<font color=red> Irwin L. Jacobs update: " Great Victory!! ".
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Personal Comments on Conseco From Irwin L. Jacobs
(updated Sep. 11)
Great News on Conseco’s Bank Debt Restructuring
Short sellers continue to wish the demise of Conseco by continuing to sell short Conseco stock.
Short interest rises to over 66.8 million shares.
Dated: September 26, 2000
After the close of the market on Friday, September 22, 2000, Conseco announced that it had successfully completed the highly anticipated refinancing of its bank debt. Needless to say, this was the single most important step for Gary Wendt to accomplish in bringing necessary credibility back to Conseco, both in the credit markets as well as throughout the Company itself. For months there had been predictions and rumors by certain analysts, short sellers and the media that the banks would insist upon receiving millions of shares of Conseco warrants that would substantially dilute the existing Conseco shareholders, or the bank group wouldn’t even consider restructuring the bank debt and, therefore, Conseco would have to file for protection under the bankruptcy laws. Obviously, all of the wishes of those people not only did not come true, but if you look carefully at what was released by Gary Wendt to a group of analysts on Monday, September 25, 2000, you will see that he not only negotiated a very successful bank restructuring, but the information about the condition and future of Conseco looks nothing less than spectacular. He laid out in great detail how Conseco was going to pay back over $3.8 billion of debt without affecting Conseco’s two primary businesses, Conseco Finance and the insurance business.
Obviously, the bank group was more than satisfied that Gary’s plans were very credible, since they not only extended Conseco’s loans an additional three years, but the banks even allowed Conseco’s public debt of $675 million, due next July, to be paid ahead of the banks. Let’s not forget that Collin Devine, an analyst at Salomon Smith Barney, in his most recent report on Conseco, predicted the banks would extend Conseco’s loans due on September 22, 2000, but the banks would never allow Conseco to pay the $675 million of public debt, due next July, ahead of the banks, and predicted that is when Conseco’s problems would once again begin.
It should now be clear to everyone, including Collin Devine and the short sellers, that wishing Conseco’s demise is not possible or practical. Even the rating agencies, including Fitch and A.M. Best, stated September 25, 2000: “This agreement removes a major uncertainty related to the Company, which Fitch views as a favorable development. It also allows the Company the ability to conduct asset sales in a more orderly fashion. With the favorable resolution of the bank maturity issue, Fitch is in the process of conducting a full analysis and evaluation of management’s strategic initiatives, financial plans and timetable to determine if Fitch’s current Conseco-related ratings and Rating Watch status should be retained or adjusted. Fitch’s current ratings will remain in place until this process is completed.”
Then why, with all of this good news, did Conseco’s stock go down rather than go up during the trading session on Monday? Here is the answer.
I have carefully watched and monitored the trading patterns every day since I got involved in Conseco’s stock over the past six months. Every time there has been any substantial good news that could potentially have a positive effect on Conseco’s stock, the short sellers immediately attempted to short several hundred thousand shares of Conseco’s stock in order to prevent the stock from rising. Frankly, this is not bad news. I will try to explain this to you. Last week it was announced that the short interest in Conseco had increased over the previous month by an additional 1 million shares to 66.8 million shares. I believe on Monday alone, the short sellers shorted an additional 1 million shares of Conseco in order to hold the stock down on the good news the Company had released on Friday and Monday. At some point the shorts will not be able to continue their past practices since Conseco’s record, rather than rumors, will take over the marketplace and once and for all put to rest the short sellers attempts to wish the demise of Conseco stock. It is a known fact on Wall Street that short sellers frequently attempt to dispel any good news that could potentially make a stock go up by short selling into good news in the hope of creating a selling frenzy among the long shareholders, with the belief that the long shareholders may say to themselves, “If the stock they’re holding doesn’t go up on good news, then when will it ever go up?”
With the size of the outstanding Conseco short interest, I do not believe this will work with Conseco’s stock. As the stock rises, at some point the shorts will not be able to borrow any more Conseco stock for short selling and will ultimately begin to get squeezed in a rising stock. Particularly since Conseco is back on track for becoming a Company with real earnings, it will once again create new buying from other investors and several large institutions. This goes back to the ads I ran in the Wall Street Journal and The New York Times where I stated the real shareholders of the Company were allowing the shorts to work against the shareholders of Conseco by letting them borrow their stock. I find it hard to believe, as I am sure you do that any Conseco shareholder would want to help the short sellers in keeping the price of Conseco’s stock down. However, I continue to believe that many Conseco shareholders still do not understand that several banks, mutual funds and brokerage houses with whom they do business do not necessarily have their customers’ best interests in mind when it comes to helping shorts by lending out your stock to short sellers for their personal gain. Prior to my running the ads it was rumored that the shorts could borrow millions of shares of Conseco’s stock for shorting. I can tell you I have monitored the stock availability for shorting every day and there is no question that it has tightened up substantially: the rates for borrowing Conseco stock have tightened and the availability of the stock for shorting has substantially decreased. I believe that, in the relatively short term, the shorts will be reeling with pain in watching Conseco’s stock rise beyond their wildest nightmare. I do hope, however, that before this happens they continue to short additional Conseco shares.
I spent most of Monday analyzing Gary Wendt’s presentation to the analysts and I must say the news was even better than I anticipated. First of all, Gary laid out a plan that showed debt repayments from now through 2003 that will allow Conseco to lower their debt by $3.58 billion, leaving the Company with a debt-to-capital ratio in 2003 of only 22%, a debt-to-equity ratio that would even be lower than most if not all the Fortune 500 Companies in America. He was very specific about his plans and did not give any pie-in-the-sky predictions in his presentation. I believe the Company has filed his presentation with the SEC under the new SEC rules that all analyst presentations and/or materials must be made available to the public, as well as to the analysts. If anyone is interested in a copy I am sure it is available through Conseco’s SEC filing. In further analyzing Conseco’s potential profits for the year 2001, I believe that Conseco is well on the way to profitability. I think they should earn $1.50 per share of real earnings for the year ending 2001. I expect the balance of 2000 to be an uneventful year as far as Conseco’s earnings are concerned as Gary has been positioning Conseco for the future in the Company’s restructuring plans. In fact, I am not sure there are any, but if there are, I would encourage and expect Gary to take any potential write-downs this year and get them behind him so that 2001 can be a clear picture of what Conseco’s future earnings will be.
As important as pure debt reduction is, the fact that Conseco plans to manage both the insurance and finance divisions to positive cash flow and profitability is what I always believed to be achievable. They are not robbing Peter to pay Paul as several of shorts have consistently lamented. In fact, in 2001, the Company’s plan calls for its operating business to cover fixed charges for the first time since 1997.
Although Gary has only been at the job for a few months he has delivered on every promise and prediction up to this point. Surely that is nothing new for him since his past record has been nothing less than spectacular. The “house of cards” is about to collapse on the shorts and although I cannot predict when or to what price Conseco’s stock will rise, I am totally convinced that Conseco’s stock is a better buy today than at anytime I have purchased my stock in the past. To confirm my continuing optimism, I purchased over 200,000 of Conseco shares on Monday, September 25, 2000.
Once again, I want to apologize for not being able to answer all of your emails, however, I encourage you to continue to email me, and I will do my best to respond.
Thank you.
Irwin L. Jacobs |
