Friday, August 24, 2007

Burger King Serves Up A Whopper

Burger King (BKC) served up a financial whopper and pleased the market with really great financial news. The company has been dogged by Billionaire Nelson Peltz who claims he can do something better. Prior experience at Arby's is influencing his opinion. So if you believe the numbers what does a take over offer provide to investors.

Burger King has improved dramatically. They increased their store count dramatically and improved hours and menu. Some minor problems with permits in the Middle East and Germany.

The critical management comment is that the ARS is up dramatically. Given the high fixed cost nature of a Burger King Store this is wonderful news.

Now if you are trying to take-over Burger King you have to pay for it. The argument that I can fix your problems will no longer work.

Note to management: If the earnings and cash flow are improving you need to increase your dividend. You are a cash business and your fundamentals have improved dramatically. In the current market where fear and panic is just around every corner an increased dividend would attract investors and strengthen the share price.

Thursday, August 23, 2007

Bank of America Knows Something

Bank of America (BAC) just dropped $2 billion on what looks like incredibly advantageous terms into Countrywide (CFC) The dividend yield at 7.5% is outstanding and being able to convert into stock at below the so called current market value has usually been only an investor fantasy. So much for all the Warren Buffet speculation.

We all know Countrywide needs help. When it gets this bad the question is what is good for the economy not what is good for an individual issuer. Everyone will surely remark on Countrywide's lack of negotiating ability. Countrywide's ability to negotiate was mitigated by the large caliber financial gun that was firmly pointed to its forehead.

Big players like Bank of America can and will do favors for the regulator in the hopes of something else breaking their way. The current favor is probably tax deductible if the mark to market moves unfavorably. Bank of America is close to bouncing off of the 10% deposit cap, when taking the ABN LaSalle acquisition into account. So while an offical outright acquisition seems to be out of the question if Bank of America can help Countrywide settle down the fed should be beholden in a strategic fashion at some point in the future.

The danger is that if the sub prime slime compromises the deal a huge negative develops in the market and accelerates panic thinking. The line needs to hold. The sharks will test the steel cage quality of the deal. If there are chinks the slide will continue for quite some time.

In the meantime another savvy player Citicorp (C) dips into the discount window and takes out armful of money. The Fed has pointed out that under the circumstances they would not see this as a sign of weakness. So the thinking is different.

Wednesday, August 22, 2007

Dell "Stick a Fork In It"

Dell (DELL) is done in so many ways you may now stick a fork in it. On an operating point of view the entire color gambit is a bust. The entire color strategy really showed that Dell is out of good ideas. Computers leverage productivity and improve our lives on either a personal or work basis. The color on the casing is near irrelevant. Dell announces a huge marketing move to emphasize color. Essentially they announced to the world that they no longer understood their own product.

But wait. Dell even messed up the color strategy. They are experiencing ridiculous delivery and execution problems and are disappointing end users because promised colors are not available. In the 21st century in an era of choice buyers cannot get what they want.

The color debacle is a corporate metaphor indicating they are lost in the forest and cannot find their way out.

Regulatory problems continue. The financial statements are not to be relied on. Recent filings with the SEC indicate serious problems are more the norm than an isolated mistake. No one is sure if senior officers can escape the legal fall out. could Dell survive losing Michael Dell

Where is the value in Dell. HP (HPQ) is eating their lunch, breakfast, dinner and all the appetizers. In that grey world of strategic thinking the question is "What should Dell do next" If Michael Dell just wants to fight it out that becomes an ego play and the PE valuations on ego plays usually fall apart.

Is the board thinking strategically and planning for the future. Are they at least having a quiet unofficial meeting to voice concerns. They need to make a deal with someone and change for the future. The future is about ideas. Dell is fresh out. Emergency succession planning may require an emergency deal. Shareholder value is usually lost in an emergency.

Tuesday, August 21, 2007

Topps Governance Conflicted

Topps (Topp) has been grappling with a conflicted take-over that seems to have gone on forever. Yesterday management locked horns with Institutional Shareholder Services (ISS). ISS has recommended against the "Tornante MDP transaction" Management recommends the proposed offer and actually is telling investors which color of proxy card they should sign.

ISS and many others are of the opinion that the Upper Deck offer is better. The rationale seems to revolve along that age old capitalist principal the sale should go to the highest bidder. A quick review of TOPPS corporate governance guidelines indicates

"Director Responsibilities

Directors must exercise sound business judgment and act in what they believe, in good faith, to be the best interests of the Company and its stockholders. ...."

Where is the board in all this? How do they justify selling the company to the not highest bidder?

Management is talking out of both sides of their mouth. They are exhorting shareholders to accept an inferior offer while maintaining discussions with the superior offer.

As I am writing this post another proxy advisory firm (Glass Lewis) issues public comment criticizing management.

This one is a real mess and needs the scrutiny of regulators and judges. The best course of action is to vote no and reset the process. Shareholders interests are not being well served. Quoting from Glass Lewis press release

"In reaching its decision to recommend a vote AGAINST the Merger Agreement, Glass Lewis stated, "We are deeply troubled by the process the board undertook in arriving at the proposed deal, and agree with the Dissident that it did not constitute a full sales process. In our opinion, interested suitors are likely to put forward their best offers only when they are forced to compete. Here, we see that the board only held discussions and negotiations with three bidders, including Tornante-Madison Dearborn, and deliberately chose to refrain from initiating a public sale despite opposition from directors Ajdler and Brog. We believe this decision essentially precluded Topps from enjoying the benefits of true competitive bidding, a process which we believe likely to maximize shareholder value."

Monday, August 20, 2007

Diebolds Tar Baby

Diebold (DBD)recently announced that they cannot sell off their voting machine business. In my Nov 8, 2006 post I had strongly urged them to do so. At that time the private equity business and the madcap lenders who provided liquidity were ever so plentiful.

Today they are saying the world has changed; private equity and liquidity are not as aggressive and they cannot offload the puppy. Convenient straw to grasp at. At the same time one is reminded of how sales have dropped so dramatically. Diebold feels that many voting machine purchase decisions have been delayed. They need you to believe this, as the company is being positioned to be dividended out as a separate entity. Already there is a separate board and a separation in corporate identity is occurring.

In a way you cannot blame Diebold. The PR storms that occur around voting machines are vicious and unprofitable in any currency.

But if the voting machine purchase decisions where merely delayed than investors who value stocks as the net present value of future earnings would be unperturbed. Because the earnings would still be coming. Sharp private equity should have been able to figure it out.

Maybe what the private equity guys figured out was that there are other problems. Senior officers of Diebold have been openly politically active with the Republican Party. If the trend is Democrat there will be a lot of pay back and investors will suffer. If there is a back log precious little will go to Diebold.

Doing a voting machine IPO during the Presidential election sounds suicidal. So how will Diebold offload this problem? My suspicions are that they missed the boat and it will hang around for some time dragging down EPS and the corporate soul as they get battered in the political press.