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Market Musings - June 2, 2018

We continue our blog series: Market Musings, Volume 2, Edition 15, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present "Market Musings of the Day for June 2nd".

Back after a bit of a hiatus, we resume our random musings. Here is a list of items we are keeping tabs on in the market:

1. Newell Brands (NWL) - SEC filings here - this company has been the subject of activist proxy campaigns by not one, but two, big names: Starboard Value and Carl Icahn. The proxy fights were amicably settled and the CEO got to keep his job, yet the share price keeps falling. Of course, other things being equal the lower the share price, the better the buy, so maybe there is an opportunity here. The shares now yield just over 4% and trade at forward P/E of just 8.7X (representing an earnings yield of 11.5%).

Note that the company just announced that the CFO is quitting, sorry make that (ahem) "retiring", usually not a good sign:

"Newell Brands Announces Chief Financial Officer Ralph Nicoletti toRetire at the End of 2018. HOBOKEN, June 1, 2018 – Newell Brands Inc. announced today that Executive Vice President and Chief Financial Officer Ralph Nicoletti will retire at the close of 2018.“On behalf of Newell Brands, I want to extend my thanks to Ralph for his partnership over the last two years,” said Michael Polk, Newell Brands President and Chief Executive Officer. “Ralph and his team have put in place a set of information management processes that will increase the analytic capabilities of the company, positioning us to strengthen our operational and financial performance. Ralph has agreed to stay on through the end of the year to help with the succession process and to continue to drive our transformation work as a key member of the Management Committee.”Newell Brands will begin a search for Nicoletti’s successor. Both internal and external candidates will be considered."

2. More Carl Icahn Proxy Fights - Speaking of Carl Icahn, at 82 he is not apparently slowing with age. He is currently embroiled in two other proxy fights, as follows:

a. Amtrust Financial (AFSI) - SEC filings - Icahn is challenging the management & P/E going private transaction at $13.50/share:

As can be seen below, management cherry-picked multi-year lows on the stock price in early January 2018 as the point at which they entered into the going-private deal with their hand-selected P/E firm:

However, unbeknownst to most of the market until early May (when the proxy statement for the merger was finally filed), AFSI management determined that April 5th would be the record date for voting on the merger (and Icahn purchased most of his shares after the record date). Now AFSI claims this was all done in accordance with Nasdaq's rules:

So the real questions are the following: Will Icahn and others who bought shares after April 5th but before the proxy was filed (May 4th) get to vote on the merger; and, if so, will they be able to block the merger? Since the stock price is now trading below the $13.50/share buyout price, it appears that the market has concluded "no" on these two questions. (For what it's worth, Glass Lewis is backing the merger, while ISS recommends shareholders vote against it.) Only time will tell.

Also note that yesterday Icahn asserted he will exercise appraisal rights for his stock (see here). Perhaps this indicates his backup plan if he loses in court on the record date issue. Below is an excerpt from the definitive proxy (full filing here) on availability of appraisal rights in connection with this merger (it does not appear that the merger is contingent on the absence of a specified percentage of shareholders exercising such rights, as is sometimes the case in cash-out mergers):

b. Sandridge Energy (SD) - SEC filings - This is another situation where incumbent management, when confronted with activists, engaged in truly obscene entrenchment tactics, such as attempting an uneconomic (and since terminated) merger with Bonanza Creek Energy (BCEI) (in order to dilute the activists' voting stakes), instituting an egregious poison pill under the guise of it being a "shareholder rights" plan (for the same reason), approving absurdly lucrative severance packages for upper management, etc etc etc. It is actually surprising that corporate executives do not end up in legal jeopardy for these kinds of things--welcome to corporate America.

In any event, Icahn and other activists managed somehow to override most of the entrenchment devices employed by the SD CEO and captive board of directors. Indeed, the CEO was jettisoned by the board, who are now in full-blown self preservation mode. Icahn wants 7 director seats for his slate, while the entrenched board has offered him just 2 slots. Icahn has also indicated he may make an offer for the entire company. SD shares appear quite undervalued, as Icahn has indicated they trade at a measly 2.5X EBITDA and well below the PV-10 value of the underlying O&G assets. Shares trade well below their 52-highs from the beginning of 2018, despite rising oil prices:

3. Snap Inc (SNAP) - SEC filings here - noted short seller Citron Research decided to come out with a long thesis on Snap:

Apparently Citron's thesis is that "the bad news is priced in". Usually we hear that from bag-holding longs who are in denial. No doubt holders of Sears Holdings (SHLD) also thought many times over the years that "it's all priced in, guys!", yet the stock has continued to sink relentlessly (including being down 17% today). Being short SNAP, we think that the company is likely terminal. Facebook's Instagram has made SNAP obsolete. In addition, the company has borderline contempt for its shareholders, denying them even a token voting right in their IPO:

Per SNAP's 2017 Form 10-K filing, page 31:"Class A common stockholders have no voting rights, unless required by Delaware law. As a result, all matters submitted to stockholders will be decided by the vote of holders of Class B common stock and Class C common stock. As of December 31, 2017, Mr. Spiegel and Mr. Murphy control approximately 95.2% of our voting power, and potentially either one of them alone have the ability to control the outcome of all matters submitted to our stockholders for approval. In addition, because our Class A common stock carries no voting rights (except as required by Delaware law), the issuance of the Class A common stock in future offerings, in future stock-based acquisition transactions, or to fund employee equity incentive programs could prolong the duration of Mr. Spiegel’s and Mr. Murphy’s current relative ownership of our voting power and their ability to elect certain directors and to determine the outcome of all matters submitted to a vote of our stockholders. This concentrated control eliminates other stockholders’ ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. As a result, the market price of our Class A common stock could be adversely affected."

And let's not forget that SNAP is still run by the same CEO who gave himself $636.6 million in stock compensation just before said IPO:

In short, SNAP's corporate governance is abysmal (unsurprisingly, the company pays no dividend). So good luck to Citron, you will need it!


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