REBEL WITH A CAUSE AND A SIMPLE STRATEGY
by Peter Koven, Financial Post
National Post’s Financial Post & FP Investing (Canada)
October 4, 2006 Wednesday
Toronto Edition
George Armoyan is a tenant. Housing prices in Toronto are outlandish,
he says, so there’s no sense in buying. So each month he hands over
a rent cheque to his landlord, who happens to live next door: Ted
Rogers, CEO of Rogers Communications Inc.
This relationship, however, doesn’t mean the pair would get along in
a boardroom.
Mr. Armoyan has made a name for himself investing in some of the
worst income trusts on the market. Despite his attraction to the ugly,
there’s only two things that turn him off a company, both of which are
trademarks of Mr. Rogers: long-term debt and multiple-voting shares.
"Most of these income trusts, for the people selling them [in initial
public offerings], to get a higher price, they’re trying to put
long-term debt in with the idea that you don’t have to amortize,
you don’t have to pay for it," he says.
"And when you do that — as my late grandmother put it — ‘Ultimately,
son, the ice will melt and the shit will come out.’"
In just a few short years, Mr. Armoyan has emerged as the foremost
activist investor in the income trust sector. His strategy is simple:
Buy minority stakes of up to 20% in troubled companies, primarily
trusts that have cut distributions. Start a dialogue with management,
get on the board, and do whatever is necessary to boost shareholder
value. He makes the investments through Clarke Inc., a publically
traded company and until recently private holding company Geosam
Investments.
His success speaks for itself. Whenever he reveals his latest target
company, that firm’s unit price inevitably jumps as other investors
follow him in. They like having a hands-on investor like Mr. Armoyan
in their corner.
And they have been following him a lot lately. In the past couple of
months, Mr. Armoyan has gone on a spending spree, buying stakes in a
wide variety of troubled companies that share little in common other
than that few other investors wanted to touch them until Mr. Armoyan
got involved.
"In just the last while, because there’s been so many failures, so
many cuts in distributions, quite a lot of people have lost faith in
the income trust, especially the business trust," he says.
Mr. Armoyan isn’t necessarily a fan of the income trust structure —
he believes most of these companies should never have gone public
as trusts in the first place, and thinks the sector’s accounting
practices are a joke. But as trusts slash their distributions and
investors turn sour on them, he sees huge opportunities.
Entertainment One is a good example. The wholesale DVD and CD
distributor suspended its monthly distributions in June amid concerns
that it would violate its debt covenants.
As the units plunged and other investors bailed out, Mr. Armoyan
and his team of analysts sat down and took a look. He did the math
and couldn’t understand why the units would be down more than 80%
when the company was doing something he approved of: paying down debt.
"I"m not looking for the distribution. I’m looking for the
fundamentals. If a company stops distributions for the purpose
of paying their debt, that’s fine. That’s building equity for the
unitholders as far as I’m concerned."
His investment has paid off already. Last week, Entertainment One
said it received an unsolicited takeover proposal, and has hired an
investment bank to evaluate a possible sale.
The units shot up 14%. He bought more of it.
Since he buys stakes in so many genuinely troubled companies,
Mr. Armoyan anticipates that some of his investments aren’t going to
pay off. There’s already a stand-out disaster: Hip Interactive Corp.,
a video game maker that declared bankruptcy last year. He was on the
board for less than a month, but was quickly appalled by the practices
of the company and its board.
But the successes greatly outweigh the failures. One of his biggest
triumphs was at Clarke, a Halifax-based trucking company. He bought
into Clarke in 2002, four years after it went public. In that time,
the shares had lost about half their value while management raised
their salaries. He ousted management, but then took another step and
appointed himself as CEO. Why do that? "I guess it was just easy to
get control of." Clarke shares have been on a steadily upward trend
ever since.
Mr. Armoyan is of Armenian descent and was born in Syria. He immigrated
to Halifax when he was a teenager and studied civil engineering
at Dalhousie.
He never got around to earning an MBA but goes to Harvard every year
for about a week as part of an executive program. Once there, he works
on case studies non-stop with 150 other executives from more than 30
different companies. He likes it because it shows him how people with
different cultural backgrounds can approach the same problem. The
Harvard experience can also guide his own investing strategy.
"I like to see what the theme of the year is. Last year it was real
estate. A few years ago it was the Internet. So usually, by the time
Harvard professors get to some cases and they start doing it, that
means it’s time to get the hell out of that business."
From: Emil Lazarian | Ararat NewsPress
