“In short, selling a company’s undervalued real estate creates an enormous tax burden, which limits the cash available to maximize value for shareholders. I truly believe that Bill Ackman knows this, and I have yet to see a structure from him that would get around the tax issue completely.”
Yesterday, LDG offered these comments in a filing;
“The Company’s owned properties were acquired over the life of the Company and, as such, have a low tax basis. Accordingly, if the Company were to sell these properties outright or in a sale-leaseback transaction it would incur a significant tax liability in doing so. The Company determined that, taking this tax liability into account along with the transaction fees, the after tax proceeds from the outright sale of its owned real estate would not offset the loss of income from the sold properties and that the sum of the amounts that the Company could obtain from the sale of its owned properties and operating business separately would not exceed the value of the consideration offered by CVS. Similarly, that if the Company were to lease back these properties that the capitalized value of the increased rent and property tax expense payable over the lease terms would more than offset the net proceeds of the sale (i.e., after payment of the tax liabilities and transaction expenses) and would accordingly not increase the consideration that an acquirer would pay to acquire the Company.”
From this we can rule out another bidder to take advantage of LDG’s undervalued real estate! Where do we go from here? I believe that it’s unlikely that WAG is going to out bid CVS. So who else wants to buy an underperforming drug retailer? WMT? I still have yet to see a sum of the parts analysis that values the company above $71.50, but WMT has the cash to pay more if it wants to.
Wal-Mart Stores is getting ready to open its first Marketside store in Phoenix, AZ. Apparently, WMT is also looking for locations in Southern California. According to the Financial Times, Wal-Mart has applied for a liquor license for a Marketside unit in Oceanside, a coastal city north of San Diego — a couple of miles from a Tesco’s Fresh & Easy. Marketside stores are modeled around a 15,000-20,000 sq. ft. box and will offer fresh foods and prepared meals. I mention this because the average LDG store is also about 20,000 sq. ft. so LDG’s current stores could fit perfectly with WMT’s Marketside store strategy.
Relative to the market capitalization of WMT, buying LDG is a drop in the bucket. With WMT outperforming TGT and the stock on the new high list, the distraction of buying LDG would not sit well with shareholders.
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According to Agri-Stats, no matter whether you measure by bird numbers, live weight or by total tonnage produced, the U.S. broiler industry expanded production in 2007, and 2008 is on track for increased production, too. Importantly, ownership and control of production has been consolidating into fewer and fewer firms. In 2008, EMI Analytics forecasts look for U.S. output to total about 36.6 billion pounds of RTC (bone-in ready to cook) chicken. Estimates show the 4 largest firms will control roughly 57% of broiler production - Pilgrim’s Pride, Tyson Foods, Perdue Farms, and Sanderson Farms. The 8 largest companies will account for 71% of U.S. production, and the 20 largest will supply over 93%.
As I see it, the fate of PPC is in the hands of eight companies that control 71% of U.S. production. If those eight firms decide not to cut production in any meaningful way, industry pricing will remain under pressure. Going back to my point about being the CEO of one of PPC’s competitors, it would not make sense for Tyson, Sanderson Farm, or Perdue Farms to cut production as the increase in market prices would provide the most incremental benefit to PPC as it is the market share leader (holds 25% of the market). PPC’s competitors have the financial flexibility to withstand current pressures over the next 6-12 months until market prices stabilize and would most likely rather watch their biggest competitor sweat it out.
The issues around PPC’s balance sheet have been well documented. Right now the issue with PPC is not liquidity, but rather the company’s ability to maintain the fixed charge coverage ratio if the industry turmoil continues well into 2009. Depending on how you measure it, PPC has $500 to $600 million of liquidity. For the company to maintain its fixed charge coverage ratio, it must return to profitability in 2009.
Right now that looks highly unlikely.
“Rule #1: Do not lose money. Rule #2: Do not lose money. Rule #3: Never forget rules 1 and 2.”
Roy Neuberger was born on July 21, 1903, and was orphaned by the age of 12. Mr. Neuberger came to Wall Street on his own in 1929 before the crash and Great Depression. Over the course of his storied career, he figured out a thing or two about proactively managing risk during economic downturns. Neuberger’s “Guardian” Mutual Fund was one of the first no-load funds in this great country.
Today, as Dick Fuld continues to wrestle with one of the most classic investment mistakes people make, I can’t help but be saddened by where Lehman Brothers has brought this great American Capitalist’s namesake Asset Management business. That mistake, of course, is sell what you can, not what you should.
This mistake happens quite often during times of economic crisis. In the end, after firms are forced to liquidate, they end up holding their most toxic paper, rather than their most precious. This is the tail that’s wagging the dog right now in the US stock market. As investment banks, hedge funds, and mutual funds are forced to raise cash and de-lever, everyone on their respective trading desks knows that their biggest investment mistakes remain on their books.
This is why the volume and volatility sirens are ringing again. Its ‘Macro Time’ - from Asian currencies to Brazilian oil stocks, the asset management community is selling what they can. “It’s global this time”, remember? That means that TED spreads widening, European junk bond yields rising, and Ukrainian stocks crashing are all one and the same thing. This is the start of people finally being forced to sell what they should have in the first place.
Asian stock markets continue to crash this morning with the region hitting 3 year lows. China led the way to the downside again, closing down another -3.3%, hitting new year-to-date lows and taking the cumulative loss in the Shanghai Exchange to -66% since the October 16, 2007 nosebleed peak. Japan closed down another -2% overnight, and I remain short that market in the ‘Hedgeye Portfolio’. The only thing that has changed fundamentally in Asia is that the masses are figuring out fact from fiction.
European stock markets continue to be weak after the Bank Of England’s chiefs (Blanchflower and King) outline that their domestic economic situation continues to deteriorate. At a point, this is going to equate to the BOE and ECB cutting interest rates. With commodity led inflation cooling to the tune of -24% in the CRB Commodities Index since early July, European central bankers finally have some room to breathe. The Euro’s decline will raise imported inflation, but at this point commodity prices and economic growth are dropping at a faster pace than currency losses.
In Latin America, stock markets continue to get pounded, as they should. Brazil is actually raising interest rates again here this morning to 13.75% - global cost of capital continues to rise as access to it tightens. Local inflation in Brazil is much like emerging Asia and Eastern Europe – they have a wage spiral component, don’t forget. All the while, as everything from fertilizer to oil gets sold out of asset manager portfolios, the US Dollar continues to strengthen. The greenback is +11.8% since its mid July lows. US denominated cash is indeed being crowned as King!
So what to do next? I say more of the same. I moved back to 84% cash earlier this week as I just couldn’t stand the idea of losing money. Putting my family’s hard earned capital at risk would be reckless at this stage of the economic cycle. Yes, you’ll hear the bulls tell you that “there’s so much cash on the sidelines”, and “people have to own something”… if I hear it once an hour, I hear it 100 times. Unfortunately, that’s both theoretical and consensus.
People don’t have to buy anything. Ask Roy Neuberger. At a bare minimum, never forget his rules 1 and 2.
My new downside target in the S&P 500 is 1209.79.
Good luck out there today,
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