Tuesday, November 17, 2009

Billionaire Validation x 2

Lonely Value had received clear endorsements from 2 billionaires in just the last 24 hours.

Yesterday, Barron's reported on Ron Burkle's $80 million purchase of Barnes & Noble (BKS) shares. Burkle's company, Yucaipa increased its existing BKS stake to 9.8 million shares or 17% of total outstanding shares.

The article asserts that the increased investment has something to do with Barnes & Noble's new e-book reader (Nook). Burkle must be "inspired" by the new device and the invigorated digital strategy. Perhaps. But this analyst thinks it has far more to do with the fundamentals outlined previously in these pages.

In a regulatory filing, the investment group further announced the intention to: "express their view regarding the need for improved corporate governance to the board of directors and the management of the company."

This is a concern expressed by Lonely Value as well. Barnes & Noble is a company with enormous untapped potential. It wouldn't be the first time this happened in a family-controlled public company.

Let's hope Yucaipa is successful in prodding Barnes & Noble and the Riggio's. Our speculation: Burkle will create a greater incentive for BKS to "go private", a possibility previously raised at Lonely Value. This isn't a stretch. The combined holdings of Burkle and Riggio now exceed 50% of the outstanding BKS shares.

Burkle knows value and opportunity when he sees it.

Speaking of which, Carl Icahn reported a 1,000,000 share position in Forest Labs (FRX) in a recent 13F SEC filing. Forest has made three (3) previous appearances on Lonely Value.

See the Forest for its Cash

2009 CEO Letter Award

If a Tree Falls in the Forest...

While the Icahn Capital stake isn't huge (yet?), FRX investors can only hope that he will help unlock the value inherent in Forest Labs.

Carl Icahn got his reputation as a corporate raider by making waves (and money). In the case of Forest, someone needs to shake things up. Cash keeps piling up and share repurchases have not made a dent. Management is intent on holding mountains of cash. Sound familiar?

A recent exchange with the company resulted in this explanation:
Our goal is to double the commercial value of our late-stage product pipeline by 2012 through the addition of new development opportunities, both licensed and acquired as well as for the advancement of our earlier stage pre-proof of concept programs. Capital deployment for the near-term is to have cash available to support our business development opportunities through licensing and small tuck-in acquisitions (in 2007 we purchased Cerexa for just under $500 million).
The leadership of Forest Labs is thus content to ignore the returns afforded by aggressive share repurchases in favor of future (and far less certain) returns from "business development opportunities".

Forest Labs has over $3 billion in cash, NO (zero, zip, nada) DEBT, and a market value of $8.75 billion. This is a company that should generate $1 billion in free cash flow in 2010.

Hey Forest, I have an idea. How about a $3 billion tender offer?

Take a page out of Warner Chilcott's (WCRX) playbook.

If "development opportunities" should come along tomorrow, next week, next year or never, use your free cash and perhaps some debt to fund them. In the meantime, you will have enriched your shareholders by taking advantage of Mr. Market, who is pricing FRX as if it will cease to exist beyond 2011. Educated FRX shareholders know better.

The current capital structure is absurd, but management refuses to address it or even acknowledge it. Instead, they stick to the same old tired (arrogant) party line. We see in the current valuation where this brilliant thinking has led.

It will be harder for my Forest friends to ignore Icahn.

Break out the popcorn!

Disclosure: Author owns BKS, FRX, and WCRX shares.

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