Activist investor who pushes for change discloses big stake in Starbucks

Investor Nelson Peltz has disclosed that he owns 842,000 shares in Starbucks. That news sent Starbucks shares up nearly 3% on Friday. Peltz has been known to push for change at companies he has stakes in. Wendy's, for example, bowed to Peltz's pressure to lower costs and spin off its Tim Hortons chain. (Read the MarketWatch story)

Comments

[otherfoot]

Uh, yeah, and he also forced the sale of Wendy's to the parent of Arby's.

Would you like curly fries with that latte?

hahahahaha

Explains why they've been spending so much on clover/ppr/new machine/etc.

Less cash= less ripe takeover target

[sortawrong]

The article is not really very clear and a bit misleading.

The truth of the matter is Peltz in Trian/Triarc. He bought a stake in Wendy's, then forced Wendys to spin off Tim Hortons a few years back. THEN Peltz bought the rest of Wendys.

He buys a nibble, forces change, then gobbles down the rest like a jamocha shake on a hot summer day.

He drinks your milkshake.

[Jane5]

Sortawrong,

I like your analogy and I want a jamocha shake.

[joe]

Otherfoot...

its more like low stock price = easy entry.

while uncle howie may think starbucks doesnt have any competitors, they certainly now have a shark at the door.

i guarantee howie isnt welcoming this news with open arms

[JMW]

Peltz's presence is the writing on the wall. If Starbucks continues to act like a commodity, Peltz will treat it like one -- he will gobble up more shares as the price declines, and then he will force his values upon the company.

Not strategy, values. That's the key word here. Peltz will make the unit cost of a Starbucks latte cheaper to push up margins, and it will come out of every barista who works there. Once a brand is an established commodity, it doesn't take a genius to buy up shares and then force costs down. Perhaps by integrating it with existing businesses.

After all, Peltz owns several fast food chains. What does his involvement signal but a protracted "merger" of Starbucks with the broader fast food business?

Like I've said before, it's cheaper for McDonald's to make a latte than Starbucks. They have guys flipping burgers, just put an espresso machine next to them. If the Starbucks brand really means "grab and go" as opposed to "third place," then it makes sense that a fast food maven like Peltz can just gobble it up and reduce it to a label on a cup.

Let's hope Schultz has something else in mind. I rather doubt it, though. Just wait until the stock dips more and Peltz is trying to get seats on the board. No amount of Clover will get Starbucks out of that mess.

[truth]

Poker players always look for a 'tell'.

Here's the 'tell' on this issue.

Look at the Seattle P-I and Times. Neither of them are picking up this story. No mention whatsoever. Yet the national press has been all over it all day.

This means that the local press (and insiders) have known about this for awhile, and have made a conscious effort to keep it quiet. It's called an 'embargo'.

Everyone's 'playing' dumb. They were just trying to keep it quiet for as long as possible.

(Of course, now that this dichotomy has been pointed out, the stories will magically appear.)

[Jim Romenesko]

Truth: I'm going to call bullshit on your assertion.

The local press didn't get the story because they don't comb through SEC files the way business websites (ie MarketWatch) do. This will be in both Seattle papers tomorrow.

[truth]

it was on cnbc at 6:30am PT. It's been posted here for HOURS.

They knew. They are just trying to keep it quiet for the big show this week.

[Barry]

Easy there guys, starbucks has 728,000,000 shares, and they only own 800,000. Thats less than 1/10 of 1%, absolutely marginal. They won't be achieving too much. I might have to eat my words, but it seems like a lot of idiots bought into the company today on false beliefs...Maybe they should have gotten a business education before investing

[truth]

You guys are wandering right into my sweet spot.

Yes, 900k shares seem like a little amount. However, if you take a minute and Google "Peltz" and "options", you'll find that he is notorious for buying a small, stalking horse stake in actual shares, but simultaneously buying loads of stock options, which don't have to be reported on the 13k or any other filings.

The share position is just window dressing to keep the regulators off their backs. (It's a permitted strategy, but they don't want to raise unnecessary red flags.)

Take a few minutes to look at the trading volume ever since the annual meeting. Especially in the options.

And remember, every option is a contract for the purchase of 100 shares.

Look at the options. Someone's sitting on 15,000 Jul 20 calls. That's the equivalent of 1.5 million shares.

The Jan 20 calls= 52,000 or 5.2 million shares.

And so on. This is how they work. They use the options to leverage their power.

Lastly, you can call bs on whatever, but there have been rumors about "someone trying to force Howard out" floating around blogs and SSC for months. This is inline with the announcement of Peltz's stake. That document (the 13k) states his activity for the first quarter 2008 only. He's likely been very active in April and early May as the price continued to drop. Just wait until the next filing for the 2nd Q. :)

The only thing that changed yesterday is that we know the rumors are true and we know who that 'someone' is. And he's a shark.

[truth]

And Jim, regarding your "bs call"....

It's not really getting the coverage in today's paper like you expected, is it?

A Seattle icon about to get gobbled up by a shark, and it gets the second item in the business briefs?

They already knew and are sweeping it under the rug.

[StLouieDrip]

Hey there Truth, I don't know enough about trading/stocks to add anything to the discussion. But I wonder why do you think the Seattle media would keep quiet? What's the benefit to the local papers to not write about the story? And would you be willing to explain more about what is an "embargo"?

[Melody]

I'm not savvy about these things, and I'm a tiny shareholder. Would someone explain to me what it means to buy "options" and how does someone like Peltz "buy options." I always thought (perhaps erroneously) that options were what people got who worked at Starbucks.

And if he suddenly bought or owned a much more significant chunk of Starbucks, what would that mean? Would Peltz become the CEO?

Thanks.

[Joe]

they're roughly the same except the options you're thinking of are only made available to starbucks partners.

the options peltz has bought give him the right to buy the stock in the future at today's price. generally you do this if you think the stock price is going up. it also allows you to take a larger position in a company at a later date at a potentially cheaper price, for the very same reason. here is a link to a wiki which explains in detail....
http://www.optiontradingpedia.com/stock_options.htm#what%20are%20stock%20options

the significance of peltz's appearance is primarily because he is an activist investor who generally pounces on weakend stock prices and uses them as leverage to gain entry into the affairs of the whatever company he's aiming for.

this was forseeable...at 15 to 17, Starbucks is weakened and vulnerable to sharks looking to make some money off their misfortune. its not clear yet what peltz's intentions are however its almost certain that howard cannot be happy to see him slipping into the stable. and, if somehow, further down the road, howard manages to lose his company, he will have only himself and ginormous ego to blame...

[truth]

stl: The best analogy I can think of for the embargo is with sports teams. The beat writer that covers the Mariners sees/hears/knows/ all sorts of damaging things during the season, but they don't write it because it would/could limit their access to the team, and generally make doing their job more difficult.

Same is true for business beat writers. Their jobs are much more simple if they maintain a very friendly posture with the companies that are most in the news.

Another reason would be advertising revenue. Papers need all the advertisers they can find/keep.

Mel: 64% of sbux shares are held by institutions. It's not a stretch at all to think that Peltz, with his 1% stake and lots of leveraged options has been working the phones with the institutions (mutual funds/hedge funds/sovereigns) and it trying to get some of these groups to play ball with him. Over the past year, the institutions have lost LOTS of money as sbux shares decline, and they might be more than happy to get out from under their positions.

In fact, I'd bet this has already happened. Peltz doesn't need to buy another share. He just needs to line up the others with big holdings and then threaten to take over the board. It starts to get a little mundane, but essentially the threat (backed up with the ammo of the institutional holders on his side) would force sbux to replace a couple of the board positions with Peltz-chosen board members. These people would do Peltz's bidding and make the changes they deemed necessary (massive layoffs/store closures/etc.)

If sbux didn't give in to the threat and give up some board seats, then Peltz could try to replace the entire board at the next shareholder meeting (this is voted on at each meeting, but is usually just a formality)

This is happening at Yahoo right now. Peltz's buddy Icahn is trying to replace the entire Yahoo board via a shareholder vote. And there's really nothing Yahoo can do to stop it.

Someone sent a missile over the bow of HQ a few months ago, hence the massive spending (clover/ppr/new machines) with no real plan to generate new revenue from it. All spending, no real plan to re-coup the costs in the form of profits. They were just emptying the bank account so they wouldn't be a good take-over candidate.

Options are publicly traded contracts. They trade on the stock market. They are tricky but powerful. I'd suggest googling the term. (I don't like to give stock tips or anything that could be construed as advice. bad juju.)

[truth]

Also, let's be clear.

There is NO evidence Peltz has in fact bought options.

But, based on his past track record that's exactly what he does.

And as Joe put it, Peltz is activist.... a shark. They don't pounce unless they mean to have dinner.

And more importantly, he has a track record of gobbling up food chains.

This isn't happy grampa Warren Buffett. This is a guy who means to wreck havoc and profit from it.

[Melody]

Truth, that's very frightening to read and I really hope you're wrong (no offense).

Do you remember the movie "Pretty Woman"? I know it sounds off topic, but in the movie the job description that Richard Gere described himself as having sounds quite akin to Peltz.

Even when I'm pissed off at Starbucks, I love them. I've had an 18 year relationship with a Siren, and so I want no harm to come to her. It's an emotional thing for me.

By the way, I think that the ownership of the Clover could pay off.

The Mastrena is a totally different story. It will deliver a better quality espresso beverage, but the public won't care. Very few people will be able to tell the difference when you start adding milk & sugar, and it will still be seen as a "push button" machine by the general public. It's a sad thing because it's a nice move for quality, but stands little chance of really doing anything in the way of bringing in more money for Starbucks.

[the future]

the future is here and Uncle Howie is not a happy man. Only thing stopping this train wreak is if he throws himself at the feet of Phillip Morris and takes a hit for the team so Kraft can clean the mess up. Or Pepsi might feel sorry for SBUX, for 10 minutes...... and buy out a hell of a lot of people.

[StLouieDrip]

Truth, thanks for the further explanation. Sorry if this is a dumb question, but are you saying Howard has purposely driven the value of the company lower in order to be less appealing to Peltz? If so, wouldn't that strategy actually make sbux even more appealing to someone who goes after weakened companies? If what you say is true (and much of it does ring true), I also expect Howard has seen this coming for a very, very long time. It would also explain why his latest behavior doesn't really make logical business sense to me, why he seems to be contradicting himself and talking out of both sides of his mouth at once. Sometimes I've even wondered if Howard is intentionally trying to cooperate in the type of takeover like you describe. I agree with Melody that it will be a sad thing to happen, but also I see it as unavoidable at this point. I guess Peltz is better than Howard at playing this particular game?

[Darleen]

If sbux didn't give in to the threat and give up some board seats, then Peltz could try to replace the entire board at the next shareholder meeting (this is voted on at each meeting, but is usually just a formality)

I think the key word here is "try". I do not think Peltz would be able to replace the the entire board. Isn't this done on a vote? I realize some shareholders are not happy with current conditions, however would they rather have a shark on board their ship? I disagree that this is "unavoidable" as saint louie drip says.

[truth]

Darleen- 64% of the shares are held by institutions. If they see the writing on the wall, they'll back whatever plan will make them money. Period. Even if every individual shareholder, like yourself, voted against the board change, the institutions would win out, since they have the majority. All they need is a simple majority.

Plus these guys are billionaires. (Peltz famously owns the most expensive home in the US.) If Howie and others don't buckle, the sharks will just short the heck out of the stock, taking it down to 12 or so, and forcing the other institutions to get behind the new board.

STL: For some reason (lack of better ideas, I'd guess) sbux just piled up cash over the last few years. They stumbled on their plans to expand in China (while everyone else flooded into that market) and only dabbled with the rest of the world.

At the end of 07, sbux had over a half billion cash on hand. And as I've already shown, with just a small investment (900,000 shares at $17/share = $15 million) and lots of leverage, someone can pretty easily take over a company and grab that half billion $ bootie.

So a very typical response would be to spend that cash down as quickly as possible, making the reward for a takeover much less.

http://en.wikipedia.org/wiki/Poison_pill

Look at the evidence. When they bought Clover, they never said "it's costing X and we think we think we can make 10x from new premium drink sales". No tie-in to revenue at all. They just did it.

Same with Mastrena. They committed to buy thousands of new machines costing tens of millions of dollars and never once tied it with revenue. They just did it.

They gave away millions in free drinks after the annual meeting/launch of PPR (somewhere I read it was $100 million in expenses.) They are giving free 'benefits'. They are giving loads of cash to their green non-profit partner. Etc.

They can't throw money out the door fast enough

They are just throwing money out the door as fast as they can, and not once have they said "this program will yield Y% revenue increase" or "that program will contribute Z$ to new sales".

[The Future]

Truth, great points but your "this program will yield Y% revenue increase" or "that program will contribute Z$ to new sales", statement has never really been a Starbucks Formula.

The company hasn't had one ever. Just grow and say Yes and all will be good in the Universe.

Business is business and the institutional investors are pissed!!

[StLouieDrip]

Darleen, as to the "unavoidable" comment, I wrote that because I used to work at a company that was taken over by a shark like Peltz. I didn't really understand it then either, but after being involved in such an intimate way, a lot of what Truth wrote sounds exactly like what happened in my old company. I wrote "unavoidable" because I also agree that Peltz wouldn't be sniffing around (i.e. "pouncing," buying stocks and options[?], getting himself into position to push his agenda) if he wasn't already counting on having his dinner. I suspect he's a few strategic steps ahead of Howard. And Howard is probably trying to play catch-up. Howard has been an absolute wizard at building up sbux, but I doubt he can be as skilled at dissuading a shark who's already in the process of "pouncing".

Okay, that's my critical and pragmatic view of it. But in my heart I hope I'm wrong. For all your sakes I really hope Howard can come up with something miraculous that will make Peltz lose interest and back off.

In any case, this is a very fascinating subject. Thanks, Truth, for the links, and the explanations.

[Melody]

This has got to be the most depressing thread ever at Starbucks Gossip. I think I may cry.

[Darleen]

Me too Melody, me too

[Aaron]

I admit, I am no financial expert. But am I missing something? This is the company that's supposed to save us?:

http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chdet=1210795200000&chddm=87123&q=NYSE:TRY&

[truth]

And people.... If you are a sbux partner AND own a bunch of stock, you had better think twice.

You are betting on this company with your job and your savings.

Diversify, diversify, diversify.

[Jane5]

Truth, thank you for your insight, it is fascinating. You too, Stlouisdrip. I always wondered how 'the big guys' operated. As a customer, all I want is the incredible quality mocha I got in the late 90's that got me addicted. However this situation comes out, I pray enough people on the board love their mocha's as I do.

[StLouieDrip]

@Joe, I've been specifically addressing Truth, but after rereading I realize what you explained about "options," and the link you provided, has also been helpful. Thanks.

But there's something else you wrote has me wondering what you meant by it...

this was forseeable...at 15 to 17, Starbucks is weakened and vulnerable to sharks looking to make some money off their misfortune. its not clear yet what peltz's intentions are however its almost certain that howard cannot be happy to see him slipping into the stable. and, if somehow, further down the road, howard manages to lose his company, he will have only himself and ginormous ego to blame...

I do think it takes a huge ego to run a huge company, but can you say why you think Howard's "ginormous" ego is part of the problem?

And Janes, I totally agree... I just want access to a satisfying cup of Sumatra, but there's certainly a whole lot of other components that are also part of my cuppa.

[Melody]

On the topic of Howard's "ginormous" ego: How many times have we heard him say "Starbucks is a growth company." ??? It's a favorite line of his, I think. Or "Starbucks can still be a growth company."

His desire to maintain a large number of stores - maybe it's a human as guys who want to drive big trucks or fancy cars - is counter productive to maintain a brand that has a sense of "exclusivity" and a "premier" reputation.

The other thing that Howard loves to talk about is that "we have 14,000 (or whatever it is) stores in 44 countries." He said it again when he spoke on Pike Place Roast day at the market. I heard those words come out of his mouth. He likes to brag about Starbucks size. He said it to the ABC nightline reporter who interviewed him on April 1st.

He likes BIG. But big is a painful to Starbucks because it just makes the brand very common, and it's much much harder to control quality and the store level experience.

Perhaps it's not his "ego" but the "size" thing feels like it ties in to "ego" to me.

He IS a great leader though.

Be not afraid of greatness: some are born great, some achieve greatness, and
some have greatness thrust upon 'em.

Onward!

[Darleen]

Melody,
You said a mouth full. I also think it takes some ego to run a billion dollar business successfully. Howard is a leader and I still have genuine faith that he WILL lead this company back. So I mirror your sentiments of "Onward"!!!

[Noodoggy]

Okay....size of a company means nothing in commitment and expertise of quality. That is a myth bred from proliferation of mass culture...from McDonalds to pepsi. The real barrier to quality is lack of commitment to quality. Each store is its own environment. At our store, we time our next batch of coffee to brew 7 minutes before the thirty minutes is up. Why? So that when a customer comes in, they have a choice...of quality. They can have the coffee that's about to expire (only 23 to 30 minutes old) or they can wait the few minutes fro the next cup. Their choice reflects their value placed on quality. I am sure you can guess how many people wait for the fresh pot! The point is...its individual actions and behaviors in a store that make the quality. The size of the company can tremendously help, but there are pros and cons to large sized companies (which i think startbucks is coming to grips with now) as well as independent coffee shops. I think Howard's talk about size is more a testament to the fact that until this past Christmas, we relied on basically word of mouth (and limited NYT ads) to grow to a multinational company that actually makes the news...and all we do is serve coffee...one cup at a time...one smile at a time...and above all...one connection at a time....
we are human and to be human is to desire connection

[truth]

Shark watch:

Someone bought 10,334 Jan 2010 call options today. If exercised, that's over a million shares.

They are drinking your jamocha shake, people.

Diversify!

[motohead]

people the whole enchilade has changed.

wall street is gonna take over this deal. mr. peltz is the staking horse (shark for the non stockholders). (google peltz, if you don't know him).

just imagine howard , a yr. ago had worth a $billion(in sbux stock, excluding personal weath over 20 years ), now about $325,000.
think he might be a little edggy (decaf).

wall street institutions control about 60 % of this company.imagine their size losses.who do you think they will line up behing a proxy vote ? what makes me sad is the clash and the loss of the culture,due to the profits,say goodbye to benefits and all sorts of things, but never forget how great howard was !!!!!

[cupajoe]

Starbucks buys the rights to 40 Canadian stores that were licensed. Is this one of managements decisions to spend money, reduce the amount of cash on hand, and not look as desirable Nelson Peltz? Peltz has interests in Wendys, Tiffanys, H.J. Heinz, just to name a few. He buys restaurant stocks that are great companies but are undervalued and lacking direction. He forces someone on his team to get a seat on the board. He may change the way Starbucks is currently, but if he can MAKE costs get cut that need to be cut, then shareholders value will go up. Isn't that why we have shares in this company?

[StLouieDrip]

http://thedripp.blogspot.com/2008/05/starbucks-vs-nelson-peltz-round-1.html

I found this ^ blogger's take on it to be interesting. He thinks Peltz is adopting a new and challenging strategy by going after a company with such an involved CEO as Schultz. Is Peltz really ready to take on Howard? the persevering Howard who undoubtedly will not let go of his company without a fierce fight? (hmm, maybe Peltz is encouraged by Icahn's latest dealings with Yahoo?) And maybe that's why Howard looks so tired? because he's playing catch-up, studying night and day on how to best thwart Peltz?

Okay, so I don't like how sbux has changed, and yeah, I'm still on boycott, but I'm personally rooting for Howard to win this one. Good luck to you all.

But why did revealing Peltz's involvement result in a 6% jump? Is that a sign that some think his involvement is a positive thing?

Also... I read where another company (Maverick Capital) disclosed Mar 31 that it owns 12.5 million shares of sbux stock. It seems MC typically operates differently from Peltz. But still, shouldn't Howard be worried about them too?

[truth]

Seems to me the blogger is about 3 steps behind. These guys don't move in unless they know they can take control if they want to. Most likely Peltz was on the phone to the institutions who own 64% of the shares and got things all lined up beforehand.

If anything, Peltz seized control in early 08, and was behind the move to bring Howard back. (Although he was never gone, which most people seem to forget.) The trading spikes in early Jan and March support this.

Also, with the huge option positions, mainly at the 17.50 and 20 strikes, speculators are guessing that Peltz will force a buyout somewhere above that.

THAT is what has driven the stock price up... the accumulation of shares by the guys called 'arbitrageurs' who see a takeover target (and a takeover artist) and bet that the company will get bought, and they profit from the quick run-up in price from 17 to the low 20s.

The street thinks this thing gets taken out around 22. Not exactly the stuff of growth stocks.

Just look at the trading action and volume over the past month. It's just crazy. That just shows that the 'arbs' and the 'shorts' and the 'sharks' are all piling in.

Oh, and if Peltz walks away.... this is a $12 stock. Because all the others will flush out too. Millions of shares and options will just flood the market.

So be careful what you ask for regarding Peltz and Schultz.

No... another bad quarter.... flat sales, rising milk prices, giant one-time expenses (clover/PPR/etc) and this is gonna get interesting.

[THE FUTURE]

Howard's comments of the past: Starbucks is recession proof...!
No business is completely recession proof and the fact that Howard was saying this until the mid Fall of 2007 goes to show how out of touch he had become..

Now all Howard can say is how much the economy is affecting the business and we all must be patient. Don't forget your "Total Pay" benefits...
I have lost more than Howard in this deal as my percentage is larger due to my pay being so low.

Passionate the man is but passion is not going to win this game.