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Strategies & Market Trends : Speculating in Takeover Targets
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From: Glenn Petersen10/23/2014 7:22:35 PM
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Drawn to Lost Causes, Hedge Fund Seeks to Turn Them Around

By William Alden
New York Times
October 23, 2014 5:12 pm

RadioShack is burning through its cash. American Apparel is reeling from chaos in the boardroom.
As these two prominent retailers struggle in the throes of financial recalibration, an under-the-radar hedge fund has emerged as perhaps their last hope for salvation.

The hedge fund, with the unassuming name of Standard General, doesn’t like to stand out. When its founders, Soohyung Kim and Nicholas Singer — two young stars at the investment giant Och-Ziff Capital Management — opened their own firm in 2007, they rejected the Greek gods and mythical beasts that had inspired the likes of Apollo Global Management and Cerberus Capital Management. They liked that “Standard General,” which was inspired by hoary brands like Standard Oil and General Electric, didn’t even sound like the name of a hedge fund.

But now, almost in spite of itself, Standard General has landed squarely at the center of two of this year’s most visible corporate turnaround efforts in retailing.

The hedge fund struck an unlikely alliance this summer with Dov Charney, the public face and founder of American Apparel, and now holds substantial leverage in determining the retailer’s future. And this month, Standard General inserted itself more deeply into the affairs of a far more troubled retailer, RadioShack, signing a deal that could give it and its partners up to 80 percent of the company’s shares next year.

Just a few months ago, few even on Wall Street, let alone the shoppers at those retail brands, had even heard of Standard General. The firm, which manages a little more than $1 billion in assets, was previously known only to media specialists as a behind-the-scenes player in a series of TV broadcasting deals. But in playing tough with two embattled retailers, the hedge fund stepped onto its biggest stage yet.

“We’re not trying to be flashy or abrasive,” David Glazek, a partner at Standard General, said in an email sent by a spokesman. “We’re just trying to be matter-of-fact about things.”

Mr. Kim, 39, the hedge fund’s managing partner, grew up a world away from Wall Street. Born in South Korea, he arrived in Queens at the age of 5 and learned English by watching “Sesame Street” and “Mr. Rogers’ Neighborhood.” After fencing at Stuyvesant High School and rowing crew at Princeton, he started on Wall Street as a credit analyst at Bankers Trust. At 24, he followed a Bankers Trust partner, Stephen C. Freidheim, to Och-Ziff, where they created a credit investing arm. After helping Mr. Freidheim set up a spinoff firm, Mr. Kim and Mr. Singer left to strike out on their own.

Standard General’s first big test came in the financial crisis. Mr. Kim and Mr. Singer were able to attract $100 million in seed capital from the Reservoir Capital Group, which backs start-up hedge funds, shortly before markets plummeted. The fund was down about 6 percent in 2008, but it avoided more severe losses largely because of bearish bets against the stocks and bonds of companies in finance, gambling and media.

After the market bottomed, the fund reversed course and placed large bets on the success of gambling and media stocks. Last year, when the average stock-focused hedge fund in the United States returned 15.1 percent, according to Absolute Return, Standard General posted a 32.5 percent return, according to a letter sent to its investors.

This year, however, Standard General has been weighed down by its signature TV broadcasting investment, Media General. In January, after the value of the stake had grown disproportionately large, the firm put part of it into a separate vehicle. But the stock has since fallen. The flagship fund was up an estimated 3.26 percent through September, but the Media General shares were down 42 percent, according to messages to investors.

Quirky investments have never deterred the fund. In early 2008, it bought a power plant in upstate New York, selling it a few years later at a profit. Though a relatively small investment, it submitted a $25 million proposal in 2011 to rehabilitate Rye Playland, the government-owned amusement park on the shores of the Long Island Sound. A presentation for the pitch said Mr. Kim and Mr. Singer, who grew up in Harrison, N.Y., were “frequent visitors to Playland as children” and have a “strong emotional attachment” to the park.

The plan, which lost out to a homegrown proposal, is back on the table after the winning proposal was scrapped. Mr. Singer, who left Standard General last year after investors pushed the fund to move away from the style of private-market investing that was his specialty, continues to represent the entity that the hedge fund created to pursue the Playland bid, appearing last month before the Westchester County Board of Legislators to reiterate his interest.

So far, the response from some local politicians has been cool. “I’m just concerned that their goal is to maximize shareholder value,” said Michael B. Kaplowitz, the board’s chairman, adding that he did not know Mr. Singer had left Standard General. “If the return doesn’t come back, are they going to then step away, invest less, try to get out of the contract?”

It was an affinity for troubled companies that brought Standard General to American Apparel.

The hedge fund, which owned the retailer’s bonds, contacted the company this year with a lending proposal. Though it was rejected in favor of an equity financing, the proposal established a relationship between Standard General and Mr. Charney that became useful to the hedge fund when Mr. Charney was later fired by his board.

Under investigation by the board over possible misconduct, including accusations of sexual harassment, Mr. Charney agreed to give the hedge fund control over his 43 percent stake, an unusual step that helped Standard General win three of seven seats on American Apparel’s reconstituted board. In offering Mr. Charney the deal, Mr. Kim encouraged him to think twice before signing it, pointing out that it significantly limited his options, a person briefed on the matter said. Mr. Kim also said that he was “saving” the company, a different person briefed on the matter said.

Through the spokesman, Mr. Glazek said Standard General was “not interested in control for its own sake.” Yet, in the case of RadioShack, which was rapidly running out of cash when it did the deal with Standard General this month, the hedge fund has insulated itself against losses and could eventually wield an even greater degree of influence.

Working with other investors, Standard General bought a RadioShack credit facility from GE Capital, while also providing the company with $120 million of cash to be used as collateral. If RadioShack meets certain requirements, including surviving through the holiday season with enough cash on hand, the $120 million will be converted to equity. Depending on how much stock other investors buy, the hedge fund and its partners would then own about 50 percent to 80 percent of RadioShack’s stock.

Standard General’s strategy to help the retailer survive involves reworking RadioShack’s contracts with cellphone carriers, which require the retailer to reimburse the carriers if customers default on their bills, according to a person briefed on the plan. If the company is forced to file for bankruptcy, Standard General would be in a relatively strong position to recover its investment as a creditor holding first lien debt.

Analysts who see bankruptcy as the most likely outcome questioned why Standard General would want to get involved.

“Standard General made a bad investment. They made a mistake,” said Michael Pachter, an analyst at Wedbush Securities. “They’re throwing good money after bad.”

Yet Mr. Kim appears to be motivated by an urge to fix seemingly intractable problems. As a member of the Stuyvesant High School Alumni Association board, he pushed to merge the association with two other alumni groups that each competed for donations, a task that required years of negotiations. When the merger was done this summer, Mr. Kim was elected president of the combined group.

He may be a vocal supporter of Stuyvesant, but he is tight-lipped about his investing activities.

“I found out he was invested in American Apparel through The New York Times,” said Jukay Hsu, a member of the alumni board who considers himself a friend of Mr. Kim’s. “It’s not something we speak about.”
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