It’s tough to be a CEO or board member these days. It used to be so easy, but now those pesky shareholders cause too many headaches. ‘Say on Pay’? What? Do they think they own the company or something? The only thing worse are those so called ‘activist’ shareholders, pushing to create ‘value’ or profits in their pockets. As if management isn’t focusing on that already.
Unfortunately for management and as we have previously noted, numerous activists have succeeded in pushing through their agendas and…the results have (for the most part) been pretty good. Recent successes include Bill Ackman’s Pershing Square (GGP/HHC/RSE), Jana Partners (Marathon and others) and Relational Investors (LLL and ITT). Even John Paulson tried to get in on the act with the Hartford Financial Group although that wasn’t as successful.
At StockSpinoffs, we mostly root for the rabble rousers, but mainly because they seem to be on the side of the spinoff. Very selfish. Unfortunately, management doesn’t always share our affection for these agitators and that is why Martin Lipton, founding partner of the prestigious law firm Wachtell Lipton, offered a brief ‘how to’ guide on how to deal with activist hedge funds. Comparing them to corporate raiders, Mr. Lipton advises companies to:
Monitor trading for signs of the “activist ‘wolf pack’”; troll news stories and Internet commentary for what “will attract the attention of attackers”; keep abreast of changes in shareholder makeup and have the CEO and CFO, in particular, maintain good relations with major institutional shareholders; and maintain a unified board.
Some other tips offered by Mr. Lipton include keeping the board constantly updated, creating a special ‘activist fund’ team and responding to activist comments only with the exciting line, ‘the board will consider’.
Activist investing is nothing new, but the fact that a heavy hitter like Mr. Lipton is releasing such a guide implies that this is something many management teams are currently thinking about. With stock prices stuck in the mud for awhile, the entry of a hot shot financier with some fresh ideas might be pretty appealing to other shareholders. Now, these funds are not altruists and sure, they might be a bit short sighted in order to rake in some profits, but overall this is likely a positive because the best defense for management is to do a good job and create value. Everyone wins that way. A more cynical person might point out that management will just end up spending more time worrying about activists and coming up with innovative ways to thwart their advances like engaging Mr. Lipton…but we tend to look at the bright side here.
Disclosure: Author holds no position in any stock mentioned.
Whew! Time to exhale as the drama is finally over. Peyton Manning is signed, Tebow was traded and now Hartford Financial Services Group (HIG) will shed several business units in order to increase its focus on its profitable property & casualty business. While the group benefits and mutual fund businesses will also be retained, the annuity business will be effectively shut down and the life, financial services and retirement segments will be sold. The end result, according to CEO Liam McGee is “a company that, in our view, over time will create higher ROEs,” and be less sensitive to the capital markets. The process is expected to take 12 to 18 months.
Although Mr. McGee will disagree – “this was Hartford’s decision” ummm yeah, sure, all you – chalk this one up as a win for John Paulson and for activist investors in general, who have been having a lot of success recently. As you likely know from our earlier articles on this subject (here and here), the company had been facing intense pressure from Mr. Paulson, its largest shareholder, to make a move in order to unlock value.
Unfortunately for us here, the company didn’t take all of Mr. Paulson’s suggestions and opted to pursue sales of these other units as opposed to any spinoffs. He wasn’t all that happy with their plan either and his fund released a statement that it does “not believe today’s actions will materially increase P/C investor interest in the Hartford.” Selling off the units potentially provides flexibility for the company as the proceeds can be used to pay down debt (help with credit ratings) or fund annuities. P&C should take on a more important role though and likely attract more coverage, but it may still be weighed down by the other units.
The stock reacted positively to the news, at one point shooting up over 7%, but ultimately ended up closing up just a bit. Analysts seem to like this move as well, although S&P downgraded the life insurance and annuity businesses (assuming a stand alone basis). The stock is up nicely this calendar year which is definitely good news for Mr. Paulson, but according to this WSJ analysis, he is still likely sitting on some significant paper losses. While Mr. McGee may believe that a “spin doesn’t make sense for shareholders at the current time,” Mr. Paulson may still be applying pressure to extract what he believes to be maximum value for himself, I mean shareholders. We will keep you updated if this situation changes, but not much to do now.
Disclosure: Author holds no position in any stock mentioned.
What do you do when your letters and pleas get ignored? Turn them into a presentation of course because pictures and charts are just so much harder to ignore.
That seems to be superstar hedge fund manager John Paulson’s approach for turning up the heat on Hartford Financial Services Group (HIG). After having no success writing letters to the board or bullying the CEO on a conference call, Paulson amended his 13D filing to include a presentation expounding on his reasoning behind a HIG spinoff. As our earlier post described in greater detail, Paulson is pushing for the company to split its life and property & casual insurance units believing that its P&C arm is undervalued and ignored as currently structured. He believes the move could increase the value of the company by over 60%. In his presentation Paulson presents his reasoning, swats aside those pesky ‘challenges’ and lays out the value proposition of a spinoff. His method? Create a NewCo to house the P&C business, issue some new cheap debt, use that money to pay off old debt that will remain in HIG and then dividend a debt free NewCo to shareholders. Easy as pie. As he notes in the presentation, many other Fortune 500 companies have had success spinning off parts.
In response, the company reiterated its earlier statements that it recognizes that “there are potential benefits to a separation of the P&C and life companies…” but “there are challenges to successfully executing a separation…We are evaluating the company’s strategy and business portfolio with the goal of delivering shareholder value. We remain objective and pragmatic about the best ways to achieve this goal.”
What?! Still evaluating! It’s been like, an entire month! Apparently, Mr. Paulson is not very big on patience. In his defense, he is only asking the company to “announce a spinoff today” – the company can then spend the next year or so figuring it out. So generous. He is really turning up the heat on the company and this should be fun to follow.
I do have at least one quibble with the presentation. It included a list of recently completed spinoffs and announced spinoffs (slides 18-19), but Sears/Orchard and Ralcorp/Post were on the announced list. Those two happened already! Easily could have found that out by checking out our site’s calendar. Give us a look John!
Disclosure: Author holds no position in any stock mentioned.
Listening to (or reading) company conference calls are a necessary but often painful part of investing. Calls are usually filled with a bunch of numbers, some CEO speak and suck-up analysts (if the company is doing well) so anything out of the ordinary or even somewhat controversial becomes noteworthy. Throw in ‘legendary’ fund manager John Paulson and now you have a real recipe for buzz.
In case you missed it – Mr. Paulson unexpectedly hopped onto Hartford Financial Services Group’s (HIG) Q4 call last week during the Q&A and went after the CEO. Paulson just happens to be the company’s largest shareholder, owning ~9% of the shares, and was likely disappointed with the company’s (or really the stock’s) dismal performance. So…he decided to let CEO Liam McGee know just how he felt (it’s not Eisman-esque, but still enjoyable):
Operator: Your next question comes from the line of Lawrence Farley with Paulson & Company.
John Alfred Paulson: Good morning. This is John Paulson speaking.
Liam E. McGee: Hello, John.
John Alfred Paulson: Liam, I want to go back to the slide 17 talking about the potential separating the Life and P&C business. And the – I know you’re doing a strategic review but there’s no slide talking what about what the potential would be, just that there’s challenges. Goldman Sachs came out with, I think, a very good analysis a few months ago where they showed this - they estimate the upside to doing a tax free spin-off of P&C could be over 70% of what the current stock price is trading at. Now, I agree that there’s going be challenges but isn’t your job to really overcome those challenges to achieve the maximum value for shareholders? Now, I would say that Hartford needs to do something drastic because the stock is the lowest valuation relative to book value of any major insurance company. Last year Hartford stock was down 38% while the P&C stocks were up 14% and even declined much more than the Life index which was down 21%. So what I’d like to see you do is not merely come back and say yes, we’re looking at strategic options but there’s challenges to achieving them but what – first of all, do you agree that you could create as much as 70% value for your shareholders by spinning off – separating P&C? And secondly, is (52:10) incentive to overcome the challenges that it’s going to take to spin this off and how long do we have to wait to hear if there’s going be a positive recommendation to separate these two businesses?
Liam E. McGee: Thanks John for the question. First of all, the analysis and the intent of the comments was to acknowledge that the challenges are significant, not to say that they could not beovercome. Second of all, our analysis, including the frictional costs, if you will, that are in that third category would suggest that a split would not create the kind of shareholder value that that particularreport suggested. And third, in addition I think your sense of urgency about realizing greater value for shareholders is shared by me and by this team. And so I hope I answered your questions distinctly and directly…
John Alfred Paulson: Partially, Liam, but if you share the interest all shareholders have in increasing shareholder value I’m surprised that as part of the discussion you don’t talk about how much value could be created by separating the P&C business from the Life business. And not the only slide you devote to it talking about that there’s some obstacles to overcome and not talking about the upside in weighing the upside of the separation against what the obstacles are.
Liam E. McGee: John…
John Alfred Paulson: And better yet, not just listing those obstacles but what I’d like to see is how you will overcome those obstacles to result in a more fair valuation for Hartford. Not that there’sobstacles but how you’re going to overcome those obstacles. That’s what I as a shareholder look for you as the management to do.
Liam E. McGee: Thank you, John. And I – that is our mindset. Our purpose in the slide was to identify the hurdles. You can – if you heard our language we did not say they were not surmountable, number one. We said there were significant costs to surmount them in a number of areas, so we felt we owed shareholders that disclosure. Number two, we do not believe that splitting them in the current environment for the reasons that we cited will create shareholder value. And third, again I’ll reiterate, we have an incredible sense of urgency on looking at all ideas to create shareholder value.
John Alfred Paulson: Well, I think you need to do a much better job of explaining that because Goldman’s report is a very good report on a path to separate the business and create what theyestimate as a 70% increase in shareholder value. And then you merely say there’s some obstacles and you don’t equate what the costs are to the benefit and what value do you think could be created. Because right now with the stock performing as poorly as it has relative to both P&C and life companies, I think you need a better explanation of what you’re going to do to enhance shareholder value. Merely that you’re working hard and you’re committed but there’s obstacles. What we need you to do is overcome the obstacles to enhance the valuation for your shareholders. Not merely point out that there’s obstacles.
Liam E. McGee: Okay, John. Thank you. I hear you loud and clear.
John Alfred Paulson: I hope so.
You know, a part of me really questions the sincerity of Mr. McGee’s ‘Thank You’ at the end. While a fun read, the reason of mentioning it on this blog is obviously the potential spinoff of the life insurance business from the company’s P&C insurance. The inclusion of the infamous ‘slide 17′ in its earning presentation shows the company was already feeling some pressure to spin. Some of the obstacles to a spin mentioned include maintaining competitive credit ratings for both companies, obtaining regulatory approval, a potential writeoff of tax assets and a few other items.
The drama didn’t end there though and earlier this week, Paulson took his spinoff demands one step further by formally filing a 13D with the SEC outlining the case for a breakup of the company. In the letter, Paulson & Co states that a spinoff is by far the best choice for the company to maximize shareholder value and that the move could increase value by as much as 60% alone. No small potatoes. According to Paulson, a 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
The filing then goes on to detail those claims and also highlights the fact that many other large insurance companies such as Travelers (TRV) previously separated these businesses. The section on ‘complexity’ and sell side coverage issue is also interesting and the filing notes that “only 3 of 19 P&C analysts cover Hartford” and that only three of the 15 life-insurance analysts that cover Hartford also follow P&C companies. The fund isn’t too impressed by the supposed obstacles to a breakup and believes that those challenges “are both over-rated and readily manageable.”
While Goldman and other sell side shops may also agree that the company should make a move (I haven’t seen those reports), apparently not everyone is convinced. The stock recorded a nice pop after the conference call and again after the filing of the 13D (that should make Mr. Paulson happy) so it seems that the market supports the move. While the outcome remains to be seen, I am sure the CEO is really feeling the heat. ‘Unlocking’ that much value is certainly enticing to investors and tough to argue against. We will keep you updated as this story progresses.
Disclosure: Author holds no position in any stock mentioned.
Ah, to be an activist investor. Push around executives, demand ‘shareholder friendly’ measures and all this while maintaining the flexibility of trading in and out of shares. After pushing hard for a breakup, Carl Icahn quickly rang the register on a chunk of his Motorola Mobility (MMI) stake shortly after its takeout announcement. Too much work? John Paulson just had to jump onto a conference call in order to send HIG‘s share price soaring [he has done some more work since though and I hope to write more about this one soon].
Another activist benefactor is Jana Partners, who recently sold 3.9 million shares of the Marathon Petroleum Corporation (MPC) right after the stock jumped 10% on the announcement that it plans to pursue a spinoff of its pipeline operations. An idea pushed hard by Jana. The WSJ estimates the firm booked ~$44mm in gains. The fund still maintains a 4.5% stake in the company though and “intends to retain a significant interest” in Marathon. While some of these moves are likely just portfolio rebalancing, it must be nice to have that kind of power and flexibility.
Disclosure: Author holds no position in any stock mentioned.
While some companies are new to spinning off divisions, others are known for their serial spinoffs. Few however, can match the fecundity of ITT(ITT)(nee International Telephone & Telegraph). ITT was born out of the Puerto Rico Telephone Company in 1920. Over the next half century, ITT was the classic conglomerate, buying such diverse companies as [...]
