Pirate Capital Makes A $124 Million Wager

When you’re a hot hand on Wall Street, investors invariably bombard you with the same question: “What do you like?”I put that question to one of the hottest hands around – 39-year-old Tom Hudson, skipper of Pirate Capital, a Norwalk, Conn., hedge fund that boasts a torrid 32% annual return in the three years it has been in business and is up about 10.5% so far this year.An activist money manager who focuses on event-driven investments, notably the potential sale of a company, divestiture of its assets, or a restructuring, Mr. Hudson’s modus operandi, he explains, is to invest in strong companies that other firms are clamoring for.Our hot hand, who manages $800 million of assets, has two favorites, both Big Board stocks, neither a household name. Factoring in Pirate Capital’s combined stock purchases in the two companies, he is, in effect, betting about $124 million that he can provoke the board of each firm to take action designed to increase the share price.One is Walter Industries ($40.60), a company with a seemingly odd mix of businesses that racked up 2004 sales of $1.2 billion. It provides affordable housing (homes costing less than $100,000) and related financing, and also manufactures iron pipe for hydrants and produces coal and gas from mines in Alabama.The company’s shares are by no means undiscovered, having already more than tripled from their 52-week low of $14.60 and rising about 20% from their 2004 close of $33.73.Mr. Hudson is putting his money where his mouth is, having acquired a 6.5% stake in Walter, or 2.5 million shares, at an average price of about $39 a share.Likewise, he has already met with Walter’s top management and made his pitch for the company to dispose of its assets. What action, if any, it might take is anybody’s guess, but some say his push for the divestiture of assets – a move Walter has made in the past – is a probable course of action, especially because there are little or no synergies between the various businesses.Come what may, though, Pirate Capital is not about to sit on the sidelines as a passive investor. Walter has an annual meeting in May, and the hedge fund has already said it plans to seek control of the board.Okay, let’s say the company does sell off assets. What does it mean for the company’s shares?In that event, Mr. Hudson figures Walter is easily worth more than $75 a share, which represents a whopping gain of more than 80% from current levels.He’s not alone in that buoyant view. A couple of recent research reports from Davenport & Company and Avondale Partners also put a $75 valuation on the shares. Davenport, which rates the stock a strong buy, views the shares as “inexpensive and significantly undervalued at current levels.” In fact, the stock trades below what it believes the natural resources segment itself is worth (an estimated $50 a share) on a stand-alone basis. Avondale cites another plus – a couple of back-to-back years of 100%-plus earnings gains. Its 2005 estimate is pegged at $2.70 a share, up from $1.14 in 2004, and it projects another jump to $6.50 in 2006.Aside from Walter, Mr. Hudson obviously wants to see a deal on his other favorite, Cornell Companies ($14.36), an operator of adult and juvenile correctional facilities in 15 states that generates 2004 revenues of $291 million. Pirate Capital took control of the board last spring, electing seven out of nine directors, and holds a 15% stake, or roughly two million shares at an average price of $13.The only thing Mr. Hudson would say about Cornell is that “its stock is moving in the right direction – up.” Sources, however, suggest it’s only a matter of time before he will move aggressively to initiate a sale of the company, which could fetch in excess of $20 a share in a buyout. That’s a gain, assuming a sale, of more than 30% from current levels.The fund is also a conspicuous player in announced deals, taking big positions after public disclosures. In this context, its sizable killings include the acquisitions of Neiman-Marcus and Toys ‘R Us, in which it held substantial positions.If Pirate Capital appeals to you as a fund you’d like to invest in, good luck, but know that it’s not cheap. Minimum investment is $2 million.

Pirate Capital Makes A $124 Million Wager

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