Wednesday, February 29, 2012

What's Ken Heebner Investing in Now?

Seeking Alpha has a post going over some of Heebner's current top picks. Worth checking out, even if (like me) you think investing in financials like Citigroup is madness.

You Can't Blame David Einhorn

As the recently released transcript of David Einhorn talking to the CEO of Punch makes clear, David Einhorn was right to sell out of the company. Here's an excerpt of the phone call:

PUNCH CEO: Well, I -- I think -- I -- I think the market sort of dictates this. I don’t think it’s a matter for the market to dictate that. We -- our view is simple, that is, that, you know, we have to make sure that we can preserve a sensible headroom to the covenant from a securitisation and -- and take out the convertible as the -- the maximum and minimum requirement of any discussion. But there’s absolutely -- if you go back over the history, and I know -- I -- and I -- and I perfectly respect that you’ve not been involved from the beginning, but when we originally floated the company, we did an initial public offering of 116 million pounds. We have only done since that time --, that’s 161 million pounds. We have only done, since that time, 175 million pounds [inaudible]. So, to be absolutely clear, I don’t -- I don’t look at the business from an equity perspective and if -- you know, and it’s not my intention to over-equitise this business whatsoever. The transactions that we’ve done, for example, we’ve shown, pretty substantially dispassion in what we’ve sold to ensure that we maximise value on the debt and, so this -- so it’s merely about making sure that -- and we can turn around to the shareholders and say, “Actually, anything that we do is sufficient to give ourselves a – headroom for a considerable period of time into the future and also addresses the convertible”. That’s the maximum and that would be the minimum that would be worth considering.

DAVID EINHORN: Mm hmm. So, would you -- as you pencil that out, what do those amounts turn out to be?

ANDREW OSBORNE: Something like 350 sterling.

DAVID EINHORN: 350 million sterling?

ANDREW OSBORNE: If you were -- if you were to roughly sort of work on the basis that you kinda took out the -- the converts, and that’s something that gives you, say, 10 percent headroom in within both of the covenants, filed covenants.

DAVID EINHORN: Wow, wow. That would be shockingly horrifying from my perspective. Can you sell half the company just at a buck and a half -- a Euro -- a pound and half? Oh, no.

ANDREW OSBORNE: So those proceeds are applied to buying back debt at say 60 in the pound and remember any --

DAVID EINHORN: Who cares -- --

PUNCH CEO: [inaudible].

DAVID EINHORN: -- who cares, who cares, after a year of going through this, now we’re going to dilute ourselves like this. Oh, no.

ANDREW OSBORNE: Why do you get diluted?

DAVID EINHORN: Because you doubled the share capital almost.

PUNCH CFO: Yeah, but [overspeaking]...
Consider what Einhorn just heard. He just heard the CEO of a company he owns a large amount of equity in tell him that he doesn't view the business from the perspective of an equity holder. Later on, the CEO doesn't even appear to understand how nearly doubling the share count will dilute current equity-holders.

I'd sell as many shares as I could after that conversation, assuming I owned any. To the point, however, Einhorn has no duty to other shareholders to not sell shares of a company when he learns something such as this affecting Greenlight's investment.

The only person in a fiduciary position here is that CEO. You can blame him for being an idiot many times over. But you can't blame Einhorn--or at least shouldn't.