Chock Full O'Something

The coffeemaking company's chairman bought a big block o'shares -- without telling shareholders about a rejected premium bid from Sara Lee.
Author:
Publish date:

AT&T's (T) - Get Report electrifying bid for MediaOne Group (UMG) clearly falls into the category of big news. Here is one of the largest companies in the world, tossing around tens of billions of dollars. Here are high-profile CEOs and name-brand shareholders making grand statements and rumors of behind-the-scenes machinations involving more big names. All in all, it's a business event that is understandably filling big holes in news space.

This is one of the major advantages to large-cap stock investing: There are very few places to hide. If the business is underperforming and the stock performance is lousy, then management will be called to account for it. Aggressive shareholders will take large stakes and publicly clamor for changes.

Calpers

will put it on its Bottom Ten List. Management will have to fix it or be gone.

That's not to say that there isn't funny business, ethical breaches or grievous-but-legal sins committed against shareholders in big corporations. It's just tougher to sweep them under the table. But in the world of the 6,000 or so stocks that trade under $1.2 billion in market capitalization, i.e. small-caps, there is less analyst and media scrutiny, and things can happen which would be nearly impossible in a company that is a member of the

S&P 500

.

Which brings us to

Chock Full O'Nuts

(CHF)

. I will be making a long story short, but if you want the juicy details, check out

Sara Lee's

(SLE)

last

SEC filing in which it decided to go public with the sad story.

Chock Full O'Nuts is a small, regional coffee maker. Sara Lee is a very large, multinational coffee maker with an eye for bolt-on acquisitions to bolster its growth in what are largely mature markets. In August 1997, Sara Lee sent a letter to the board of Chock indicating its interest in a merger, which the board subsequently rejected. Over the ensuing year, Sara Lee from time to time informally reapproached Chock about a merger, but Chock said nothing doing.

Sara Lee met with Chock's management to discuss a merger in June 1998 and officially offered $9.50 a share in August 1998, when Chock's share price was hovering from 5 to 6. A confidentiality agreement was signed, and more meetings were held. Sara Lee increased its offer to $10.50 in October 1998, which the Chock board subsequently rejected. Sara Lee then went away, no doubt confused.

In all this time, there was not a

single word

disclosed to shareholders. This was clearly a

material event

that the board should have disclosed to shareholders. This was not a case of two CEOs on the golf course idly chatting about the neat possibilities if the two companies ever merged. This was not a case of three recent college graduates with Bar Mitzvah money throwing up a hairball bid. This was Sara Lee offering, in writing, a 50% premium to the then-current price, a bid representing a price that Chock's shares had not enjoyed since 1993.

That's grievous sin No. 1. Unfortunately, it gets worse. Fast-forward to Feb. 24, 1999. Imagine some poor soul of a small-cap money manager, undoubtedly facing severe performance pressure and client redemptions. Imagine him seeing a block of 533,000 shares of Chock Full of Dog in his portfolio. He knows nothing of the offer for the company just four months ago. Miraculously, he gets a $5 bid for the block and he sells.

But the buyer, in this case, turns out to be none other than the chairman of Chock Full O'Nuts, Norman Alexander, who disclosed his purchase of the very same 533,000 shares in an

SEC

filing March 8. This obviously incensed Sara Lee, which then reloaded its $10.50 offer for Chock Full O'Nuts and filed the ugly details in an SEC filing.

Now we may all be a bit tired of seeing

Mario Gabelli

in the

Barron's

Roundtable every year, but there are numerous reasons why every small investor should put stars on his photo. He is a large money manager who takes big stakes in smaller, undervalued companies, and he has a long record of boisterously defending shareholder rights in his own inimitable way.

He owns 15.3% of Chock Full O'Nuts, and according to a

Wall Street Journal

article last week, he sent a letter to Alexander and the Chock board, calling on Alexander to resign and saying it was "morally wrong" for Alexander to purchase the stock without disclosing to shareholders that the company had rejected takeover bids at substantially higher prices. A spokesman for both Alexander and Chock said that Alexander had gotten clearance from legal counsel to buy the block and that there had been no contact between Sara Lee and Chock for four months.

The real issue here is in regard to the relationship between a company's board of directors and its shareholders. We are not attorneys, but clearly there is an enormously gray legal area here as to what is material disclosure and what is not. Narrow legal definitions aside, what about any sense of broader definitions of fiduciary responsibility to shareholders? What about ethics and moral obligations?

An interesting side note is that Gabelli and Alexander have had run-ins in the past. Alexander's main vehicle is

Sequa

(SQA.A)

, an odd assortment of businesses that appears to be substantially undervalued. Alexander managed to sneak in what are known as A-share/B-share stock provisions a number of years ago, which make him the absolute dictator of Sequa on a voting basis. But in Chock, he is limited to just being a control guy, with a son and another director of Sequa on his board.

Alexander nearly ran Sequa into the ground in the late 1980s with too much debt, a disastrous investment in a leveraged lease portfolio, not to mention stock-market losses when he pretended to be a combination of

Mike Milken

and

Carl Icahn

. The stock was beginning to recover in the early 1990s, so Alexander proposed taking Sequa private at some absurdly low price.

Gabelli, who owns a boatload of Sequa, screamed bloody murder and Alexander retreated. We got involved in Sequa about a year ago when

Leon Black

, a noted M&A player, joined the board. Our hope was that this would be a catalyst for business restructuring at Sequa. After all, Alexander is 84 and bound to slow down sometime. But clearly, seeing things like Chock made my stomach a little queasy.

What do you think of the goings-on at Chock Full O'Nuts?

Give Alexander a break -- he's just pursuing the great American dream like everybody else.

This is unbelievable -- where's the SEC when it comes to stuff like this?

Why be so surprised? It happens all the time.

This is why I'm a day-trader -- so I don't have to worry about shenanigans like this!

Jeffrey Bronchick is chief investment officer at Reed Conner & Birdwell, a Los Angeles-based money management firm with about $1 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value Fund. At time of publication, RCB was long Sara Lee and Sequa Class A shares, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at

jbronchick@rcbinvest.com.