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Sep 30, 1996

The Greenway Way

The proxy battles of the activist investors at Greenway, culminating in the reent fight over Woolworth's foot locker

Stock price bottoming out? More bad news on the way? Future looking hopeless? Maybe not... Here comes an activist...

With its stock price haemorrhaging below the $10 mark in early 1996, Woolworth Corp added a surprising twist to its warning issued on January 22 to the effect that its fourth quarter and full year earnings would be below analyst expectations. A couple of days earlier, it had received from Greenway Partners a shareholder proposal to break up the company. And this was the angle taken as the headline for Woolworth's bad-news announcement, thus handily reversing the stock price free-fall.

'Usually we are the ones to announce our shareholder proposals to investors,' comments Alfred Kingsley, senior managing director of Greenway Partners, a $500 mn New York-based investment partnership. 'However, Woolworth figured out a way to use Greenway's strategy to improve its stock price. In the end, our intention was to focus the market on increasing Woolworth valuation. It worked. That keen attention had its impact on our portfolio too.'

It seems as if Greenway cannot lose. The firm buys stocks in companies which it is convinced are undervalued and, whether it applies its 'activist bent' or not, which are expected to achieve higher valuations in the long term. 'If a stock rises by itself, that is just fine with us. Management will never even hear we have a position,' says Kingsley's partner and Greenway managing director Gary Duberstein. 'Nonetheless, we often like to make constructive suggestions about how to enhance shareholder value.'

So far these suggestions have been made politely, usually in the form of shareholder proposals. But Greenway is not one to back away from a proxy fight. After all, Kingsley was Carl Icahn's senior adviser and lieutenant for 28 years, and was personally responsible for scoping out many of the takeover baron's targets for greenmail or acquisition in the wild 1980s. As for Duberstein, he spent eight years as general counsel for Icahn. When Icahn lowered his investment profile in 1993, Kingsley and Duberstein decided to strike out on their own to look for companies that might benefit from a shake-up.

The 1990s are a completely different environment for proxy contests, according to Kingsley. Since the SEC's 1992 rule change, Greenway Partners can communicate with other shareholders without complicated legal advice and paperwork filed with the SEC. That's important, given the reputation Greenway has earned for frugality, which extends from the fees they charge investors to the home-made graphics on their shareholder letters.

Hedge fund managers usually charge investors an annual fee of 1-2 per cent of assets on top of a 20 per cent share of total profits. Kingsley and Duberstein just calculate expenses at the end of each year and divide them among investors. That came to less than a tenth of 1 per cent of the portfolio in 1995. And only if they post a winning year do they take the usual 20 per cent of total profits. Last year the fund won big, up 25 per cent, and it has gained 20 per cent so far in 1996.

As for soliciting votes, Greenway does not retain a proxy solicitor to fight its battles. When it is time to get the message into the mill, out come the scissors, glue and coloured markers to design packets of materials. The colourful letters often attract investor attention while underscoring Greenway's valuation sermon. These letters are sent far and wide to target investors. Only afterwards does the SEC get a copy for its records. 'We get the story to shareholders by letters, mailers and faxes,' says Duberstein. 'We don't have to do a prior review with regulators. Of course, we must be sure that statements are accurate.'

Greenway's first proxy target - US Shoe - came into sight shortly after the firm's formation in 1993. The partners proposed splitting up US Shoe into three companies, footwear, eyeglasses and women's clothing. The resolution received just 25 per cent of the vote at US Shoe's shareholder meeting in 1994, a loss which Greenway credits to a rising stock price. Greenway paid less than $9 when it first started acquiring its 4.9 per cent of US Shoe; the price was $18 by the time of the meeting.

'It's an inverse relationship,' says Kingsley. 'As the price of the stock goes up, the vote in favour of our proposal goes down. The discontent of shareholders depends on how low the stock price is.'

Still, Greenway helped cast the spotlight on US Shoe, attracting the support of other shareholders, including heavyweights like California Public Employees' Retirement System (Calpers). Apparently Greenway also drew attention from would-be acquirers of the various discussions. As bidders for pieces of US Shoe began to surface, Greenway and other shareholders pushed the company to respond to the challenge.

Within a year, Italy's Luxottica Group had paid $28-a-share for the company, leaving Greenway with a $40 mn profit on its holdings. Meanwhile, Luxottica shed the women's apparel unit to Luxottica's controlling shareholders and the shoe division was sold to Nine West.

Greenway achieved similar results by plying its skills on Monarch Machine Tool. When it spied a 1994 proxy resolution by a smaller Monarch shareholder to 'maximise shareholder value', Kingsley called the shareholder in question with a pledge of support. 'We asked him if he was campaigning and he was not. So we decided to campaign for him,' he reports. 'As a result we were able to win over 40 per cent of the vote.'

Greenway filed the same proposal in 1995. This time the proxy was pre-empted by Monarch. The company decided to do what Greenway demanded, and appointed Lehman Brothers as adviser.

Meanwhile, in October 1994 Perry Drug Stores was notified of a Greenway resolution to sell out to a larger competitor. A couple of months later, with the proposal still under wraps, Perry announced its acquisition by Rite Aid at a 44 per cent premium to its stock price. 'I guess they took our advice,' concludes a satisfied Kingsley.

At any time, Greenway Partners might have 20 companies in its $500 mn stock portfolio, though not all of them are candidates for the special spin-off or sell-off treatment. In 1994 the fund took a handsome profit on a large position in IBM which was purchased when the price was in the 40s, just before Louis Gerstner arrived to revamp the company. And it took a nice windfall from its nearly 5 pe cent stake in Comp USA, selling out at triple the price at which it invested in the computer retailer.

As the 1996 proxy season entered into full swing, Greenway Partners was starring in two highly visible contests. At Unisys Corp the firm launched a proposal to split the company into three parts - computer systems, system maintenance and information services. Meanwhile, Woolworth Corp was pressured by Greenway to spin off its athletic footwear division, Foot Locker.

'Spinning off assets is not the same as pulling a rabbit out of a hat,' Kingsley insists. 'It is not new or revolutionary. Spin-offs have become a much admired and accepted practice. AT&T is doing it, ITT did it and Sears Roebuck did it. Everyone is doing it. It's not financial engineering, it is smart business,' he asserts.

Unisys already had a good deal to worry about when Greenway came along. The company was heading into its fifth restructuring in seven years, while revenues had shrunk from over $10 bn to around $6.2 bn during the same period. What Greenway proposed was not totally unfamiliar to Unisys management. Company strategists had already come up with a restructuring plan to separate the units several months earlier; and senior management was looking at the various opportunities available. 'The company had already done the restructuring on paper,' notes Kingsley. 'We thought they ought to do it for real.'

In typical rapid-fire fashion, Greenway sent three aggressive letters to Unisys shareholders between March 8 and the April 25 Unisys annual meeting. They included such helpful and artful exhibits as a chart entitled Unisys: The Incredible Shrinking Company; a Wall Street Journal article about Premark executive Warren Batts entitled Confessions of a Corporate-Spinoff Junkie; and explicit instructions on where to put an ''X on the Unisys proxy card.

Unisys CEO James Unruh was besieged by Greenway and other angry shareholders at the meeting, but the shareholder proposal was lost. Still, a 35 per cent share of the vote was a respectable show of support, and over 50 per cent of employee stockholders supported the breakup idea.

Kingsley notes that the relatively high vote was a reflection of the company's troubled stock price. And as Unisys battles to stop its slide, Greenway remains a close spectator, ready and eager for more action if the opportunity arises in the coming year.

In the case of Woolworth, Greenway did not have to wait long to join the fray after the company spilled its news in January. One week after the company's earnings release, Greenway filed its 13-D signifying its ownership of 6 per cent of Woolworth stock and including its proposal to spin off Foot Locker. Then Kingsley and Duberstein began gearing up to get the message out.

'We believe Foot Locker is worth more than the whole price of Woolworth stock,' states Kingsley. 'Here is a unit that does around 20 per cent of Nike's business in the US, has the lion's share of the lucrative market for sneakers that cost over $75 a pair, and an international division growing by leaps and bounds. Foot Locker is a phenomenal $3.5 bn company with 3,500 stores. It should be operating on its own.'

Woolworth waited until April before officially turning down the Greenway proposal, setting the scene for a proxy fight. After a board meeting, Woolworth announced that its directors advised against Greenway's proposal because a spinoff of the athletic business would leave the company without any profits. The Foot Locker division registered profits of $305 mn last year, but Woolworth Corp as a whole lost $164 mn after tax because of losses on other operations and a one-time accounting charge.

Woolworth management labelled the Greenway proposal 'impractical' and said it involved a high level of risk. If a profitable Foot Locker was spun off, the loss-making leftovers would face a negative reaction from vendors and lessors; the company would have difficulty in meeting its financial needs; and the firm would suffer from diminished access to capital markets.

Kingsley was not surprised at the response of Woolworth. 'We figured they would be against the proposal,' he says. 'That is just the way most companies are. If they didn't invent the idea then they don't like it.' Greenway lost no time in starting to call shareholders and prepare faxes, letters and its inimitable and colourful cut-outs.

'Woolworth has a number of hidden assets that shareholders do not see,' claims Kingsley. 'For instance, there is a German retail division with around $2 bn in revenue and valuable real estate, and a number of other units that add up to much higher value than the current stock price of $21. In fact, before we came along, most people did not know Foot Locker was part of Woolworth.'

Woolworth management, which declined to comment for this article, reportedly hit the road in force to convince shareholders that Greenway was dead wrong. 'Normally roadshows are for financings,' says Kingsley. 'Still, they used a similar strategy to that pursued by US Shoe in 1994. In an effort to convince major shareholders to vote against us, Woolworth sent out top managers to explain their corporate plan and comment on the new strategy. At least such roadshows get management out of their ivory towers and among shareholders to tell them what's going on.'

As Greenway monitored the feedback from its campaign, it became clear that many Woolworth shareholders agreed with the dissidents' basic arguments. But many wanted to give Woolworth's new management a chance to work by supporting the company. Even Greenway could not deny the quality of management, and openly praised CEO Roger Farah, a top retailer brought in by Woolworth's board last year in the hope he would turn the company around. Still, as Greenway emphasised in its proposal, shareholders were getting impatient.

Greenway once again took an aggressive approach to shareholder letters and fired off three between May 6 and June 4 in preparation for the June 13 annual meeting. Woolworth parried with a single shareholder letter on May 20. In glowing terms Woolworth outlined its 'multi-faceted turn-around strategy' and lambasted the 'financial engineering' of Greenway. 'We believe the spin-off proposal has little merit. It is costly, high-risk and ignores the realities of what it takes to operate our businesses and build lasting shareholder value,' the letter read.

Bolstering Woolworth's defence against Greenway were improved first quarter 1996 results. The company was able to show off a reduced loss of $37 mn, compared to $133 mn lost in the first quarter of 1995. Debt had been reduced by $680 mn, or 44 per cent, from last year's levels, and interest expense had been lowered 38 per cent from 1995 levels. Woolworth called it 'a clear sign our turn-around strategy is working.'

Kingsley and Duberstein knew they would lose the vote even before the annual meeting. After all, Woolworth's stock price had risen from below $10 in January to around $20, and the Greenway law of inverse proportions was expected to hold. Greenway and Woolworth were 'friendly adversaries' at the meeting, according to Duberstein, and there was no acrimony as he and Kingsley presented their proposal. Nor were voices raised when Greenway asked about the possible reinstatement of Woolworth's dividend, which was withdrawn last year after an uninterrupted string of over 80 years.

On the face of it, it was a crushing defeat for Greenway Partners. Some 85 per cent of Woolworth shares were voted against the dissident proposal. In practical terms, however, Greenway came out the winner with a 100 per cent gain on its Woolworth portfolio position since launching the proxy proposal. After all, it was only an advisory vote. 'Even if we had won the vote, Woolworth would receive a second bite at the apple,' concludes Kingsley. 'I do not understand why more big institutions do not vote for proxy resolutions like this - it's no-risk.'

The next step in Greenway Partners' proxy strategy is to see how Woolworth management fares with its new turnaround plan. It is too early to tell whether the fund y will bring up the same proxy proposal next year. 'The Woolworth situation is still on everyone's mind,' confirms Kingsley .

And you can bet that if Greenway can push the Woolworth stock price up again, the scissors will come out of the drawer to launch another battle.