Icahn plus SWF = Time Warner cable division sale

A public activist effort that Carl Icahn began in 2005 and one that involved a sovereign wealth fund finally is coming to fruition.

That year Icahn began publicly pressing Time Warner Inc. chairman Richard Parsons to split up the media giant. On Wednesday, April 30, Time Warner Chief Executive Jeffrey L. Bewkes said the media giant would complete the spin off of Time Warner Cable, a divestiture Icahn had called for three years earlier.

In 2006, Icahn reluctantly backed down from his proposed proxy contest to press for a cable spin off and stock buyback. At the time he had the support of a number of activists including Jana Partners, SAC Capital Advisors LLC, and Franklin Mutual Advisers LLC. But they cumulatively had roughly a 3% stake in the company, not enough to move the institutional investors who backed Parsons.

A little known fact about Icahn’s efforts to break up Time Warner: He cooperated with a sovereign wealth fund in Dubai to press Time Warner to a sale.

According to a Feb 16, 2006 Schedule 13D filed by Istithmar PJSC, a Dubai based sovereign fund, its subsidiary, Istithmar Media Investments, which bought a 2.39% Time Warner stake, entered into a relationship with Icahn:

“In connection with [Istithmar Media Investments] acquisition of the Participation Notes and possible future investments in the Common Stock, [Istithmar] have retained Icahn Institutional Services LLC, an entity wholly owned by Mr. Carl Icahn, to serve as the investment advisor to [Istithmar Media Investments] with respect to [Istithmar Media Investments] economic exposure to shares of common stock through the participation notes and possible other investments in common stock.”

Istithmar PJSC is a Dubai-based firm that is owned by Dubai World, also the parent company of DP World, the Dubai owned company that sought unsuccessfully to acquire operations at six U.S. Ports. Lawmakers on Capitol Hill changed the law governing foreign acquisitions of U.S. assets after a U.S. government panel initially approved DP World's plans to acquire the six U.S. port operations. DP World backed down amid the resulting political uproar and agreed to sell its operations here to a U.S. entity.

Icahn’s Istithmar agreement was terminated shortly after it was formed, but it showed how in less politically charged days, a combination between an activist and a sovereign fund to press for changes at a U.S. company was not unthinkable. That kind of combination would raise the ire of lawmakers in Washington if it were to happen in today’s climate. -- Ron Orol

Activsts vs. Charming Shoppes: So Far, it looks like a Tie

A duo of activist investors seem to be having mixed luck with their efforts to press for changes at Charming Shoppes Inc., a Bensalem-based multi-brand retailer of women's plus-size apparel.

Hedge funds Crescendo Partners and Myca Partners have launched a proxy contest to install three director candidates on the company’s board at its May 8th scheduled annual meeting. But influential proxy advisory services company Glass Lewis & Co. only recommended one of the dissident duo’s slate, Michael Appel. The proxy advisory services company did not recommend institutional investors vote for Crescendo director Arnaud Ajdler and Myca official Robert Franfurt.

(A split recommendation is a favorite tool for the proxy advisory service firms in cases where they don’t want to appear too supportive of the dissidents or the management-backed incumbents)

Even so, Appel’s presence will likely help advance the share-value improvement goals of Crescendo and Myca. Appel’s experience as a retail-focused managing director at Quest Turnaround Advisors would likely bring a deal-oriented focus to Charming Shoppes. Though, company officials complain that his lack of experience as a director or in the apparel industry make him a bad candidate. Too bad for Charming Shoppes.

Also, largely in response to the activists, Charming Shoppes announced Friday it has retained Banc of America Securities and Lehman Brothers as financial advisors to assist the company in looking into “strategic alternatives” such as selling its “non-core misses apparel catalog titles in order to provide a greater focus on its core brands, Lane Bryant, Catherines and Fashion Bug, and to enhance shareholder value.”

That kind of restructuring is exactly the kind of thing activists are looking for. Even if Crescendo and Myca don’t get all three of their candidates on the company’s board, they can always come back next year with additional nominees. -- Ron Orol

Sun Capital's Furniture Brands Battle Heats Up

Activist investor Sun Capital Securities Group LLC may be one step closer its goal of putting three directors on the board of Furniture Brands International Inc. and, possibly, its goal of taking over the business.

The insurgent investor on Monday received the support of Institutional Shareholder Services, the influential investor proxy advisory firm, for all three of its candidates.

In addition to its proxy contest, the activist fund had made an unsolicited bid for the furniture-maker on Feb. 21.

Furniture Brands has shunned Sun Capital's advances, saying that the strategic plan it launched in the fall of 2007 is "on track, and earnings momentum is developing." A key part of that plan is to switch to an operating company model designed to generate $40 million to $50 million in annual cost savings.

The St. Louis, Mo.-based furniture-making company also points out that should Sun Capital win its contest to put its nominees on its board, these directors would have a conflict of interest because they would be "less likely to fight for value” once another bid was put on the table. -- Ron Orol

New 13D Head at SEC

After five months without an official director, the Securities and Exchange Commission reportedly has a new head of mergers and acquisitions, Michele Anderson. And she's going to have her hands full.

The agency hasn't officially announced it yet, but Anderson was promoted to become the Corporate Finance division's new chief of the Office of M&A. Anderson replaces Brian Breheny, who in November moved up to become deputy director for Legal and Regulatory Policy at the agency.

High on Anderson's agenda will be figuring out what do about the agency's Schedule 13D rules when it comes to "cash-settled swap agreements" and other synthetic securities deals that activist hedge fund managers enter into with derivatives dealers. Do such swaps give activist hedge funds more control over a company's fate than they would like to let on? That's a question Anderson will try to figure out.

Recently, a railroad operator, CSX Corp., sued activist investor Children's Investment Fund Management LLP, charging that it violated federal securities laws by holding back information on how many shares it owned. Whether activist fund managers are forming illegal groups with derivatives dealers or just indirectly influencing the amount of shares being dumped on the market, Anderson's job will be a busy one.

In addition to 13Ds disclosure, Anderson will also be busy with cross-boarder business combination exemptions.

But Anderson comes prepared. Even though she worked recently as a legal branch chief in the Office of Telecommunications, she worked in the M&A office a few years earlier. - Ron Orol

Telos Wins Costa Brava Litigation

You win some and you lose some. Lately, hedge fund Costa Brava Partnerships III LP, has been on the losing end of their litigation activism approach.

Late Tuesday, April 15, the Circuit Court for Baltimore City dismissed a claim against information technology contractor Telos by the Boston-based hedge fund that the company was being managed for the benefit of insiders. The Costa Brava suit sought to have the court put Telos into receivership, wresting control away from existing management.

That loss piles up on a Jan. 7, Circuit Court of Baltimore City in Maryland order dismissing two claims against Telos by Costa Brava.

Costa Brava filed suit in 2005 claiming it was owed roughly $79 million in dividends.
Telos is privately owned, with 75% of its common stock owned by British investor, John Porter, while the rest is controlled by British investors, Telos management and employees. In 1989, the company issued publicly traded and redeemable preferred shares, some of which Costa Brava purchased, but the defense contractor didn’t pay dividends on the shares since their inception. In October 2005, shortly before a scheduled redemption date for the shares, a three-person committee of independent directors at Telos recommended that the company repurchase the entire package of preferred shares at what the panel considered a "substantial" discount.

One month later Costa Brava filed suit against the company and directors, arguing that it hadn't paid its obligations to preferred shareholders and that insiders were violating their fiduciary duty to investors. By August 2006 a special Telos litigation committee of six directors including two independent directors representing preferred holders, two Costa Brava representatives, set up by the company to investigate the matter, resigned.

Later, the company found other independent directors and set up a second special litigation committee that found that the counts against directors should be dismissed and that it was in the best interest of the company for the lawsuit to come to an end.

The Baltimore court in January concluded that the special litigation committee members "performed their duties in good faith" and "undertook a reasonable investigation" of Costa Brava's claims. The judge also dismissed claims against all directors, including Telos CEO John B. Wood. On April 15, the court also dismissed the activists other claims.

Costa Brava charged that when the ERPS was issued in 1989, Telos repeatedly stated in its Registration Statement to the SEC that the owners and prospective purchasers
of the ERPS should expect payment of [payment in kind] “PIK dividends in the first six years of the ERPS (1989-1995). But as part of the April 15 order: Judge Albert J. Matricciani, Jr. disagreed:

“…[I]n the judgment of the court neither the [Exchangeable Redeemable Preferred Stock] ERPS registration statement nor the company charter and Articles of Amendment and Restatement can be read to give rise to a contractual obligation with Telos to pay plaintiffs accrued [payment in kind] PIK dividends at the time of the first scheduled redemption date or anytime thereafter.”

The litigation activism approach wasn’t all bad news for Costa Brava. In a separate but related case, Costa Brava won a civil suit in Circuit Court of Fairfax County, Va., it launched in December 2005 against Telos' independent auditor, Goodman & Co (there were no damages awarded). The activist hedge fund alleged in the suit that Telos hire Goodman to produce an audit that would help it avoid redeeming millions of dollars of preferred stock of the IT firm owned by Costa Brava and other investors. Later, Goodman & Co. filed an appeal motion after the trial and on March 25, the Fairfax County judge reaffirmed the jury’s verdict.

Judge Bellows’ ruling of March 25: “As to sufficiency, the Court finds that there was sufficient evidence to support the jury’s verdict [that Goodman & Company aided and abetted a breach of fiduciary duty by Telos and its Directors].” Not introduced in the Fairfax case was a February letter from the SEC giving Telos a clean bill of health, accounting wise. -- Ron Orol

Did blogger Jackson help Icahn?

Two months after Carl Icahn failed to have his nominee elected in a proxy contest at Motorola Inc. in 2007, YouTube video blogger Eric Jackson jumped into the fray. His activism strategy used a YouTube video he dubbed "Plan B for Motorola" and an Internet Wiki to attract support from other micro-investors like himself. Like Icahn, Jackson wanted Motorola CEO Ed Zander gone, much of the board replaced and a new head of Mobile Devices with a clear strategy.



When the company revealed major financial problems in its second quarter 2007 financials two days later, Jackson says his effort began receiving major support. He got the backing of roughly 150 investors with about $600,000 in shares, less than 1% but significant nonetheless.
"They didn't move quickly enough, so starting late last year, we started saying that the best course of action, given the extent of the problems in the company, was to break it up," Jackson says.

And while Icahn's two-year public prodding is certainly the major reason why Motorola decided Wednesday it will split into two independent, publicly traded companies, Jackson's novel approach to activism is lifting eyebrows. Anne Faulk, chief executive of Swingvote Inc. in Atlanta, says Jackson may be the vanguard of how shareholders and executives communicate with each other. Certainly, some of Jackson's goals -- having Motorola executive Ed Zander resign and seeing that the company divide into two units -- have been accomplished.
The same can be said of Jackson's efforts last year at his first YouTube activist campaign at Yahoo! Inc., which also has gone through serious changes since his insurgency began. Jackson sent out a "Yahoo! Plan B" YouTube video and later launched a "just vote no" campaign to persuade shareholders of the widely used Santa Clara, Calif.-based portal to expel its CEO, Terry Semel, from his chairmanship along with six others on the company's 10-person board. He also set up a blog, "Breakout Performance," a MySpace.com account and a LinkedIn Web site to spread dissent.

Semel later did resign, and now Microsoft Corp. has a $31 a share, or $44.6 billion offer on the table.

With the stock of Motorola still low at around $10 a share, don't expect Jackson to end his insurgency just yet. In February Jackson launched a $2 million activist fund, Ironfire Capital LLC. Even with few dollars behind him, corporations should beware of Jackson's YouTube "Plan B." - Ron Orol

Steel Partners Vs. EnPro, Point Blank, GenCorp, Rowan and Sapporo

Steel Parnters II LP seems to be on a bit of a tear of late.

The activist fund, managed by Warren Lichtenstein, on Friday settled a pending proxy contest with EnPro Industries Inc. Lichtenstein agreed to call off his pending proxy contest after Enpro agreed to expand its board size to nine members from eight and add Don DeFosset, the former chief executive of Walter Industries Inc., and one of Lichtenstein’s nominees (A number of activist investors, including Pirate Capital, sought to have Walter broken up in 2005. Steel held a large Walter stake at the time).

Separately, Point Blank Solutions Inc. announced April 8 that its board would look into strategic options such as a sale of the company after Steel Partners launched an agitation campaign at the body armor production company. Though, Steel Partners hasn’t wrapped up its efforts there. Point Blank later postponed its annual meeting by four months leading Lichtenstein to say this in an April 10th letter to the company’s CEO Larry Ellis: “The board, under your leadership, has gone astray during the past 48 hours by its unilateral postponement of the 2008 annual meeting.”

In addition to efforts at Point Blank and EnPro, Warren has garnered settlements at both GenCorp Inc. and Rowan Companies, in the past few months. Now watch out for his expected rash of campaigns in Japan. His campaign for change at Sapporo Holdings Ltd., for example, is ongoing. -- Ron Orol

Soveriegn Fund Lobby Group Formed In Washington: Now They Just Need Some SWF Members

The head of the recently formed Washington lobby group for sovereign wealth funds, the investment arm of foreign governments, expects the U.S. government will take action regarding these investment vehicles in 2009-- and that decision will help other countries compete for these funds’ investments.

“We believe the US will take some actions regarding SWF in 2009 and we believe these steps will serve as a model for other nations,” said Thomas Karol, president of Sovereign Investment Council , a recently formed organization to represent sovereign funds in Washington, at a conference hosted by The European Institute. “Some will follow the US model and some nations will use that model to compete with the US for sovereign investments.”

Despite his reservations, Karol and the newly minted Sovereign Investment Council, have yet to gain any members from the asset class the organization represents. Typically lobbying shops are set up by a group of businesses who seek to have a voice in Washington, not the other way around. In any event, expect Karol to launch a major global wooing initiative to try and bring some real sovereign funds to the council’s table.

In his address, Karol argued that lawmakers and other legislators are contemplating a litany of responses to the phenomena of SWFs and these measures will likely discourage sovereign fund investment in the U.S.

One bill, that was being considered by the California state legislature, would have precluded state pension funds, the California Public Employees’ Retirement System, or CalPERS, and California State Teachers’ Retirement System, from engaging in any transaction with private equity companies that are affiliated with sovereign funds (Many U.S. buyout shops have sovereign funds as limited partners and the burgeoning Chinese sovereign fund, China Investment Corp. Ltd., or CIC, has a $3 billion investment in Blackstone Group LP). This could have a chilling action, Karol said, not just for sovereign funds but also U.S. buyout shops, while at the same time drive buyout shop investment to other countries such as the U.K.

Karol also expressed concern by an initiative launched by Senate Finance Committee chairman Max Baucus and ranking member Charles Grassley to have the non partisan joint committee on taxation to analyze the U.S. tax rules that apply to SWF, which are tax exempt entities. “Countries may yield to political pressure to use tax laws to make SWF act in a certain manner to retain that tax exemption,” Karol argued. “Or worse, change the entire government to government tax relationship.”

Finally, Karol raised concern about pressures put on sovereign funds by critics that argue the government investment vehicles should periodically, perhaps once annually as is the case with a sovereign fund in Norway, disclose their positions. “If people know what you’re going to do with your portfolio: everything you buy will be expensive and everything you sell will be cheap,” Karol said. “In certain countries in the middle east, sovereign funds may have investments they may not want to have disclosed to their neighbors. It may not be prudent to tell the people around you, who might be heavily armed, just how rich you are. You may not want to tell people that you are investing with someone who may not be friendly with the country around you.”

That may be true, but many in other countries may want to know about a sovereign wealth fund’s positions and links to the government in Sudan responsible for the Darfur humanitarian crisis, for example. -- Ron Orol

Sovereign Wealth Funds and Washington

The Committee on Foreign Investment in the United States, an interagency panel that examines U.S.-foreign deals for national security issues, will be getting some sought after clarity by the end of the month when the Treasury Department releases draft rules based on a law adopted last year revising the panel's review processes.
A key consideration will be whether sovereign wealth funds, the investment arms of foreign governments based mostly in Gulf and Asian countries, will fall under the new regulations when they buy large minority stakes in U.S companies. (SWF have bailed out a number of U.S. financial institutions struggling with subprime-related mortgage write-downs, including Citigroup Inc. and Morgan Stanley.)
The U.S. Treasury's draft rules are expected to clarify that even those foreign investments falling below the 10% threshold can be investigated on security grounds. For many CFIUS observers in Washington, that news simply means the status quo will continue.
CFIUS is a complex agency, and even with the new statute, foreign investments or acquisitions of U.S. assets can be investigated by the panel if there is a "controlling interest," which in many observers' minds can include allocations below 10% stake investments. But nevertheless, the question of what constitutes control is one that is being debated in Washington.
Patrick Mulloy, a member of the intergovernmental U.S.-China Economic and Security Review Commission, says CFIUS leaves "control" to be defined by agencies that make up the interagency panel. Golden shares and their super-voting rights aside, some observers argue that a sovereign fund could own a small passive stake of less than 10% but still have a controlling impact on a corporation.
But others have said ownership of less than 10% stakes can represent a noncontrolling minority investment, which wouldn't trigger a CFIUS review. John Douglas, partner at Paul, Hastings, Janofsky & Walker LLP in New York, says some sovereign funds have been taking stakes slightly below 10% because any allocation above that threshold in an institution that has a commercial bank would trigger a Federal Reserve Board review. That Fed review, they believe, could also trigger a CFIUS review.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., and a number of other lawmakers, argued in a Sept. 27 letter to Treasury Secretary Henry Paulson that in some cases, "passive foreign ownership interests in assets in the U.S., including through sovereign investment funds, may have national security implications."
Sometimes sovereign funds have taken much less passive roles in investments. Would one argue that the Qatar Investment Authority's decision to team up with activist investor Nelson Peltz last year to buy a 4.5% stake in Cadbury Schweppes plc and agitate for change to be a controlling stake? Qatar Investment Authority is an arm of the emirate's government.
Looks like minority sovereign investments, be they 5%, 10% or 15%, will still fall under the CFIUS purview.

Pershing Pursues Books at Borders

Activist investor Pershing Square Capital Management LP has agreed to buy Boarders Group Inc.’s international units, but that deal may be far from done.

The insurgent on Monday revised its financing agreement with Borders with a deal that is more favorable to the mega bookstore chain. In it, Pershing Square will pay $135 million for the bookstore’s international chain, up from $125 million. The revised deal also includes a lower interest rate of 9.8% on $42.5 million senior secured term loan offered by the activist fund.

But even with the transaction to sell the international division to Pershing Square, Borders has retained the right to continue looking for strategic buyers for these units. “As previously stated, Borders Group believes its international subsidiaries are worth substantially more than the amended backstop purchase offer price and the company has retained the right to continue its ongoing strategic alternatives process for these businesses,” Borders stated in its release Monday.

A sale of the international units to a strategic buyer, particularly if one pays a significant amount, is likely an outcome Pershing Square would prefer over its agreed to deal. In fact, activists are known to strike deals or make bids for companies or divisions simply to put them “in play” so that other strategic buyers come in and take them over. That may just be what Pershing Square is looking for here.

Pershing Square has an 18% Borders stake and one of the fund’s partners, Richard T. Mcguire III, was elected to the company’s board on Jan. 17.

Other activist-types have congregated at Borders as well Kenneth Shubin Stein of Spencer Capital Management LLC and Glenn Tongue, a value investor at T2 Partners Group LLC reported in February on a 13D SEC filing that they owned a 4.7% Borders stake.

Borders Group has hired J.P. Morgan Securities Inc. and Merrill Lynch & Co. to help explore strategic alternatives including a sale of all or parts of the company. - Ron Orol

Link to press release by Borders:

George Soros on Credit Default Swaps

International financier George Soros thinks the financial tension in the markets is going to ease out but there are still a number of landmines left to navigate around.

Case in Point: Credit Default Swaps, or CDOs, a synthetic financial instrument that acts as an insurance policy against debt defaults.

“This is a totally unregulated market hanging like a Damocles sword over the financial system,” Soros told reporters on a conference call hosted by the New America Foundation Friday. “You don’t know whether your counterparty is good for its payment or not.”

This is a concern that others in the financial markets have expressed. Jonathan Sablone, partner at Nixon Peabody LLP in Boston, discusses it in my “An open book?” news story in The Deal magazine.

Soros suggested that there is an active and unregulated $45 trillion CDS market that has become unhinged from actual hedging against defaults. Regulators and industry players need to create a clearinghouse or exchange where these swaps can be settled according to well established rules is critical to avoid an implosion, Soros adds. “Until that happens the market is nervous and creates this counterparty risk,” he said. “People who have these contracts need to know whether or not the counterparties are good or not and you will only know that when you know who the counterparties are.”

He contends that the amount invested in the CDS market is roughly equal to 1/2 the entire U.S. household wealth or five times the U.S. national debt.

The biggest player, Soros ponits out, is J.P. Morgan Chase Inc., which has roughly $16 trillion to $18 trillion in CDS’s while Bear Stearns Cos. has $2.5 trillion CDSs. But Soros notes that a large chunk of these financial instruments are held by individual hedge funds. Hedge funds holding CDS obligations both as parties and counterparties and observers are concerned that the inability of highly leveraged counterparties to meet their obligations on such instruments could lead to a "cascade" failure through the system.

Soros says he takes a middle of the road approach to market regulation. “I have found myself to be a critic of both market fundamentalism in the west and a critic of state regulation in the former Soviet Union,” Soros said. “We have to stop swinging from one extreme to the other.” -- Ron Orol

Another Media Company is Target of Activists

Another media company has become the target of an activist hedge fund manager.

Spanish Broadcasting System Inc., a Coconut Grove, Fla.-based operator of 21 radio stations and 2 television stations, is the target of activist fund Discovery Equity Partners LP and a “just vote no” campaign it launched Wednesday against the media company’s board and CEO Raul Alarcon.

“We are being regularly contacted by shareholders wishing to share their concern over the management of the company and, in many cases, to express their skepticism with respect to the board’s willingness to confront Mr. Alarcon with our recommendations,” the activists wrote in its letter which was attached to a Securities and Exchange Commission filing on Thursday.

Discovery Equity’s foray at Spanish Broadcasting, a company with a $121 million stock market capitalization, is just the latest in a string of recent activist campaigns against media companies. Other more high profile targets include: New York Times, Knight Ridder, The Chicago Sun-Times, Media General Inc. and Reuters

The activist investors, which own a 9.8% Spanish Broadcasting stake, want to see the company’s board set up a special committee, strike a contract with an investment bank and consider either a going-private transaction or a sale to a strategic buyer. Discovery Equity Partners wants Spanish Broadcasting to give it a list of shareholders so other investors can be contacted for their just vote no campaign. “The purpose of the inspection demand set forth above is to enable Discovery to contact other record and/or beneficial owners of SBS’s shares for the purpose of communicating with those owners regarding the withholding of their votes in the election of directors at SBS’s 2008 annual meeting of Stockholders and other matters pertinent to that meeting,” the activists wrote. . -- Ron Orol

Dillard's and Barington Agree on Candidates

A settlement reached late Tuesday over the future of Dillard’s Inc. is a mixed bag for both the activist investors seeking change and the management of the department store chain.

Insurgent investor Jim Mitarotonda of Barington Capital Group LP and another fund, Clinton Group Inc., nominated a slate of four directors for the company’s 12-person board. But he agreed to call of his campaign after Dillard’s agreed to one of his candidates and three other mutually agreed upon individuals.

Nick White, a former Wal-Mart executive, was on Mitarotonda’s initial slate of nominees and he was included on the board. Three other individuals, James A. Haslam III, chief executive officer of Pilot Travel Centers LLC, R. Brad Martin, former chairman and CEO of Saks Inc. and Frank R. Mori, co-CEO and president of Takihyo Inc. and former president and CEO of Anne Klein Inc., were also put on the board. These three were not part of the Barington-Clinton slate.

“Both the board and management welcome the perspectives and insights of our proposed new directors,” Dillard’s Chairman William Dillard II said in a statement.

And even though Mitarotonda did not get most of his chosen candidates on the board -- one of the candidates he put up for election was himself -- he did get a slate that is likely to be more independent of management than the incumbents it replaces. (Eight of the 12 directors are controlled by the Dillard’s family through their ownership of Class B shares).

Also, with this partial victory, Mitarotonda was able to have the company agree to re-examine its real estate and capital obligations. It also agreed to close department stores that were underperforming and subject new locations to return on capital requirements. The activists had hoped Dillard’s would complete a sale-lease back of owned properties, a typical tactic considered by insurgents seeking to have corporations raise capital for other purposes such as stock buybacks or special dividends. Even though that didn’t happen, the company’s steps to put a razor eye on real estate is a step in the activists' direction.
And there is always next year. -- Ron Orol