Atlantic’s Roepers Needs Allies at Owens-Illinois

Atlantic Investment Management may be tilting at windmills in going after the glassmaker.


A hedge fund that takes activist positions from time to time has disclosed a 5.1 percent stake in Owens-Illinois, maker of glass containers. But the fund will likely need help convincing management to take actions that are friendlier to shareholders. Atlantic Investment Management, founded by Alexander Roepers, said in a regulatory filing it recently boosted its stake to 8.4 million shares, its recent purchases made from August 24 through October 11 for between $16.50 and $19 per share. The stock closed around the time of the filing at $16.64.

The purchases were made on behalf of AJR International fund, Cambrian Fund, and Managed Accounts.

In the SEC filing, Atlantic said it continues to hold the shares for investment purposes. However, it did stress it is in “active discussions” with the company’s management regarding unspecified actions which could boost shareholder value. It also said it may hold discussions with other parties who might “engage in shareholder value enhancing activities.”

Who is Roepers? He founded Atlantic in 1988 as a long-only manager. But in February 1993, he launched AJR International, an offshore hedge fund. The following year he created Quest Capital Partners, LP, a domestic version of the fund. In 1996, he launched Cambrian Fund Ltd. and its domestic equivalent, Cambrian Partners LP.

Roepers specializes in mid-cap value stocks, seeking stocks trading at 7 to 8 times cash flow that are attractive on their own merits as well as to strategic buyers.

As of July 1, Atlantic had $1.7 billion under management, up more than 6 percent from year-end and more than 24 percent from the prior year. So far this year, Roepers has been having a tough time. AJR was down 14.16 percent through September, according to HSBC.

Roepers’ filing is interesting for a couple of reasons. For one thing, although from time to time he takes activist positions, they are still rare. The last time he filed a 13D was in March 2009, when he took a 5.1 percent stake in Joy Global, the world’s largest coal mining machinery-maker. He had bought the stock around $20 and started unloading it once it went above the $30s. In 2006 he had proposed the company institute a $1 billion buyback.

The Owens Illinois stake is fascinating because Roepers sort of telegraphed his punch exactly one year earlier at the Annual Investing Congress in New York. Roepers singled out Owens-Illinois among seven companies that offered “Clear Value,” and served up a detailed case for OI in particular. He said catalysts for the stock included volume recovery and acquisitions, and emerging market growth.

He then reserved a slide presentation for his case for OI.

Roepers told his audience in general he likes to invest in companies with recurring and predictable revenues and cash flows. He also likes to see low insider ownership, since they are more vulnerable to a takeover.

He also laid out his strategy: Build a strong rapport with the CEO and CFO through multiple on‐ site and face‐ to‐ face meetings; craft and discuss win‐ win proposals for management and shareholders, including corporate development, corporate governance, operational restructurings and use of free cash; submit these proposals in writing to the CEO and, as needed, to the Board of Directors; and “as appropriate” broaden the discussion of proposals to include other large shareholders, financial media and private equity group.

Roepers called Owens-Illinois a “fortress with a massive moat.” He explained the world’s largest maker of glass bottles—which currently has a market capitalization of nearly $2.9 billion--has high barriers to entry, stable end markets, proven sustainability of profit, no bad debt issues, no technological obsolescence risk, and a rapidly growing emerging markets exposure, which at the time was already comprising one-third of revenues.

At the time, Roepers figured the stock-- trading at $26.80--was worth $45 per share based on 12 times estimated 2011 cash flow.

Roepers did not return a phone call seeking further comment or an update on his analysis, if there is any.

Interestingly, in August S&P Capital IQ raised its rating on the stock to Hold from Sell, stressing it expects net sales to rise about 10 percent in 2011, driven by organic volume growth and acquisitions in South America and China last year. However, it also was concerned stronger currencies in Australia and New Zealand would continue to impact exports of wine and beer from that region at the same time beer consumption remained soft. It also projected gross margins would fall to about 18.5 percent this year from 20.4 percent in 2010 due to cost inflation in Europe and North America. In fact, S&P cut target price by $2 to $19.

In an interview, S&P analyst Stewart Scharf says he does not see a near term impact from Roepers’ filing. “I’m sure Owens is closely looking at it” and looking at certain strategies, such as a possible poison pill, he says. But Scharf doesn’t expect anything dramatic to materialize from the filing. “I don’t see near term deals,” he told II.

And not only does the company not have a lot of cash to do a stock buyback or issue a one-time special dividend, its debt—two-thirds of capitalization—makes it unlikely it would borrow to reward shareholders in these manners. “The debt is a deterrent to a potential buyer,” Scharf adds.

In fact, the stock fell last Friday despite the news, on an otherwise strong session for the major indices in general.

So obviously Roepers needs to do more to convince the investment community he has the ability to coax management to take actions to boost the stock price. Perhaps another aggressive investor—or potential buyer for the company—will come forward soon.