The Morning Brief: Starboard Value Targets Advance Auto Parts

Activist hedge fund firm Starboard Value has unveiled its newest target. But once again investors had no way of seeing this one coming. The New York firm, headed by Jeffrey Smith, disclosed it owns 3.7 percent of Advance Auto Parts, the auto parts and service company. In a publicly disclosed letter to Advance chief executive officer Darren Jackson and the board of directors, Smith asserts that Advance’s stock could be worth more than $350 if the company implements “a comprehensive margin improvement program, together with additional value creation opportunities, including substantial working capital improvements,” and other measures. The stock could top $400 if the company brings its margins more in line with one of its top peers, O’Reilly Automotive, Smith says.

In its 23-page presentation, also made public, Starboard calls on Advance to implement the old favorite activist standby: Using cash flow to support “a large recurring dividend” or share buyback program. Once again, there was no way for investors to anticipate this move since the hedge fund did not disclose a stake in the company as of the end of the second quarter. We have chronicled several times recently that activist hedge funds are increasingly making moves on companies in which they did not previously disclose a stake in recent regulatory filings. Shares of Advance closed up more than 11 percent at $189.53.

Meanwhile, on Tuesday Starboard fired off a letter to the chairman and chief executive officer of Media General informing them it opposes the company’s plan to acquire Meredith Corporation, calling the deal “value destructive.”

Starboard, which said it built its 4.5 percent stake following the acquisition announcement, asserts in the letter that if the deal is terminated, Media General stand-alone “is significantly undervalued with opportunities to create substantial value” through a restructuring plan. Starboard also says there is a 350- to 500-basis-point operating margin disparity between the company and its top performing peers. “Further, with consolidation of the broadcast industry well underway, we felt that there should be a far more synergistic and value accretive partner for Media General had the company fully explored all available strategic alternatives.”

Starboard is irked that Media General refused to consider or negotiate an unsolicited acquisition offer from Nexstar, calling it “a potential value-maximizing transaction,” while at the same time proceeding with the Meredith deal, which it calls “an unconventional, value-destructive acquisition.”

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Baxter International and activist hedge fund Third Point announced a compromise agreement. Under the deal, the medical products provider agreed to immediately appoint Third Point partner Munib Islam to its board of directors and add another, mutually agreed upon independent director “in the near-term.” Islam will serve on the board’s executive search working group and audit committee. Baxter is expanding its board to 12 members to make room for the two new directors.

Islam leads New York-based Third Point’s equity research and sits on its risk committee. Before joining Third Point, Islam worked at Highbridge Capital, serving as a managing director and portfolio manager of the Highbridge European Value Equities fund.

“Following the spinoff of Baxalta, Baxter has a unique opportunity to increase both its margins and its market share in the growing, innovative medical products industry,” said Islam in a press release.

Baxter and Third Point, led by Daniel Loeb, also entered into the usual standstill agreement. Baxter also agreed to move from a staggered board of directors to annual elections of directors beginning at the 2016 annual meeting.

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Tiger Global Management is one of several investors to participate in the latest, $325 million funding round for Avant, the privately-held online lender. The New York firm has previously participated in several funding rounds for the company. Chicago-based Balyasny Asset Management was also one of the investors in the latest funding round. Avant is now worth more than $1 billion, thus joining the unofficial club known as unicorns, according to Fortune.

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Edward Lampert personally bought more than 460,000 shares of Lands’ End in the open market for a little less than $27 per share. Altogether he owns 9.24 million shares. Combined with his Bay Harbor, Florida-based ESL Partners hedge funds, Lampert now controls 49.9 percent of the total shares of the retailer that was earlier spun off from Sears Holdings.

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