Monday, June 23, 2014

Déjà vu and Fantasy at the Outset of Summer

Déjà vu and Fantasy at the Outset of Summer

While waiting for the World Cup to resume, I read two stories.  The first announced that
Carl Icahn has acquired a stake in Family Dollar Store (NYSE: FDO).[1]  The second story announced that Blackstone’s stock (NYSE: BX) has finally risen above its IPO price of $31 after seven years.[2]    The Family Dollar story gave me a powerful sense of déjà vu and the Blackstone article sparked a financial fantasy.

Déjà vu

Family Dollar, a discount retailer, has underperformed over recent years.  Mr. Icahn isn’t the first hedge fund investor to pressure the company to sell.  Trian Fund Management, managed by Nelson Peltz, made a similar foray three years ago and was unsuccessful.  Family Dollar, headquartered in Matthews, NC, faces unrelenting competitive pressure from Wal-Mart and Target.  The company has been trying to lower its costs and pricing in order to turn around its fortunes. 

About twenty years ago I met with the management of Family Dollar Store.  At the time, I was Chief Investment Officer at NationsBank, and we had a sizable position in our mutual funds.  The company’s stock had underperformed.  At the time, FDO told me that they were going to address the problem by closing stores and lowering prices.  When I questioned them about the impact of lowering prices on the company’s margins, one executive gave me an example of how it would work.  He told me that they’d simply lower the amount of detergent in their cleaning products.   In other words, they’d be able to lower prices by subtly lowering the quality of the product.   After the company’s latest effort to cut prices, I’m betting that there isn’t much detergent left in the bottle.

Activist Fantasy

Compared to most financial stocks, Blackstone’s stock has grossly underperformed the market.  While the company is extremely profitable on a variety of measures, investors have remained cautious.  What follows is absolute make-believe because Blackstone’s share structure and corporate governance immunize Blackstone from Carl Icahn or any activist investor.  After reading Mr. Icahn’s press release discussing his investment in Family Dollar, I realized that he could have issued a similar press release about Blackstone and argue that it’s time for Steve Schwarzman to sell Blackstone.  A battle between a major activist hedge fund and a major alternative manager would be extremely entertaining and might distract me from the World Cup.  Alas, it won’t happen.  However, the United States might beat Germany on Thursday.


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