Relational Investors' Batchelder Joins Home Depot's (HD) Board

Activist fund Relational Investors scores a board seat in its fight with Home Depot. Will it help the stock?

Late Monday, The Home Depot (NYSE: HD) and Relational Investors LLC announced they reached an agreement on corporate governance matters. As part of the agreement, David H. Batchelder, a principal of Relational, will join The Home Depot board of directors on February 22, 2007, and Relational has agreed to drop its proxy contest.

Batchelder also will be appointed to the Leadership Development and Compensation Committee and to the Audit Committee.

Link to past reports on Home Depot and Relational Investors

Relational Investors Submits Proposal for Changes at Home Depot (HD)

In a recent letter sent to Home Depot Inc. (NYSE: HD), disclosed by the company today, 0.64% holder Relational Investors LLC submitted a shareholder proposal to be considered at the company's 2007 Annual Meeting.

In the proposal, Relational Investors requested that the Board of Directors form a committee comprised exclusively of independent directors to evaluate the strategic direction of the Company and the performance of management, with duties to include studying strategic alternatives for the Company, including a major operational restructuring and/or recapitalization, a partial or complete sale or buyout of the Company, and/or a major recomposition of the executive team.

Relational Investors said it is submitting the Proposal because it believes there is opportunity for substantial appreciation in the value of the stock if the proposed changes are made.

In response to the proposal, Home Depot said it will oppose the formation of the committee but will accommodate a meeting with the firm to be arranged shortly after the first of the year.

Home Depot Proxy

Home Depot Press Release

Relational Investors' Whitworth Comments on Home Depot's (HD) Nardelli News

Today's big news is the "resignation" of Bob Nardelli from Home Depot. Relational Investors, LLC Ralph Whitworth gave an interview on CNBC about its stance on the news. Relational recently sent a letter to Home Depot recently requesting changes, which the company disclosed in December. Link

On CNBC, commenting on today's news that Home Depot (NYSE: HD) CEO Bob Nardelli has left, Ralph Whitworth of Relational Investors, LLC, a firm that has been pushing for changes at the home improvement giant, said the news paves the way for strategic changes at the company. Whitworth said the stock is 50% undervalued and said his firm will continue their efforts.

Whitworth said the big questions is what Home Depot is going to do with their enormous cash flow. He said if the company continues on the same path they will continue to pressure the company. Whitworth wants the company to stop spending money on the supply business and instead use the money to buyback stock. He said the company is unlevered and can take on 20%-30% leverage, which they can also use for buybacks.

Whitworth said he was not completely surprised the company changed its support for Nardelli.

Whitworth said his firm has not yet met with the company, but plans to in next few weeks. He said the company needs fresh blood on the board, and said his firm intends to push to nominate their representatives.

NOTE: We will publish the link to the CNBC video when it is updated at CNBC.com

Whitworth's Relational Investors Now Targeting Sprint-Nextel (S)

According to reports from the Wall Street Journal, activist investor Relational Investors has built a stake of about $500 million, or nearly 1%, in Sprint-Nextel (NYSE: S).

The paper said Relational Investors' Ralph Whitworth has been calling for a number of changes at the company, including a pullback in its capital spending and a potential sale of its fiber-optic networking and long-distance operation.

On Tuesday, Relational Investors said they sold their remaining shares in Ceridian Corp. (NYSE: CEN), with Whitworth saying the firm has "bigger fish to fry."

Relational Investors was recently successful in its push to remove Home Depot (NYSE: HD) CEO Bob Nardelli and to split off the HD Supply business. Relational Investors was also provided a seat on Home Depot's board.

Past reports on Relational Investors

Relational Investors To Unum Group (UNM): We're Watching You, Don't Mess Up

In a 13D filing after the close Friday on Unum Group (NYSE: UNM), Relational Investors disclosed a 6.21% stake (21.3 million shares) in the company. This is up from the 14.37 million share stake the firm disclosed for the quarter ended December 31, 2006.

Relational said they believe the shares are undervalued and believe that several major factors have contributed to the Shares’ undervaluation and underperformance including the Company’s history of: (i) repeated, significant, one-time reserve and settlement charges against reported earnings, (ii) poor operating results and (iii) poor forecasting.

Relational believes these deficiencies have deteriorated management's credibility with investors and caused investors to skeptically view management’s turnaround plan.

Relational said recent meetings between its representatives and the Company's executive and operating management have increased their confidence that the Company can achieve its 2007 and 2008 performance targets. On March 5, 2007 Relational presented their views and concerns to a subset of the Company’s board. At this time, Relational believes the board is well informed and properly overseeing management and the strategic direction of the Company. Relational believes the Company’s board will have to consider broad strategic alternatives if the Company's 2007-2008 performance targets are not met or if their achievement becomes unlikely.

Relational Investors has been in the news recently related to is successul push to remove Home Depot (NYSE: HD) CEO Bob Nardelli and to split off the HD Supply business. Relational Investors was provided a seat on Home Depot's board.

Citigroup (C) Execs Fear Activist Funds

According to reports from FT.com this morning, top executives at Citigroup (NYSE: C) are worried the company could become the target of activist hedge funds that could press for a break-up of the company. Activist could also push to force out CEO Chuck Prince.

The report said fears have been heightened following a successful push from The Children's Investment Fund to force a break up of ABN Amro (NYSE: ABN), which has led to a bidding war for the Dutch bank.

Many think Citigroup is too big to become an activist target.

Looking through the list of holders there are no "usual suspects" of the activist hedge fund variety that hold any meaningful position. In the top 25 holders there are two, Morgan Stanley and T.Rowe Price, that have been involved in activist situations recently. Neither are activist funds, but have tried to push for changes. Morgan was looking for changes to the share structure at the New York Times (NYSE: NYT) and T.Rowe Price has opposed mergers at Diversa (Nasdaq: DVSA) and Laureate Education (Nasdaq: LAUR). Morgan Stanley owns a 1.34% stake in Citigroup and T.Rowe Price owns a 0.7% stake.

The top five holders of Citigroup are Barclays (4.44%), Price Alwalled Bin Talal (4.44%), Capital Research and Management (4.41%), AXA (3.49%) and State Street (3.1%).

Ex-CEO of Citigroup Sanford Weill owns 16.6 million shares or 0.34% of Citigroup.

Looking at the ABN situation, The Children's Investment Master Fund only held about 1% of ABN AMRO when they successfully pushed for a break-up at the bank.

Another scenario where a relatively small holder successfully pushed for changes at a large company involved Home Depot (NYSE: HD). Relational Investors owned just 0.64% of Home Depot when they successufully pushed for changes at the home improvement giant, including the ousting of CEO Bob Nardelli. Relational Investors was also awarded a board seat at Home Depot.

History has shown that it does not take an enormous stake in a company to successfully push for changes especially if investor sentiment is with the activist, which with Citigroup appears to be the case. Citigroup executives might be right to fear activists.

Relational Investors Discloses "Confidential" 5.1M Share Stake in Analog Devices (ADI)

In an amended 12/31/06 13F filing, activist investors Relational Investors disclosed a 5.1 million shares stake in Analog Devices Inc. (NYSE: ADI). The firm requested confidential treatment of the position and it was not disclosed with the firm's original 12/31/06 13F which was released on 02/14/07.

Relational maintained its 5.1 million share stake in ADI from 12/31/06 to 03/31/07, according to its new 13F.

In the firm's new 13F for the quarter ended 03/31/07 , Relational Investors also disclosed a new 14.2 million share stake in Sprint-Nextel (NYSE: S) (WSJ report in April noted the position). The firm also closed out its stake in Ceridian (NYSE: CEN).

Relational Investors is best known for its push to remove Home Depot's (NYSE: HD) CEO Bob Nardelli.

Home Depot: An Activist on the Board

An activist on the board.
An activist on the board.
Hi-ho, the dario,
an activist on the board.

After the close, Home Depot (NYSE: HD) announced an astonishing $22.5 billion increase to its share repurchase program. The Company will fund the $22.5 billion share repurchase with the net proceeds from the sale of HD Supply, existing cash on hand and the net proceeds from an anticipated $12 billion issuance of senior unsecured notes.

As you may recall, activist firm Relational Investors was awarded a board seat in February as part of a settlement on corporate governance matters. Relational was instrumental in getting former-CEO Bob Nardelli ousted and getting the company to look at a sale of the supply business, which was also announced yesterday. It can also be safely assumed that they had something to do with the buyback decision.

Here is my guess on how the board meeting went:

Frank (Blake, Chairman): But David (Batchelder from Relational), if we take on this much debt the credit agencies will cut our ratings.

David: F%@^ those pricks. Lever up that damn balance sheet.

Frank: But David, what about our customers? We can spend the money improving service.

David: F@^! the damn customers, shareholders are what matters. The customers can figure it out through trial and error or eventually they will run into what they are looking for walking around the stores.

Other Board Members: Proposal approved. What should we do next David?

Relational Investors' other holdings: ConAgra Foods (NYSE: CAG), Prudential Financial (NYSE: PRU), National Semiconductor (NYSE: NSM), Baxter International Inc. (NYSE: BAX), Sovereign Bancorp (NYSE: SOV), Unum Group (NYSE: UNM), Analog Devices Inc. (NYSE: ADI), and Sprint Nextel (NYSE: S).

Activists Getting Respect and Results - NYT

The New York Times has a interesting article on how activist investors are getting respect and getting results. Link

The articles discusses this week's firing of Home Depot CEO Bob Nardelli, the fruits of Ralph Whitworth of Relational Investors who was ruffling feathers at the company. The article has interesting background on Whitworth, saying his fund, "oversees about $7 billion, all invested in only nine companies that are chosen with an eye toward activist intervention." The fund has averaged a return of 25% over the last nine year.

There is an interesting quote in the article from James V. Pickett, chairman of Wendy’s, which was itself the target of activism from Pershing Square Capital and Nelson Peltz back in 2005. He said, "Most of the issues the activists raised at Wendy’s were things we were already dealing with. They just increased the intensity. But when they own that much of the company, you have to listen to them even if you don’t want to.”

Recent Notes on Relational Investors

Whitworth's Relational Investors Shows Capital One (NYSE: COF) Stake, Also Raises Sprint (S) Stake Among Others

Ralph Whitworth's Relational Investors hedge fund disclosed its latest 13F for the quarter ended September 30, 2007 last night. More notable was Whitworth's amended 13F for the quarter ended June 30, also released last night.

In the 06/30 amended 13F, Whitworth's firm disclosed that they held a 4.8 million shares stake in Capital One (NYSE: COF) at the end of the quarter. The firm first reported the stake yesterday because they had confidential treatment, which allowed them to keep the stake secret. The confidential treatment expired. Warren Buffett is another filer that often uses confidential treatment.

The latest 13F showed that Whitworth's firm raised the Capital One stake to 6,766,187 shares at the quarter ended September 30, 2007.

Whitworth raised his stake in Baxter International (NYSE: BAX) from 31,595,614 shares to 32,457,579 shares. He also raised his stakes in Unum Group (NYSE: UNM) from 31,177,709 shares to 35,718,918 shares and Sprint Nextel (NYSE: S) from 32,029,827 shares to 51,251,644 shares.

Whitworth lowered his stake in Prudential Financial (NYSE: PRU) from 14,741,006 shares to 10,973,117 shares. He also lowered his stake in Analog Devices (NYSE: ADI) from 5,105,462 shares to 2,955,462 shares.

Whitworth maintained stakes in National Semiconductor (NYSE: NSM), Sovereign Bancorp (NYSE: SOV), Home Depot (NYSE: HD).

Activist Investors Look Good In Recent Days

A handful of nice wins in recent days for activist investors:

Applebee's International, Inc. (Nasdaq: APPB) said its Board of Directors has formed a committee of independent directors to explore strategic alternatives for enhancing shareholder value, including a possible recapitalization or sale of the company. APPB is an activist target of Richard Breeden.

Ceridian Corporation (NYSE: CEN) announced that its Board of Directors has decided to explore a broad range of strategic alternatives to enhance shareholder value. The Board has retained Greenhill & Co., LLC as its financial advisor and Wachtell, Lipton, Rosen & Katz as legal advisor to assist in this effort. CEN is an activist target of Bill Ackman's Pershing Square Capital.

WCI Communities, Inc. (NYSE: WCI) retained Goldman Sachs & Co. to assist the Board and senior management in a thorough review of the Company's business plans, capital structure, and growth prospects, with the objective of enhancing the company's value for all of its shareholders. WCI is an activist target of Carl Icahn.

The Home Depot (NYSE: HD) announced that the Company and its board of directors have decided to evaluate strategic alternatives for its HD Supply business, including a possible sale, spin or initial public offering of the business. HD is an activist target of Relational Investors LLC.