (available via a 45-day delay).

I would also reiterate that under $6 per share this is a very “heads I win, tails I don’t lose much” type of investment. There is uncertainty surrounding a few different aspects of the investment (like cable distribution costs, the transition to digital, new internet ventures) but little to no downside based on hard assets and cash. If a few things go right ValueVision could be worth 2-3x its current price. In addition to the information provided in the above writeup, I’ll add a few of my thoughts below:

Continue reading… »

Fachidiot (German): An excessively narrow-minded technical expert. A man with a hammer.

Sears Holdings (SHLD) has recently been the subject of much discussion among the media and investor community. Below are a few quotes from an article in the Chicago Sun-Times discussing the thoughts of Gary Balter, a retail analyst at Credit Suisse.

…Sears could be a $188 stock if Lampert would sell valuable assets such as Sears Canada, Lands’ End, distribution centers, Sears’ headquarters in Hoffman Estates, and brands such as Craftsman and Kenmore.

Yes. And Berkshire Hathaway could be a $250,000 stock if Buffett would sell everything they own except the Acme Brick Company and Buffalo News. The brands mentioned above are very valuable, but they are critical to the success of Sears Holdings as a retailer. That’s right, Sears Holdings is a retailer. It seems as though this revelation has disappointed some investors over the past few weeks.

Continue reading… »

Photo by saibotregeel

Tariq Ali writes a great post about the follies of our fellow investing clan. I disagree with a few of the specific points he brings up but think the overall message is right on.

It’s wrong to judge the quant and technical analysis firms without knowing exactly how they work. If an investor who was just starting out asked me what style I suggested, value investing would be my answer, hands down. It’s much easier to grasp, and anyone can do it—you don’t need a PhD or any extraordinary skills. But that doesn’t mean that the other forms of investing aren’t valid.

Some traders are just lucky. Some value investors are just lucky. Both styles have practitioners who are phenomenal at what they do, and who have proved it over time. Until you’ve practiced all of these forms of investing, it’s hard to judge which is more valid.

The Headcount

Using the number of employees at a firm to judge success is misleading. Again, I don’t know much about them, but many don’t just run a single fund. Citadel for example has a wide range of investment-related activities (much like investment banks like Goldman Sachs). Also, it’s hard to get an idea of exactly how many of those employees are the actual decision makers for the portfolio (what really matters).

Warren Buffett has 1.5 employees (himself plus half of a Munger) on the investing side, and manages over $100 billion. I’d say he has done just fine over the years. There are three clear advantages to having a limited headcount. One, it avoids group-think when making decisions. Two, there’s no need to worry about “one-employee disasters”, ala Amaranth and Brain Hunter. And three, more obviously, it lowers overhead for small firms.

Eddie Lampert has a few dozen employees. Mohnish Pabrai has 1.7 employees. Neither is the “correct” amount as it all depends on your investing style. From what I’ve heard, Pabrai does little to no scuttlebutt. Lampert sends his analysts out on research and fact gathering missions and is constantly analyzing mountains of data regarding his positions. Both investors have proven they are highly capable and successful.

Continue reading… »

On the 45th day of every quarter, fund managers and institutions must file their 13Fs. For anyone managing over $100 million in assets, this list of holdings (for the past quarter) gets published on the SEC’s website. Another great resource for monitoring the portfolio’s of super-investors is GuruFocus.

Below is a list of 5 stocks that were added in the last quarter to the portfolio’s that I watch. These are either potentially interesting investments or just companies to keep an eye on.

1. The Children’s Place Retail Stores (PLCE) — Okumus Capital, Carl Icahn, David Einhorn — Operates 1,193 children’s stores under the Children’s Place and Disney Store names. Down recently because of lower sales forecasts, an internal investigation into policy violations, and problems with their Disney license. Put itself up for sale last month, with the former CEO (who resigned in September) as a potential buyer. Children’s Place has a cheap looking EV/EBIT ratio of 5.6x.

2. CarMax (KMX) — Warren Buffett — Berkshire’s buy sent the shares up over 7% today. CarMax is a great company that’s down from its recent all-time high. Growing quickly over the past few years, CarMax looks relatively undervalued.

3. Stamps.com (STMP) — Mohnish Pabrai — An interesting company with high barriers to entry and return on invested capital. Some downside protection with the large cash balance. If you’re confident that management will continue to grow the customer base, STMP could have a lot of potential.

4. The Home Depot (HD) — Eddie Lampert — Lampert is usually very concentrated, holding no more than 5-7 stocks. So any of his major purchases are worth a look. Home Depot has been beat down lately for a number of reasons. Determining how much the housing downturn will affect earnings is one of the key aspects of this investment. HD is a good company that needs some work, but could be a very successful investment in the long-term.

5. Macy’s Inc. (M ) — Carl Icahn, Fine Capital, Okumus Capital, Snow Capital — Formerly Federated Department Stores, Macy’s has 850 stores under the Macy’s and Bloomingdale’s names. Has been running into problems ever since acquiring May Department Stores in 2005. Down 35% in the last six months. Authorized a huge $4 billion share buyback in April. Macy’s doesn’t look too cheap based on current earnings, but has potential as a turnaround.

Disclosure: I don’t own any stocks mentioned in this post.