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Takefuji in The Globe and Mail

The Globe and Mail has an article on Matthew Haynes, a deep-value investor managing the GGOF Global Absolute Return Fund:

Mr. Haynes prefers deep-value stocks, looking for companies with assets that are trading at 50 cents on the dollar. He favours those issues where there is an event or catalyst in the stock story that should unlock value not yet reflected in the stock price.

The $74.4-million GGOF fund is relatively new, having been launched in July, 2006. Its return since inception is 21.59 per cent and so far this year the return is 3.87 per cent. Canada accounts for about 16.6 per cent of the portfolio, the U.S. 15.9 per cent, and Japan and the Netherlands 8.4 per cent each.

I'm not familiar with Haynes or his fund, but I notice he's a fellow shareholder in Takefuji (8564/JP or TAKAF/OTC):

Promise Co. Ltd. and Takefuji Corp. are in the Japanese consumer finance industry, a sector that has suffered in the face of concern about regulatory changes that will reduce the interest rates they can charge. The companies are trading "at huge discounts to tangible book value" yet have "overcapitalized balance sheets," Mr. Haynes said. Promise already has a large percentage of its loan book at a lower rate, "so it may not suffer the same decline in earnings as some" of the other companies, he said. Takefuji is trading at a similarly depressed valuation. Promise closed at ¥3,610 ($33.74 Canadian) Friday and Takefuji at ¥4,020.

The article doesn't say when Haynes bought the Japanese consumer lenders, or whether or not he's underwater in these positions. I hope he came into them recently. Because, if you're a regular Controlled Greed.com reader, you know I bought Takefuji a year ago and it's the worst performer in my portfolio.

Yet I remain cautiously optimistic Takefuji will work out. Ditto Media General (MEG/NYSE), another portfolio poor performer. Am I being foolish or bullheaded? Well, I prefer to think of myself as being patient. (One year in a 3-to-5 year time frame is just that -- one year -- after all.)

And time will tell whether Takefuji is a deep-value stock. Or just a case of deep you-know-what. ;-)

BCE Board Encourages Bidding War

That's what the signs point to. And if the signs are right, it is a good thing for those of us owning stock in BCE (BCE/NYSE). Andrew Willis posts about the board on his Streetwise Blog on The Globe and Mail's website:

Late Sunday, the lawyer and BCE board member who is running the special committee made her first contribution to the process, and it was a quite a debut. Donna Soble Kaufman, formerly with Stikeman Elliott, told potential bidders that BCE would move to ensure that no one bidder established a monopoly on domestic private equity funds.

This announcement will bring great joy to the Ontario teachers’ funds, which played a key role in kicking off the BCE strategic review. It is also heartening to the two or three major American funds, including Blackstone and Cerberus, that are sniffing around Canadian telecom these days.

This weekend also saw at least one report speculating Bain may enter the picture. In any event, it is increasingly looking like the BCE board is acting in the interests of shareholders. Let's hope those appearances prove accurate at the end of the day.

Lex on Citigroup/Nikko Cordial

The venerable Lex column in the Financial Times examines Citigroup buying 61% of Nikko Cordial (NIKOY/OTC). Looking at the deal from Citi's perspective, the Lex editors aren't overly impressed at the result so far:

Since it holds less than two-thirds of the shares, Citigroup will need shareholder approval to carry out significant reforms, such as unit closures, limiting its ability to restructure Japan’s third biggest brokerage. Many of the minority investors look set to be the same awkward squad of funds that were pushing for a better price, so their co-operation is not guaranteed. Meanwhile, morale in what is a people business may suffer and vultures will hover over areas perceived to be for the chop. Citigroup must also keep Nikko Cordial’s stock exchange listing, exacting a financial and regulatory cost. Finally, on the assumption that Citigroup is going to create value from the deal, it must now see 39 per cent of that seep away to minorities.

Vanity not-quite-Fair

Bob Baer's feature in the April 2007 Vanity Fair -- "Iraq's Mercenary King" -- focuses on Tim Spicer. He is the head of Aegis Defence Services, a British Private Security Company. And a competitor of one of my holdings, ArmorGroup International (ARG/LN or AMGPF/OTC). ArmorGroup even gets mentioned by Baer:

The current deputy director of the C.I.A., Steve Kappes, came from ArmorGroup, a private military company that has security contracts in Iraq. Before Kappes was at ArmorGroup, he was at the C.I.A. Cofer Black, a former counterterrorism chief at the C.I.A. and then the coordinator for counterterrorism at the State Department, with ambassadorial rank, left to become the vice-chairman of Blackwater, which does much of its business in Iraq. The pieces all fit a little too snugly.

That last line is typical of the language Baer peppers the article with. Which leaves me feeling the article is a little too smug at times. And that's apart from the fact the heavy use of the loaded term "mercenary" is inaccurate. Baer knows that, but we can be sure most of Vanity Fair's readership doesn't.

Getting back to Tim Spicer, I read his autobiography, An Unorthodox Soldier. It was written in 1999, before Spicer launched Aegis, when he ran an outfit called Sandline International. Since it is pre-9/11, you might think it's outdated. But it's not entirely. The first couple of chapters give a fine overview of the history of private military contractors.

And the last chapter discusses the chaos Spicer perceived happening in the post-Cold War world. Sure, he's making the case for the world needing people like him. Yet I found it somewhat prescient, in light of later events.

Hey, I'm not carrying water for Spicer here. I'm hoping ArmorGroup will whip Aegis' butt in winning contracts, after all. But there's a lot of noise out there to be ignored when investing. And that's especially true for those of us putting money into PSCs.

You see, a lot of people in and out of the press hate the military. They also hate private corporations. And when they see private corporations making money by performing what they see as military-related tasks, they go over the edge. I'm not even including Baer's entertaining article in that group. His piece is downright tame compared to much of the stuff in print covering this topic.

Still Owning Nikko Cordial

I've retained my stake in Nikko Cordial (I hold the ADRs which trade OTC in the US under symbol NIKOY). The latest reports I've seen say approximately 61% of Nikko shares have been tendered to Citigroup. Citi now controls the company, but lacks the two-thirds ownership required to make decisions without regard to minority shareholders.

Why didn't I give up the position? Because I believe that Nikko Cordial will do well over the next several years. I have no idea how the shares will perform in the near term (though more than one report has them trading above Citi's 1700 yen price in Japan on Friday). No one does and you and I shouldn't care. Or we shouldn't if we're long term investors.

What's next?

Either Citi will sweeten the pot a bit to gain more than two-thirds of the outstanding shares. Or the market will gradually value Nikko more over time and we can sell our stake for a better price later. Citigroup obviously believes Nikko is -- or will be -- worth more than 1700 yen or it wouldn't have made the offer. But that's a side note.

I don't know what's going to happen. I do have conviction that Nikko Cordial is a fine investment, and will continue to be with Citigroup calling the shots.

One more thing: Nikko was purchased at the ADR split-adjusted price of $8.64. Bloomberg says the ADRs closed Thursday at $14.00. The stake was established at a great price, which positions the Nikko Cordial holding well for the future.

WallSt.net Audio Interview

I was interviewed by Dennis Olson for WallSt.net yesterday. It was the second episode of their Financial Blog Watch series. We talked about how I got started investing, how ControlledGreed.com got started, various topics regarding stocks and I even got to mention some of the blogs I read regularly.

It was great fun and I appreciate Dennis and the folks at WallSt.net for the opportunity.

Two BCE Articles in The Globe and Mail

Two pieces about BCE (BCE/NYSE) in The Globe and Mail today. The first is about company directors concerns about undermining any bidding war for the company:

Other sources close to BCE said the company's board is concerned that a bulked-up CPP group could discourage other bidders - effectively undermining a bidding war - and lead to the perception of favouritism toward one party.

The sources said some directors are concerned about this perception in light of the role chief executive officer Michael Sabia played in helping recruit two pension funds, including the Caisse, to the CPP group.

"BCE board members are aware that the process seemed to create a favoured bidder, and they want to get rid of that perception," said one investment banker working with a potential buyer. He said lawyers working with BCE are also concerned about ensuring the sale process is open.

The second Globe and Mail piece is by Andrew Willis, and is music to my ears:

So, for the sake of argument, here's the choice that may soon face the BCE board, and the federal Conservatives. BCE may get two offers. Team CPPIB may throw down $41 a share, an offer that comes from a consortium that is 65 per cent domestic investors. A group led by Blackstone then bids $43, but just $1-billion of equity comes from a Canadian investor, though that partner holds the majority of the votes. (Hello, Onex.)

I know who investors are going to endorse; we proved with the Inco sale that cash tops patriotism. And the precedents are clear: Smart financiers are free to structure a way around that 46.7-per-cent cap. What's more Canadian than a dual-share class company? If the past is any predictor, the bulk of BCE's equity may soon be held by foreign fund managers.

Keep in mind, those dollar amounts he mentions are in Canadian Dollars.

ArmorGroup in the Asia Times

This article on ArmorGroup International (ARG/LN or AMGPF/OTC) in the Asia Times is accurate, IMHO. The exception is when the author writes about the company's stock price and valuation:

From a financial viewpoint, ArmorGroup can be seen as a good deal. At the time of the contract announcement its stock was the equivalent of $1.03 per share, just below the net tangible asset value of $1.06 per share, and well below the stated book value of $1.47. Its dividend yield is more than 4%.

That's wrong. The deal the author refers to is an extension of a contract in Afghanistan announced earlier this month. The stock price, net tangible asset value, stated book value and dividend yield mentioned were true when I recommended the stock last September. But they have not been the case for all of 2007, much less at the time of the contract announcement.

Toyota Passing GM

Toyota Motor's surpassing General Motors (GM/NYSE) in first-quarter sales of cars and trucks, threatening GM's 76-year reign as the world's biggest automaker, was no surprise. And not they key for those of us long GM shares. Especially those of us who have come aboard as shareholders over the past couple of years.

What is the key? Bloomberg quotes an analyst in this report:

"It's not about market share and it's not about world domination, it's about making a profit,'' Rebecca Lindland, an analyst at Lexington, Massachusetts-based Global Insight, said in an interview. "It's a difficult pill to swallow, but GM really needs to get their house in order and their sales are going to have to drop to do that.''

GM stock has done all right lately, staying above $30 for the most part. For it to continue doing well, and eventually be the profitable investment I anticipate, the company needs to be profitable. Not the world's biggest auto maker.

Citiggroup May Fail to get Full Control of Nikko Cordial

Citi's attempt to takeover Nikko Cordial (NIKOY/OTC) remains fluid. Bloomberg reports that Citi may fail to gain full control of the company:

Investors controlling at least 28 percent of Nikko are seeking a better price, up from 21 percent two weeks ago. Citigroup raised its bid 26 percent to 1,700 yen ($14) a share in March and has ruled out another increase.

Failure to win more than two-thirds of Nikko's equity would leave the New York-based bank unable to exercise full power over actions such as mergers or the sale of a unit. That could force the U.S. bank to seek compromises over major decisions with investors who resisted its offer. The bid expires April 26.

"The freedom of management will be constrained,'' said Kenji Mizutani, professor of economics and business at Chukyo University in Nagoya and a former executive director at Mitsubishi UFJ Financial Group Inc. "Lack of absolute control may make it difficult for Citigroup to sell units to recoup some of its investment.''

This a bit further on in the piece:

Adding to Citigroup's difficulties, index-linked funds at Japanese firms such as Nomura Asset Management Co. and Daiwa Asset Management Co. typically don't tender their shares in a takeover bid. Such funds together hold about 8 percent of Nikko.

Managers of domestic index-linked funds tend to keep their holdings in companies that get bought without being delisted to maintain a correlation between index and portfolio performance. In Japan, a single shareholder or group must control more than 75 percent of a company to have it removed from trading.

I'm just posting bits of the article here. Followers of this situation will want to read the whole report. But note this piece of interesting speculation at the end:

Citigroup may complete the purchase even if it fails to win full control, and later try to add to its holding, investor Patrick Lemmens said.                

"Citigroup put a reasonably priced offer on the table,'' said Lemmens, who helps manage $3.5 billion at ABN Amro Asset Management in Amsterdam. "They will take what they can now and buy the remaining stakes later.''