Dan Loeb Activist Investor Letters

Why I read activist investor letters?

Activist investors are known to put mismanaged companies “in their place”. They are very interesting from a business strategy perspective. If I were an “owner” I would definitely be addressing employee’s who mismanaged my company in a similar method, but on the other hand as a business operator these letters give a good perspective on missteps companies and management takes while running a company.

The metrics that are called out on the letters are levers that can be improved or leveraged for growth or the highest ROI. The numbers to keep an eye on when doing fundamental analysis.  It also shows the difference between the shareholder versus how a management team divides up a business and provides a great deal of insight into what management thinks is important and how they are situating the company competitively for the present and future. Activist Investors call out the opportunities, the question marks (low market share and high growth potential), and how those can be pushed to becoming stars or cash cows. But also what cash cows might slip and end up in becoming dogs (low market share and growth), and extending the life-line for the cash cows for the longest time possible. This is basically what newspapers have been pushed to do by hedge funds, their papers were once cash cows now turned into dogs.

Letter to Disney

Just this week, Regal Cinemas shuttered all its US operations and physical theaters. While we all share a certain sadness and nostalgia for this eventuality, I am sure that people felt similar emotions about horse-drawn carriages when the automobile was first introduced. Every Hollywood executive has been able to enjoy first-run films in the comfort of their home theaters for years. We urge you to democratize this experience and to continue to embrace the future of home entertainment with the utmost urgency in executing the company’s digital transformation

Nabi Biopharmaceuticals

In closing, I would like to remind the Board of its fiduciary duties to represent the financial interest of Nabi’s shareholders, not the pecuniary interest of Nabi’s management. Approving the use of incumbent investment bankers who have not served shareholder interests well in the past, and approving option and restricted stock programs that gratuitously enrich management and yourselves at the expense of the company’s shareholders, are exactly the types of actions you are legally charged to avoid, not enable. Under your watch, this company has had a virtually unbroken record of poor quarterly results (which, not surprisingly, you managed to extend in the first quarter), missed milestones, and trial failures – all leading to significant value destruction for the company’s shareholders. Should this somehow have escaped you, we will happily furnish you with a timeline demonstrating the repeated disappointments and resultant dreadful stock price performance.

Intercept

Third Point manages over $1.1 billion in capital; the InterCept stake represents less than 2% of our capital under management. We have the financial wherewithal to substantially increase our position and the staying power, if necessary, to continue to apply pressure until such time that we believe that a majority of the Company’s Board seats are controlled by people who, in our view, are able to sell the Company.

Nevertheless, time is of the essence. Each day that you delay the sales process Intercept competitors continue to peck away at the Company’s customer base and margins continue to erode. The current Proxy contest could permit shareholders to exercise their will to remove you from the Company Board. We encourage you to take constructive steps before you are not only unseated from the Board but possibly from your job as well.

Ligand Pharmaceuticals

We recommend that the Company stop giving its royalty stream away to Royalty Pharma. Many of the Company’s drugs represent $1 billion market opportunities, driving royalty income to Ligand ranging from $30 million to $120 million per product. In particular, we are especially excited about your joint effort with GlaxoSmithKline on SB-497115. While we understand the risks inherent in drug development, we would argue that you should be able to generate a minimum of $120 million in royalty income by 2010. Applying a 10x multiple to $120 million and discounting back four years at 20%, we arrive at a 1-year fair value of approximately $550 million for your royalty business. Again, in our opinion this is a worst-case valuation. It assumes success for only ONE of your royalty products, and assumes that product generates only $1 billion in revenue.

 Mr. Robinson, Ligand shares currently trades below the 1993 IPO price of $13. You claim in your mission statement that you are committed to `provide a high level of reward for shareholders.’ To date, the only high level of reward you have provided is for short sellers. It is time for you to step down from your position and for the Board of Directors to sell the Company to the highest bidder. We have already spoken to investment bankers who would be happy to take the assignment and believe that there are strategic buyers interested in purchasing the Company for a significant premium.

Penn Virginia Corporation | Penn Virginia Corporation 2

Do not confuse our investment as a vote of confidence in management’s ill-conceived acquisition and exploration strategy. Rather, we believe that Penn Virginia is asset rich and trades significantly below its intrinsic value. We believe that the reason for the discount is that shareholders lack confidence that management has set forth a clear path to value creation. We have set forth such a path below, the essential elements of which are:
1. Refrain from further dilutive oil and gas acquisitions.
2. Drastically cut back on the company’s drilling program.
3. Contemplate the sale of some or all oil and gas assets.
4. Use the cash flow freed up by steps 1, 2 and possibly 3 above to repurchase the Company undervalued stock in the open market.
 5. Increase value of the Company via its General Partnership interest in PVR.

Pogo Producing Company

In the year since the acquisition closed, you have spent over $350 million – approximately 20% of the purchase price – in capital to improve these assets, yet production has actually declined 10% from 30,000 barrels of oil equivalents per day (“boepd”) to 27,000 boepd. Given the significant scope of the acquisition and poor performance of the assets to date, we were hoping your answers to our questions would help us understand the strategic thinking behind the acquisition and what return on capital the Company expected to achieve. Your answers were not satisfactory. When we asked you about the natural annual decline rate of the assets, you responded “7 to 8%,” which seems unlikely given the 10% annual decline experienced during your first year of ownership while you invested significant capital attempting to increase production. This is especially troubling and gives credence to reports by industry participants that Pogo’s management did only minimal due diligence before consummating the transaction last year.

While the Northrock acquisition is emblematic, the true measurement of your performance as a chief executive is the return you have generated for shareholders. Unfortunately, the results are not encouraging.

Salton, Inc

Accordingly, we believe the Company has ample options to refinance its 10.75% bond maturity due December 15, 2005. However, we urge the Company only to consider options that maximize value for all stakeholders. Based on our independent due diligence and as confirmed by our meeting with you in New York on September 8th, Salton is a company with tremendous asset value:

– We believe that the Foreman Grill business is worth at least $400 million.
– The Company’s 51 % stake in AMAP is worth at least $50 million in a “fire sale” scenario.
– We understand that European sales are profitable and generate between $30 mm to $35 mm of EBITDA, which at a bargain price of 6X should be worth in excess of $180 million.
– We also believe that Toastmaster, the UK warehouse facility and other assets could be worth in excess of $100 million for a total asset value north of $730 million.

Star Gas Partners

Irik, at this point, the junior subordinated units that you hold are completely out of the money and hold little potential for receiving any future value. It seems that Star Gas can only serve as your personal “honey pot” from which to extract salary for yourself and family members, fees for your cronies and to insulate you from the numerous lawsuits that you personally face due to your prior alleged fabrications, misstatements and broken promises.

 I have known you personally for many years and thus what I am about to say may seem harsh, but is said with some authority. It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites. The matter of repairing the mess you have created should be left to professional management and those that have an economic stake in the outcome.


Western Gas Resources, Inc

We are also mystified by the Company’s recent entree into fiercely competitive regions in Canada and the opening of a Calgary office. Our own study indicates that most Canadian drilling inventory acreage is tied up. New entrants to the region like Western will be hard pressed to compete with the low cost of capital of income trusts and incumbent exploration companies that are valued as if they will convert their corporate structures into income trusts. Furthermore, two better capitalized US companies, Burlington Resources and Apache, already operate in Canada. Were we in your shoes, we would only consider entering into coal bed methane technology sharing agreements where a limited amount of capital is put up by the Company

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