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  • Borders: Interesting Risk/Return for the Optimist [View article]

    I am surprised by a number of your comments. First, you have missed the point of this article. It is to illustrate how to evaluate the payoff of an investment in the equity of Borders. Obviously, there are many obstacles Borders needs to overcome for the equity to have value. Surprisingly, you fail to recognize almost any of the significant ones. I point them out in the above article. What makes this situation (and analysis) kind of cool is the variety of possible scenarios that could occur and what the equity would be worth in each. I work through one possible scenario above. Anybody, however, could work out a number of potential outcomes, assess a probability and value to each and incorporate the current stock price to calculate the expected value. You could even place odds on “bidding wars” if you prefer that to analyzing the financials.

    Second, let’s take a stab at calculating a portion of the “real value of their assets.” If you bother to reference the 10-K you will find it hard to support your guess of $300 million of “real assets.” You choose to take the inventory levels as of January 29th (note that these have been updated through the end of April) of $600 million. Let’s work through this. From page 27 of the 10-K:

    “Store Closures: Based upon a comprehensive review of our store portfolio, in February 2011 we initiated a store reduction plan to close 226 underperforming superstores. We expect that this plan will be substantially complete by the end of May 2011.

    These closures will result in a reduction of our future consolidated sales, cost of sales (including occupancy costs), and selling, general and administrative expenses, where certain store operating costs are classified. We anticipate incurring costs in fiscal 2011 associated with the termination of the related leases. Fiscal 2010 sales and operating losses related to the closing stores were $720.4 million and ($68.4) million, respectively, and at January 29, 2011, the carrying values of inventory and long-lived assets were $217.8 million and $30.2 million, respectively. Inventory and long-lived assets relating to these stores will be sold as described below.

    Inventory Liquidation Agreement: On February 16, 2011, we entered into an Agency Agreement with Hilco Merchant Resources, LLC (“Hilco”) to execute the liquidation of inventory and furniture, fixtures and equipment within 200 Borders superstores selected to close by April 30, 2011, as well as certain inventory held in a distribution center. Store closure sales under the Hilco agreement started on February 18, 2011. The agreement also included an option for us to liquidate the inventory of up to 70 additional stores under substantially the same terms, and on March 17, 2011, we exercised this option and elected to close an additional 26 stores. Pursuant to this agreement, Hilco paid us approximately $182.6 million in cash and letters of credit in the first quarter of fiscal 2011. This amount is subject to adjustment upon completion of the liquidation sales.

    During the fourth quarter of 2010, because of the likelihood that the inventory of these stores would be sold to liquidators rather than being returned to vendors or sold directly to customers, we reduced the value of our inventory to reflect an anticipated recovery value less than cost. This charge totaled $69.2 million and is categorized in Cost of merchandise sold (includes occupancy)” in our consolidated statements of operations.”

    So for the $248 million of inventory and property that is being liquidated, Borders received $182.6 million up front. That’s 74% of the value it was carried at. Assuming everything was liquidated on the same terms would yield $470 million, but the rest of the inventory is actually still slated to be sold through the profitable stores (at a profit). You can use this as a starting point in calculating the real value of the assets if you’re interested. I hope it helps.
    May 27, 2011. 03:20 PM | 1 Like Like |Link to Comment
  • Borders: Interesting Risk/Return for the Optimist [View article]
    That largely consists of pre-bankruptcy trade account payables and long-term lease liabilities that are pre-petition liabilities, unsecured, and subject to compromise (mainly the leases).
    May 25, 2011. 02:35 PM | Likes Like |Link to Comment
  • Borders: Interesting Risk/Return for the Optimist [View article]
    Please share: Here’s some of the recent comments I’ve come across:

    “Mr. Lebow has become Chairman and CEO of [Borders] and is now the de facto controlling shareholder of the company. As a consequence, Pershing Square no longer plays a significant role in the company’s strategic direction. Mick McGuire, the previous chairman, and a former member of the Pershing Square Investment Team stepped down from the board…We wish Mr. Lebow well with his new investment in Borders and look forward to his stewardship of the company.” [Pershing Square 1Q10 letter to investors, 6/8/10]

    “The most significant corporate event relating to Borders during the quarter was the Barnes & Noble board’s decision to pursue strategic alternative, which was likely due to pressure from the company’s largest outside shareholder, Ron Burkle. We have long believed in the strategic logic of a business combination between the two largest superstore companies. We also believe that B&N’s chairman and largest shareholder is more likely to be a seller than a buyer of the company. We believe that any third-party acquisition of B&N will significantly increase the probability that Borders is included in a potential industry consolidation, because of the significant cost economics and other synergies that could be achieved in such a combination” [Pershing Square 2Q10 letter to investors, 8/26/2010]

    “For example when making his investment in Borders, a decision Ackman now concedes was a mistake” [Reuters “What if Elvis ran a hedge fund,” 10/14/10]

    “The Reporting Persons (Pershing Square) have informed the Issuer that they would be prepared to finance, on mutually acceptable terms, an offer by the Issuer to purchase all of the equity securities of Barnes & Noble, Inc. ("BKS") in an all-cash transaction valued at $16 per share. In the alternative, the Reporting Persons have informed the Issuer that they would be prepared to finance, on mutually acceptable terms, an offer for mixed stock and cash consideration, to the extent BKS stockholders prefer to share in the substantial synergies of the business combination and receive equity in the combined company.” [SC 13D/A filed 12/06/10]

    From a CNBC interview 1/24/11
    Ackman: “So its (Borders’) levered, new management, turnaround wind at your face. My advice is short the stock. Or, move on.”
    Becky: “Is it going away? I mean, it’s at 84 cents right now. There’s a question whether it’s going to be paying publishers. “
    Ackman: “Look, I think there is an opportunity for a viable superstore business, but it’s not necessary just a book store company. We’ve been an advocate of a combination between Borders and Barnes and Noble for some time. One of the problems is that there is some overlook in terms of real estate and so on. So look, it’s been discussed, and again I’m not an insider here, as Ben Lebow has been running the show and I kind of like that. “

    Link (Ackman begins talking about Borders 5 minutes in):

    “Last year, Mr. Ackman had proposed lending Borders up to $960 million to finance a merger of the company with its larger rival, Barnes & Noble. He still supports a deal, but only if Borders is able to shed enough underperforming stores, a person briefed on the matter said” [New York Times, “Borders’ Bankruptcy Shakes Industry”, 2/16/11]
    May 24, 2011. 03:41 PM | Likes Like |Link to Comment
  • Borders: Interesting Risk/Return for the Optimist [View article]
    Pershing Square has not sold. Here is a link to a correction filed for a similar story. Pershing is not required to list securities that trade on the pink sheets. If Pershing Square wanted to sell, they would have to file a form in advance stating their intentions since they are a substantial shareholder. No such form has been filed.
    May 24, 2011. 10:15 AM | 1 Like Like |Link to Comment
  • Aegean Marine: Fueling the Global Shipping Fleet [View article]
    The Champ, Yahoo lists total debt. Their 6K shows $342MM LT debt vs $86MM cash. Other items included in total debt are trade payables and ST borrowings. Diff between Total Debt and Long Term Debt.
    Apr 14, 2011. 04:21 PM | Likes Like |Link to Comment
  • The Politics of Natural Gas: How and Why to Invest [View article]
    I think it's very hard to predict when prices will rise, and for the foreseeable future $4-5 MCF is where gas is going to be. You have to invest in companies that can still be profitable at that level, which is what we've done. Eventually the U.S. will enact subsidies and other legislation to promote nat gas, but timing isn't clear. Higher cost producers will rise faster if nat gas increases through their operating leverage, but we prefer the low cost names with less dramatic upside but greater staying power.
    Apr 14, 2011. 04:15 PM | Likes Like |Link to Comment
  • Another Assault on Coal, Another Push to Natural Gas [View article]
    Kent that's a good article. We are constructive on natural gas and have written about it regularly elsewhere on Seeking Alpha. But we've been cautious in relying on the EPA to bring about the decommissioning of older coal-fired plants through tighter regulations because of the politics in many coal-producing states. For example, senators face re-election from W Va, PA and OH and the Congressional Republicans are likely to try and block some of the EPA's moves. How do you regard the politics around this issue?
    Mar 19, 2011. 10:51 AM | 2 Likes Like |Link to Comment
  • Low Beta Stocks Look Particularly Compelling Today [View article]
    That’s a great point as Kraft has been working at improving its cost structure since 2004 and it’s reasonable for many investors to have lost patience. However, it typically takes companies of Kraft’s size a while to right the ship. With leading market shares in many of its products we expect gross margins to improve to levels in line with other market leading consumer staple products. Additionally, the acquisition Cadbury provides opportunities for many synergies and cost reductions helping boost margins. Similar to Kraft’s traditional business, Cadbury’s margins have been depressed due to significant investments in the business. However, the higher multiple Kraft paid for Cadbury also frustrated some investors including Warren Buffet. But again, we believe that is now reflected in the price and success with integrating Cadbury and realizing synergies should act as a short term catalyst.
    Mar 14, 2011. 08:54 AM | Likes Like |Link to Comment
  • Low Beta Stocks Look Particularly Compelling Today [View article]
    Kraft is solidly profitable and about 50% debt to market cap isn’t very concerning to us. Using a multiple of earnings to value the company takes interest expense into account.
    Mar 14, 2011. 08:50 AM | Likes Like |Link to Comment
  • Aegean Marine: Fueling the Global Shipping Fleet [View article]
    Ed's Perspective - we thought that ANW's margins should be fairly resistant to pressure from their customers, but it turns out that if your customers are losing money they negotiate more aggressively with all their suppliers as they look for places to cut costs. We'll see in the next couple of quarters whether they can restore some of their lost margins. We don't believe this is where ANW expects them to be over the long term. There's no LIFO/FIFO issue, they don't hold fuel for that long.

    The apparent disconnect between EPS and margins is because Revs have been growing faster than share count (i.e. rev per share increasing).
    Mar 9, 2011. 05:32 PM | Likes Like |Link to Comment
  • Investment Considerations Within Natural Gas Sector [View article]
    Bill, you'd have to ask the company.
    Feb 26, 2011. 08:52 AM | Likes Like |Link to Comment
  • Williams: Pair Trade Offers E&P Business at Huge Discount to Net Asset Value [View article]
    Using a sum of the parts analysis, our price target is $36/share. We value the E&P business at $15/share. Although an ideal scenario would have been an IPO of the GP interests and distribution of WPZ shares combined with the E&P spin-off, we applaud management's recent actions to reflect the fair value of WMB's assets in its stock price. Our catalysts have been realized and we have taken off the position.
    Feb 17, 2011. 02:45 PM | Likes Like |Link to Comment
  • Boulder Return Fund, Range Resources, Borders Group: Why We're Adding to These Positions [View article]
    Joe, I agree that there's no obvious catalyst. We've been watching it for some time as well. The relative underperformance of BRK-A has made it more interesting recently, but there's no reason to expect an imminent resumption of the distribution.
    Jan 18, 2011. 11:08 AM | Likes Like |Link to Comment
  • Boulder Return Fund, Range Resources, Borders Group: Why We're Adding to These Positions [View article]
    Yes, the expense ratio is high. We think the discount provides sufficient compensation, but I can certainly understand why that may not be a universally shared view.
    Jan 17, 2011. 05:32 PM | Likes Like |Link to Comment
  • Why Municipal Bonds Aren't Worth the Risk [View article]
    Prices will probably be somewhat higher in a year - though I doubt by much. Strong economic growth will help finances but lead to generally higher interest rates (which illustrates that sharply lower municipal bond yields are not likely since slower growth will tend to hurt many issuers' finances). And prices may be lower, or have been sharply lower, in the meantime. That is the asymmetry facing muni investors.
    Jan 14, 2011. 09:54 PM | Likes Like |Link to Comment