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Personal Comments on Conseco From Irwin L. Jacobs
Dated: September 11, 2000
Since the time I ran the ads regarding short selling of Conseco in the Wall Street Journal and The New York Times (I have included a copy of the ad on this Web site) until now, I have received hundreds of calls and letters from individual Conseco shareholders, institutional shareholders and the media. After talking to and hearing from all these people I must say it has been an amazing experience to witness how many so-called “sophisticated investors” and “sophisticated media” know so little about the world of short selling and what a potential negative impact they can have on the common shareholders and the companies in which they own stock. It has become nearly impossible to keep up with the correspondence that I have received and continue to receive regarding Conseco. Therefore, since I seem to be one of very few (if not the only) large Conseco shareholders that is willing to speak out, I have decided to publish my personal thoughts, opinions and what I believe to be some of the real facts that are important to point out as they relate to Conseco on this Web site.
It has now been ten weeks since Gary Wendt became the CEO of Conseco. Based on everything I have heard him say publicly, as well as all of the business decisions he continues to make, I am more impressed with Gary today then I was when I heard and read about him during his successful tenure at GE. Among other things, I admire his candidness and proactive style of business. Gary stated during his last quarterly telephone conference call that there would be no dilution to the common shareholders in the refinancing of Conseco’s bank debt. Several, if not most, of the national news media as well as several Wall Street analysts that follow Conseco’s stock (particularly Colin Devine from Salomon Smith Barney) have said – either by venturing a personal opinion or quoting other sources close to the situation – that the only way the Conseco bank group would renew Conseco’s bank lines would be if it received a substantial amount of stock and/or warrants in Conseco. What has never been discussed or printed by the analysts and/or the media was the fact that if the banks in the Conseco credit ever forced Conseco into default, they would immediately trigger all $3 billion of public debt to become pari pasu with all existing bank debt. How anyone in their right mind could possibly think the banks would ever consider doing such a ridiculous thing is beyond me.
I personally believe we will be hearing from Conseco and their banks on or before September 22, 2000, that they have entered into an agreement that should be good for all concerned (except the short sellers). My optimism comes from Gary Wendt’s statement on August 17, 2000, condemning the short sellers’ tactics and confirming Conseco’s management’s optimism that it will be able to negotiate an acceptable agreement with its lenders on or before September 22, 2000.
Further, besides restructuring its bank agreements, Conseco has other cash flow and equity opportunities at its disposal. Conseco has been paying a 7% coupon on all $503.6 million Feline PRIDES. In February 2001, in accordance with the Feline PRIDES Indenture Agreement, Conseco will automatically convert, at its option, all $503.6 million of the Feline PRIDES’ 7% coupons into common stock equity at an average conversion price of approximately $50 per share regardless of what the price of Conseco’s common stock price is at the time of mandatory conversion. This transaction alone will add approximately $1.50 per share of new equity to all 335 million outstanding common shares of Conseco stock at the time of conversion. After conversion in February, Conseco will no longer have to pay the approximately $35 million of annual coupons that they have been paying since 1997 on the 7% Feline PRIDES. Although all of this has been spelled out in all of Conseco’s public documents, none of the so-called analysts or media have talked about the Feline PRIDES.
Although the common stock dividends are only 20 cents per share, as a large Conseco shareholder, I would encourage the board to discontinue the common shareholder dividends until Conseco is completely back on track with predictable earnings.
I, personally, have concluded that over the next three years, if Conseco should decide to hold onto all its core businesses and simply sell off the $2-plus billion of non-core business assets, it most likely will be totally out of all public and bank debt sometime within the next three years. On the other hand, I really believe that Gary Wendt will do for Conseco what he did for GE and make Conseco one of the super powers of the insurance and finance business. If this turns out to be the case, Conseco’s bank and public debt will most likely be unimportant. I am quite sure that there will be long lines of banking institutions, as well as the public, demanding to be a part of Conseco’s growth if Gary decides to expand Conseco beyond its present core businesses.
I also believe that once the existing bank debt is restructured and Gary is able to tell us his plans for building and growing Conseco, the credit rating agencies will no doubt begin to raise Conseco’s credit ratings. Quite frankly, I would be very surprised if we did not see one or more of the rating agencies raise Conseco’s credit rating within the next 30 to 60 days following the finalization of its bank agreements.
Obviously, all of the above is good news for all Conseco common stock shareholders; however, there is one other important piece of good news. It has recently been reported that there have been over 66 million Conseco shares short in the marketplace. Once the bank agreement is announced, I believe the reality and opportunities for Conseco’s future will become obvious even to the short sellers. I, therefore, would not be surprised to see a panic among the short sellers. Let’s also not forget there will most likely be several institutions and money managers that will be looking to invest in Conseco once the lender agreements are finalized and once they better understand Gary Wendt’s long-term plans for the company. I believe this should also create an enormous amount of buying in Conseco’s common shares.
Under Gary Wendt’s leadership, I believe the future for Conseco and its shareholders never looked better than it does today. |
