Highlights Of the Einhorn-Punch Call

If you have no idea what the “Einhorn-Punch call” is, please read this post as background.   Cliff notes:  Greenlight Capital’s David Einhorn had a conference call with his Merrill Lynch Broker, Andrew Osborne, and the CEO of Punch Taverns, where Greenlight was the largest shareholder.   During the call, some information about a potential offering of shares was disclosed, and Einhorn proceeded to sell a chunk of his stake before the offering.   Einhorn was fined by the FSA, as was Osborne.

This morning, courtesy of FT Alphaville, we find the actual transcript of the call in question, included in the FSA’s ruling against Andrew Osborne.    I found a few sections particularly interesting.

First, a simple piece of business insight from Einhorn, as the CEO is talking about the market reaction to the stock price.  Einhorn tells him:

“my advice to you is, don’t let the market dictate to you. You figure out what you think it’s worth, and then use the market as a opportunity to create value, which is something that I think you’ve been doing instinctively, if not explicitly, on — on the debt side of the balance sheet, and — and actually with some of the asset sales. You’re letting the market tell you what the opportunity is and taking advantage of it. So, why — why throw that aside for the purpose of — of figuring out what to do about the equity.”

This reminded me of an old Steve Wynn quote which I can’t find right now, where he basically said that if the market was willing to overpay for his stock, he’d sell them more, and if they were undervaluing it, he’d buy it back.   Take advantage of what the market is doing – use it to create value.

Einhorn and the Punch CEO come back to this topic a few pages later, as Einhorn presses him again on what he thinks the company equity is actually worth.

Punch CEO:  “But at the same time, I just — you know, I’m not — I’m not setting a market price for the — for the equity. I’m just running the business. I’m actually, frankly, not looking at the equity price; I’m looking at it from the point of view of maximising the value for shareholders, long-term.”

Einhorn: “Right. Well, I think its fine to run the business not looking at the equity price, except when you’re considering doing a transaction relating to the equity. Then — then — then it’s — then you can’t run the business without considering the equity price. When you’re doing it — when you’re transacting in the equity you have to think about the equity price.”

The entire call is a little dance between Einhorn, Punch, and Osborne, where Einhorn gets the information he wants while speaking in hypotheticals or generalities.   Sometimes he didn’t even beat around the bush:

Einhorn: “Mm hmm. So — so how much equity do you think you need to raise to protect the situation?”

The Punch CEO responds with a rambling, vague answer, and then we get:

Andrew Osborne: “Something like 350 sterling.”

Einhorn basically freaks out at this point, emphasis mine:

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.”

At this point, I have a feeling that Einhorn is turning to his trader, and mouthing SELL SELL SELL while making the hand signal for SELLLLLLLL.

After some discussion about the equity issuance, they come to this (emphasis mine):

Einhorn:  “Look, you know, if you think that the company is gonna default on the debt and go — become worthless, of course you should sell equity. Not only that, we should sell our equity and — because then the equity just isn’t gonna do so well. Even if you raise equity, you know, it – it unwinds so many of the things that we’ve been believing for the last year and a half, we will need to reassess. And that’s unfortunate because I’ve been feeling very good about this investment.”

translation:  I am going to sell my stock – that’s what “we will need to reassess” means.

Punch CEO: “Yeah, I mean, I am — to make it quite clear, you know, and we’re — you know, I’m the largest private shareholder in the business and I’m very, very clear in terms of my responsibility –“

Einhorn:  “No, I’m pretty sure — I’m pretty sure I’m the largest private shareholder.”

Zzzzing!  He might as well have said DYKWTFIA ?!!??!!?  “Don’t tell me you’re the largest shareholder, muthaf*cka – I AM THE LARGEST SHAREHOLDER”

Punch CEO: “Well, I wouldn’t — got it, sorry. I have got something like Greenlight as any financial institution rather than — rather than an individual, but, I mean, given that your name is ascribed to — to the holding collectively, I will accept that.”

Then the CEO gets back to the NDA issue:

“Happy to have a more detailed conversation with you about some of those — those issues, but it — it is not possible to do that without having to — having to require — having to have you sign an NDA.”

A few pages later, Einhorn sums it all up, emphasis mine:

“Of course. So, if you’re — if you’re now — look I mean the thing is that we’re not gonna make this decision, you’re gonna make this decision. You guys are the managers, you guys are in charge of the company; we’re shareholders, and we prefer to be passive shareholders and not run the company.  If we wanted to run the company, we should be doing something different. We want to run our company, not your company.

If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done — signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the — you know what’s going on here. And — and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. Its’ — it’s — it — it really is some — it really is okay, it’s not what we’re looking for, and I’m not trying to browbeat you into doing something that’s going to bankrupt the company because there’s a lot of reasons the company shouldn’t want to go bankrupt.”

Just in case there was any uncertainty that Einhorn was talking about selling, he made it quite clear: “you will continue on even if we don’t continue on with you.”

Then they get into more discussion about signing an NDA to get more details – which his kinda ironic, because Einhorn’s mind seems pretty much made up.  If the company needs to sell equity, then he doesn’t want to own the stock…  But he could use one more piece of information, and he promptly extracts it:

Einhorn: “…I — I am uncomfortable with an NDA that is going to, you know, restrict our ability to, you know, to transact.”

then:

Osborne: “We can give you a timeframe.”

Einhorn: “So, what would — what — what would that be?”

Osborne: “Well, within less than a, kind of a week.”

Einhorn: “Within a week? Yeah, we can [overspeaking] we could probably do something with –“

At this point, I’m guessing Einhorn  has his hand over his mouthpiece, and is yelling at his trader like this:

 

 

They then go back and forth about if it’s a done deal or not, and what other shareholders are thinking, before Einhorn concludes:

“Oh, I see. All right, look, if it’s a question of – let us – let us think this through. Let us — let us — let us think this through whether it makes sense to sign an NDA or not. I’m — I’m not sure that it does.”

The call ends shortly after that.

Interestingly FT Alphaville has a comment from Andrew Osborne on the FSA ruling, which includes the quote:

“The FSA is clear that not one single piece of information I disclosed constituted inside information. The FSA accepts that I did nothing deliberate, dishonest or reckless and at worst this was an error of judgement.”

Again, I am not a lawyer, and we’ve had some informative “inside information” threads before on this blog, but I’m shocked that the key pieces of information:

1: we are considering an equity offering of 350MM GBP, and

2) we are talking about a timeframe of less than a week

could possibly not be considered inside information.   In fact, the FSA ruling states “In providing information about the Transaction to Greenlight during the Punch Call, Mr Osborne engaged in market abuse by improperly disclosing inside information.”   Which directly contradicts Osborne’s quote.

related: Greenlight, Punch and Insider Trading, or Not

FT Alphaville:  The Punch Call

FSA: Andew Osborne Final Notice

-KD

 

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