Takota Interview On Being An Occasional "Active" Investor!
Takota Asset Management had an issue with Sherritt International’s [TSX:S] efforts to raise capital to firm up its balance sheet, co-founder W. Scott Leckie told Activistmonitor.
"It was poor judgement," he said. "Their recent decision to raise equity at current share prices was an example of poor capital allocation where they diluted shareholders of 20% of their interests in exchange for a modest reduction in debt of about 10%."
In May 2017, Sherritt entered into aggreement with Sumitomo and Korea Resources to eliminate USD 1.4bn in debt, in exchange for part of its stake in the Ambatvy nickel mine in Madagascar. Sherritt retains a 12% stake and operates the mine until at least 2024.
Leckie is pushing for “management to make good capital allocation decisions” so shareholders can “fully benefit” from the top end of the nickel/cobalt price recovery and the new demand for batteries for electric cars and grid storage.
That criticism comes on the heels of Sherritt management successfully negotiating to reduce debt owed to financial partners in the Ambatovy nickel mine in exchange for Sherritt’s reduced stake in the mine. Leckie praised that effort but said the issue of shares is a problem.
He’s been known to press management of companies he’s invested with in the past. It starts with public letters to the board and with discussions with the CEO and investors. Leckie’s even blogged about his concerns. Attending an annual meeting is usually the next step. He wouldn’t say whether he’d be attending Sherritt’s spring meeting.
In regard to Sherritt, Leckie said “I have had a complex relationship with the company” over the 27 years he’s been involved. “I have at times undertaken initiatives to support the company (filing affidavit on their behalf in a legal challenge with Deutche Bank) but at other times I’ve been critical.”
More of an active than activist investor
Leckie sees himself more as an active investor as opposed to being an “activist.”
“Once you’ve done the initial work of researching a business, and purchased your investment you keep tabs on it but let a competent management overseen by a strong board run it, grow it and create value for shareholders,” he said. “When there’s something that stands in the way or threatens the value, that’s when we’ve tended to become more vocal. That’s where you’re picking up this activism bent from me,” he said.
When letters and discussions don’t work, Leckie’s been known to go public with his opinions or stand up at an annual meeting to “ask tough questions.”
Targeting a company for activist action is usually a last resort—and even then, he prefers to piggy-back by enticing another activist to get involved. He acknowledges having forced his way onto a board a few times.
In 2016, Leckie pushed to join the board of New Millennium Iron Corp.[TSE:NML], an iron ore development company. He and other dissident shareholders wanted to improve the company’s balance sheet.
Leckie has twice been involved in “a full-blown proxy battle to get control.”
His 2008 proxy fight with Zarlink Semiconductor [TSX:ZL][NYSE:ZL] is a good example. At the time, Leckie demanded that Zarlink’s CEO, chairman and five corporate directors step down. “Change creates the opportunity for renewed shareholder value through new leadership and a new corporate strategy,” he said then.
While he won the Canadian vote, Zarlink ultimately prevailed in a close proxy fight as it was better able to reach investors with its view that the company was on the right track.
Today, Leckie calls it his greatest defeat, though there’s a caveat.
“The company in the end did all the things we wanted,” he said.
But by that point, Leckie had reduced his position in the company so he “didn’t fully benefit.”
Before becoming a portfolio manager, Leckie was a stockbroker who favored shorting Canadian institution when they were in financial distress.
From Aquilon to Takota
Leckie started Aquilon Capital Management with two colleagues in 1990. They built it into a performance-focused firm with big-name Canadian investors—who he declined to name. The staff grew to 50-plus and produced 20% per annum investment performance over the 18 years it existed, Leckie said.
It was at Aquilon that Leckie mastered short-selling, focusing on promoted securities of the controversial Vancouver Stock Exchange (VSE) “and other fraudulent companies.” When the VSE was swallowed up by the Canadian Venture Exchange, those opportunities became fewer, he said.
Aquilon managed USD 650m in assets before it was sold to National Bank of Canada in 2008.
Leckie didn’t connect with the corporate structure of National Bank. He attributes that in part to having an issue with structure, maybe, he says, because his father died when he was 13 and wasn't part of his life during those important years.
Leckie extricated himself four years into a five-year commitment at the bank. He went on to start Takota with three colleagues who had followed him from Aquilon to the bank.
Takota is focused on mispriced securities that the company generally finds in the mid- to small-cap company area, he said. “That’s where the bulk of my investing takes place--where you find inefficiencies in pricing.”
Leckie declined to share a number for assets under management, saying, he sees it as a “competitive disadvantage” to share such information. “What I will say is that we brought back much of the assets sold to National Bank and that we can bring whatever fire power is needed to a situation whether that be derived from internal assets or augmented by incremental relationships.”
Leckie’s firm has a history of engaging in arbitrage-like transactions and value investing, “a form of arbitrage trying to capture the difference between a securities trading price and the intrinsic business value per share of a company.”
Big improvements in cash flow
Takota looks for special situations where the cash flow from a business could be large, but where there’s some temporary or cyclical issue that has the shares of bonds of that business trading at a big discount to their potential value, or mid cycle vale—“situations you can get your head around and research and where you can align yourself with a good management group,” Leckie said.
He is among those investors who takes a long-term view in investing. He describes his investment strategy as “intrinsic value investing” because of the research and analytical judgement he puts into determining the per share business value of a company.
In addition to keeping busy with Takota, Leckie is the father of three sons and enjoys shinny hockey (a form of ice hockey).
He also reads about other investors. Background about Carl Icahn is of special interest. Leckie likes to tell a story about being on the opposite side of Icahn on a trade with a Canadian company. “I was short and he was long. And in the end I was right,” Leckie said, crediting his local intelligence.
And except for his beef with Sherritt, Leckie said he hopes “not to be involved” in activist campaigns in 2018, a sign that “investments are running smoothly and the management groups and boards that we’ve aligned ourselves with are making positive progress toward building or releasing value.”
He described his firm’s investments as having “big tails, meaning their cash-flow generation and price response happen quickly and traditionally at the end of the business cycle.”
Leckie sees those investments “accelerating in price as the business cycle matures, coming to fruition and being sold. I have a hard time seeing what will replace them, other than in opportunities that benefit from falling securities prices,” he said, adding “read short sales.”
by Shia Kapos in Chicago