(Ep.79) The Acquirers Podcast: Chris Mittleman – Severe Value, Mittleman Brothers, Aimia, And Two Decades Of Value

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In this episode of The Acquirers Podcast Tobias chats with Chris Mittleman. He’s the CIO, founder of Mittleman Brothers. During the interview Chris provided some great insights into:

  • How Aimia Reinvented Itself As An Investment Company
  • The Time Berkshire’s Share Price Dropped Almost 50%
  • Bottom Fishing Carl Icahn
  • Buffett’s Genius In The ‘Dying’ Blue Chip Stamps
  • Aimia Acquires Stake in Clear Media Limited
  • Harry Brent Sold Berkshire Too Early
  • Global Concentrated Value Investing
  • Is There A Link Between Value Investing And The U.S Dollar?

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirers Podcast. My special guest today is Chris Mittleman. He’s the CIO, founder of Mittleman Brothers. Absolutely fascinating investment strategy, long-term track record about performance. We’ll be talking to Chris right after this.

First time, I heard about you was Carmike AMC, the 13D, because I thought that was really interesting. You guys used some unusual litigation tactic in that from what I recall.

Chris: Yeah, we were just holding out for a better price because it was clearly undervalued. I don’t think it was so unique. I think it was just about standing up for fairness when it was not being offered. It’s unusual to have to tell the company to hold out for a better price when the company itself should be doing that for you. But I think there was a lack of– Well, first of all, there was not a lot of insider ownership in Carmike and so that’s a risk you take sometimes when you’re dealing with people that are acting more as agents than as owners. That agency risk can bite you sometimes.

What happened there was that these guys, not owning a lot of stuff, were receptive to a number that didn’t make sense to an owner. Yeah, that was a problem. I tried to educate them on this and before this deal was even announced, I tried to give them a sense of what we thought fair value was. This was over the course of many years, because we have been owners for 7, 8, 9 years, I think. And they just didn’t get it. Some people are not very good at the appraisal process, figuring out what things are worth. I guess these guys– even though they ran the business, well, I was never unhappy about the way that they were running the business. But when it came to valuing the business, they didn’t have a real facility there.

And that happens a lot. It’s rare that you get a guy who’s a great business manager in a certain field and also happens to understand valuation really well. When you think about it, it’s a very different thing. A guy who runs an amazing business not necessarily going to be attuned to these capital allocation-type decisions. I’m not surprised that happens. I was just surprised that they did what they did because I had been so communicative about our views on it, and to sell at a price that was so clearly below what your largest shareholder had been telling you for some time, that seemed wrong.

Tobias: I couldn’t agree more. It’s a phenomenon I’ve seen many times with an entrepreneur-engineer, typically founder, who gets to a point where it’s quite a substantial business and then hasn’t sort of thought through the capital allocation, buying back shares. If they get cheap, what levers they can pull at that stage. I think that’s often an opportunity for– not necessarily an activist investor, just an engaged investor to explain the various tools that they have at their disposal to correct that price.

Chris: Yeah, I agree.

Tobias: Carmike was particularly interesting though, because AMC was cheaper than Carmike, even at the bid price. The AMC CEO had said he wouldn’t issue shares at that price, and somehow Carmike was quite happy to sell at that price.

Chris: Yeah, I think you have to remember also that Carmike was– they also had inside of them this thing with Screenvision. Screenvision was before the movie advertising firm. If AMC acquired Carmike, they would have gotten a big boost from that stake in Screenvision. There was a mechanism by which if you converted theaters over, you got like extra shares. I can’t remember exactly what the form of renumeration was, but it was valuable and it was a lot more valuable than AMC or Carmike was talking about. We brought that up.

Once you adjust it for those things, the valuation was actually much lower. So, the headline valuation that they were talking about was a mirage. In reality, the actual cash-on-cash valuation was five times, or something like that. It was five and a half to six and a half times. Something that was just too low for a change of control for a movie theater business at that scale and market position.

We got a little bit more out of it. Instead of $30, we got 34.5, something like that. But unfortunately, it was a very pyrrhic victory, because instead of getting 100% cash at $30 and reinvesting that somewhere else, the stock that we got an AMC went from $35 to $4, and where it is today. And we averaged down into that. So, what was a victory of sorts is turned into something a little bit different. I still think AMC will ultimately give us a good return, but it’s just ironic that we were fighting for stock versus cash and stock was the worst thing that we could have gotten at that moment. So, care what you wish for.

Tobias: Let’s talk about Mittleman Brothers a little bit. You set that up, it was 12/31/2002. So, first operating year, 2003. This is the fund I’m talking about. Did the firm preexist the fund?

Chris: Oh, I’m sorry. That number what you’re referring to there is our composite performance. And that composite performance actually predates the existence of the firm. The firm itself was founded in November or December of 2005. The reason that we have those three prior years of composite performance is that I had been working in other firms managing money for the various accounts that came with me to begin and for Mittleman Brothers. So, we got a professional opinion that those performance numbers were portable because I had full control and sole discretion over the accounts. That’s why we have portability of results going back to, I guess, the very end of 2002. You’re right, my first year of performance was 2003.

Global Concentrated Value Investing

Tobias: What’s the strategy? Talk us your flavor of value. I see you’ve got a private equity-type approach. You like free cash flow, growing free cash flows over time.

Chris: Yeah. I don’t think there’s anything really unusual or fancy about it. We look for the same kind of thing, I think, that everyone looks for in this business, a durable franchise, something where you can get some sense of certainty that the cash flows that are there now will be there in the future. When you look at the way that we’ve actually invested over the years, that kind of tells you the story. It’s been a very concentrated approach, so I’ve always believed in that.

When I first started, as a stockbroker in 1990, I came up with this concept of a global concentrated value approach. Literally, in the first year of my career, I just read everything that I could read and it seemed why concentration made sense versus diversification, especially for an one-man show. The global aspect of it came about more accidentally just because I started working in what was then Shearson Lehman Hutton’s international sales divisions. That was my first exposure, and it was all this international research around, so I had an affinity for it just because I was exposed to it at a young age in my career.

The value side of it was obvious. Value investors, it’s the inoculation, that whole thing, it either takes or doesn’t. So, yeah, from the very first days, I still have portfolios that I typed out on a typewriter that were basically 15 to 20 stocks, and same kind of concentrations we use today, same type of global diversification, anywhere from 30% to 60% International. Right now, we’ve been at the very high end of our international concentration for the last four or five years, which has not been helpful, because international has not been the best place to be versus the US lately, that may be turning now, we’ll see.

Tobias: Everything that’s not SAS or FAMG] or FANMAG or FAATMAN, or however you want to say it has been tough. If you value a small international, it’s been a bit of– [crosstalk]

Chris: I know. Yeah, we’ve been in the epicenter of where the flows are not. We are small, we are global and value oriented. It’s basically the worst quadrant that you could occupy, and it shows. Obviously, our performance in last few years has not been good. It’s frustrating, but I do think that at some point the pendulum will swing back. I don’t really think that it should be so much about hoping for a return of the popular indices to your stuff. We were actually outperforming. Value has been underperforming for the last 10, 12 years. But the first four or five years of that, we were actually outperforming, and outperformance substantially.

I don’t think that just because one ascribes to a certain discipline that you have to resign yourself to suffering when the discipline suffers. Yeah, it can be a headwind. But it doesn’t have to be. There’s some guys that I know of, smaller value guys, that are doing really well in a bad environment for small value. It’s a bit of a convenient excuse, I guess, when we’re not doing well to be able to point to that and say, “Oh, well. At least, we have some excuse.” But the reality is that it’s not determinative really. If you pick your points well, prices, timing, all that stuff, you can make money even in a bad environment. I think that that’s out there as well.

But, yeah, it’s at least nice to be able to say that we had some kind of headwind and that’s maybe one of the reasons why we’ve not done well over the last few years.

Tobias: You had some spectacular returns from Inception, and then you’re still ahead, even though the last few years have been tough. That’s one thing that I’ve observed quite a few more discretionary managers have. Not everybody’s pure. Nobody’s looking at price multiples and building portfolios and price multiples. Everybody’s looking for some quality and some other aspects in there that the quants regard as being separate factors, but no value investor would really ever separate them out. You want a cash in your balance sheet and cash-rich– good cash flows, and so on. So, what are you looking for specifically when you’re looking at targets? What’s sort of industries? What sort of businesses?

Chris: Sure. I don’t start with any top-down approach. I’m looking to buy a stream of free cash flow that I think will grow at an attractive price if I can get it. Obviously, there are special situations sometimes at the margin of that that are attractive, sometimes we could buy a company that we think may not have any free cash flow for a year or two, but it’s so cheap relative to its assets, that we’ll take the risk that the free cash flow doesn’t come back as quickly. We’ll make exemptions and carve-outs. I try not to be overly dogmatic about it. I want to be open-minded because sometimes they’re great opportunities that would not necessarily be picture-perfect representations of your usual MO and that’s fine. You don’t have to–

The beauty of this business is that every day is a chance to do something different. If you really believe in something and it happens to be a little bit off from what your long-term core has been, that’s not the end of the world. I’m not embarrassed or ashamed to sometimes veer away from whatever one would consider to be pure value if I think it’s worth doing. That said, that’s very rare for us to do.

I do think that when you look at our history, it has been these obvious franchise companies where they’ve had a major market position and an industry for many years, where the proof of concept is beyond any reasonable doubt and where there’s been some kind of a negative trend that we think is either transitory or cyclical and will ultimately be resolved. We’re getting involved in companies that once were considered good that are now considered not so good and paying low prices for that, where we have a disparate point of view about how bad and how long they’ll be bad.

Tobias: The last few years of value underperformance, what has that done to your strategy? Have you evolved at all through that period? You feel this is something that will come back eventually if you just keep on doing the same thing?

Chris: Yeah. I hope I’m not being obstinate in the face of a new reality or just being blind, but I think that cash is cash. If you’re buying companies that generate cash or will generate cash in the not-too-distant future, you’re ultimately set up to make money. I do think that these cycles can take many years to play out. So, it’s not shocking to me that we’ve been in the wilderness returns-wise for five, six years now. It’s happened to others before. There have been other managers that I admire and respect that have been out of favor for five or six years.


Bottom Fishing Carl Icahn

I remember when I first bought into American Real Estate Partners, which is now known as Icahn Enterprises, IEP. It was called American Real Estate Partners, the symbol was ACP, but it’s the exact same corporate entity. I bought it in 1996 thinking that I was bottom fishing Carl Icahn because Carl Icahn had gone through a number of years of being just very beat up. He lost all of his money in TWA twice, two consecutive bankruptcies. He lost all this money in Marvel Entertainment, which is before they became successful with all these movies. He saw the potential and lost it all. When I bought into that in 1996, I paid $9 a share when it was $13 of net cash, and another $10 of income-producing real estate. And I thought there’s no way I’m not going to make money with this guy at some point. I mean he’s not lost his mind.

Six years go by and the stock hasn’t gone anywhere. It’s gone up and down. Six years have gone by. I had watched the stock for six years before buying thinking that I was really being patient and smart. Another six years go by and I made no money. And the value guys that were in the stock before me, who led me to it, had left. Tweedy, Browne was the big value– [crosstalk] They sold in despair, like eight or nine, but then from 2000, six years after the initial buy to 2007, it went from 9 to 140. And we sold, unfortunately, no higher than 88. I think we had like a 54, 56 average exit.

Essentially, what happened was that six years of pain and misery turned into 10 years of about a 20% CAGR on that investment. Sometimes, it can take a long time, but how do you know whether you’re being just stubborn– you have to question yourself all the time, and I don’t know 100% for sure that I’m going to be riding all these names. I’m sure that I won’t be. I’m sure that some will be– I think we looked at– Evan in our office, our business development marketing guy, he did a spreadsheet year or two ago, and it turned out that we had like 100 names in total that we’ve ever invested in during the 17 years of the composite.

Of those 100 names, we booked profits on nearly two-thirds of them. So, that’s not a bad hit ratio, it’s probably pretty good. I haven’t seen anyone else do that exercise or published something like that, but I would assume that it’s pretty good. So, if we’re right two-thirds of the time over an extended period of time, then that should be good enough to make an above-average return because obviously, we’re buying things that are cheaper than the market average.

I do think it comes back is what I’m saying. I don’t think I’m being pollyannaish in thinking that things will ultimately get better because so much money is piled into these passive strategies. It’s very reminiscent. You look much younger than me, so I don’t know if you would remember this, but in 1999 and 2000, it was a very similar mentality in the indices and in QQQs.

The Link Between Value Investing And The U.S Dollar

The people that thought that all you needed to do was hold Cisco and GE, and Disney and JDS Uniphase. And these things would take you to the promised land because they had been relentlessly going up. So, it’s hard to fight that mentality until it doesn’t work anymore. But those things all went down like 90%, almost all of them over the next three years, and we were actually up in those three years.

So, the clients that became the foundation at Mittleman Brothers who were with me, I was getting very skeptical, unhappy communications from clients in ’99 telling me that I was out of touch with reality, the old school doesn’t work anymore. It’s been years, because it was years at that point. In ’99, it had been four years or so of me telling them stay away from these expensive internet stocks and then going straight up, and my stuff going up, but not nearly as much.

What happened over the next three years, 200, 2001, 2002, the market goes through a three-year Bataan Death March bear market where it’s down 40% to 80% depending on the index, and we were up 20% over those three years. It wasn’t just us. There was other value guys like David Dreman. A lot of value guys made money in those three years. I think that kind of set up the renaissance of value investing that lasted until the– I guess, whatever period started the retrograde.

So, yeah, I do think it cycles and the cycle will ultimately turn– it may be turning now, because as much as I don’t like to think about these things, the US dollar does seem to play a factor in the efficacy of value investing. For some reason, when the dollar is going down, it seems like value investing does better, and especially global value investing, like we’re doing for obvious reasons. Maybe this sharp downdrift in the dollar– I think it dropped 9% in the last month or two. Maybe that is a prelude to a shift towards value again. I’m obviously hopeful that it will be but, it may be.

How Aimia Reinvented Itself As An Investment Company

Tobias: Yeah, I hope so too. Let’s talk about Aimia. I hope I’m pronouncing that correctly. What’s the story there?

Chris: Sure. Well, Aimia has started out as just a normal value investment from my perspective. I became aware of Aimia in 2003, but I became aware of it– You’re a value investor. We watch other value investors and so I had been watching Onex Corp, which is a publicly traded Canadian private equity firm that’s run by a guy named Gerry Schwartz.

I was just impressed with him at a young age, watching him in the early 90s do different deals and I never invested in the stock, but I just watched it. And so, by having that stock on my “machine,” when news hit in 2003 that they were going to acquire 30% of Aeroplan from Air Canada, it really piqued my interest because that had never been done before. In the history, no one had ever invested in a frequent-flyer program of an airline as a separate entity.

I thought that was a genius idea because the frequent flyer programs were clearly these cash cows inside of airlines. Gerry Schwartz described it at the time as the diamond or the crown jewel of Air Canada, and I totally got that. Before he could close on that deal, I think the deal was to be valued around 8.3 times EBITDA or something like that, for that 30% stake, Air Canada succumbed to bankruptcy, and the deal got scuttled. So, the deal didn’t happen. But it was in my mind, and I watched it.

A couple of years later, 2005, Air Canada is out of bankruptcy. Aeroplan comes public at like 15 times EBITDA, so they must have secretly been thankful they didn’t do that deal with Gerry Schwartz. But obviously at that point, it was not appealing to me, but I still watched it and it was on my radar screen. Then, something happened years later. I didn’t realize it, but they changed the name of the company from Aeroplan to Aimia. At that point, I lost track of it.

There’s a guy named Matt Sweeney, who’s a super-smart value investor who runs a place called Laughing Water Capital. Matt Sweeney sends us his letters. He wrote up a piece on a company in Canada, which is also traded in the US called Points.com, which trades loyalty points. It was an interesting value idea that actually worked out very well. We didn’t buy it, but it went from, I think– he was recommending it at 7 or 8, it went to like 15, something like that. But upon receiving his letter in 2016 I think it was, I remembered about Aeroplan, it triggered my memory and I went looking for it. I didn’t find it. Then, I found it as Aimia, and so I put Aimia on my screen. I’m trying to build you the story of how this all came about.

I had Aimia on my screen. A couple of years ago by or a year or so goes by, and in May of 2017, Air Canada announces that they’re going to not deal with Aimia anymore on their loyalty– they basically did not extend the contract when it expires in 2020– whatever the year was that it was going to expire, they were going to break it. And the stock fell 60% in one day.

So, May 2017, Aeroplan or Aimia dropped 60%. Because of Matt Sweeney’s letter triggering me, because I had it on the screen, I noticed it and I knew that there was other value. There was value in that business beyond just Aeroplan. I knew they had the loyalty program in Mexico, PLM. I knew they had a big loyalty program in the United Kingdom called Nectar. I really knew that there was going to be value there beyond Aeroplan.

A couple of weeks after that happened, I started buying the stock, goes down 40% more, which is typical for us. I start buying a stock, it’s almost guaranteed it’ll be down for 40% in a few months, and that happened. We got to about 10% of the stock in the fall of 2017. In Canada, that’s the limit for filing.

They have a pretty high limit there. In the United States, as you know, it’s 5%. So, I filed that we were going to be passive investors in Aimia, and that was my intent. But I did notice something strange happening in Aimia that I didn’t like. They seemed to be in a panic over this Air Canada thing, and they were selling things at prices that didn’t make sense.

They had a royalty on another loyalty program in Canada called Air Miles. Air Miles is owned by a US-listed company called Alliance Data Systems, ADS. Air Miles has about, I think, 10 million members in it, and it’s a very valuable loyalty program. Aimia owned a 1% royalty on that program, which amounted to about $8.5 million pure free cash flow a year. They sold it for like five or six times that number. And these things in Canada, they’re a royalty trust in Canada that trade at 15, 16 times in the open market.

I was flabbergasted, and I was stunned. So, I met with their then CEO and their then CFO in our office in New York City. They were gracious enough to stop by. And I told them, “Look, we’re not going to sue over this, because it’s not a huge amount of [unintelligible [00:25:16], but this can never happen again. This is an atrocious deal.” I asked them, “Can you tell me who advised you that this was okay to do?” They wouldn’t tell me the name of the investment bank.

Ultimately, I found out later, didn’t really matter. The point is that I put them on notice. I said, “Look, I don’t want to be in a situation here where I wake up and find out that you sold Nectar for something like 5, 6, 7 times EBITDA.” That was the point of my message.

A couple of months go by, February 1, 2018. They sell Nectar, not for 5, 6, 7 times EBITDA which I feared, for a negative number. They sold a $50 million a year free cash flow generator, the largest loyalty program in the United Kingdom for a net cash transfer to the buyer, which was Sainsbury, Nectar’s largest partner. And then, I realized that this was beyond remediation, that we were going to have to get involved actively.

I spent the next week corralling resources, lawyers, everything. I fired off letters, private stuff at first, met with them, ultimately got a couple of board seats, my brother, Phil, being the most critical one. By putting Phil on that board of directors, we were able to essentially stop them from hurting themselves much more than they were going to do. So, we intervened. We stopped them from– the fire sale that was in process, we stopped thankfully before it got much, much worse. We were able to salvage probably a few hundred million dollars that would have been gone had we not showed up when we did. So, this was a very unusual amount of activism for us to be involved in. This is not what we desire to do or aspire to do. We’re not one of those firms that wants to get involved in the nitty-gritty of running a company to that degree.

That being said, once we were inside, we realized there’s a lot of opportunity here because of the prior mistakes and the tax losses that were generated, we were– this thing was turning into ultimately almost the perfect permanent capital vehicle, and to have $700 million of tax loss assets and a huge pile of cash, some decent businesses already under the umbrella, especially this thing in Mexico, this loyalty program, Premier Loyalty, it looked like an amazing setup. So, it looked like an Icahn Enterprises or American Real Estate Partners, but better. It looked like all these different holding companies that I’d invested in the past, but better. So being a big shareholder in it, being so closely involved with it, we thought we should try to help them direct those funds wisely. They didn’t want that. They wanted to stay in loyalty and that brought into a whole new fight.

Ultimately, the litigation would resolve. The board was changed in its entirety, except for my brother, Phil. And now we’ve got a board of real owner-operator types. The board of directors owns 25% of the stock amongst themselves, obviously Mittleman Brothers being a big chunk of that 15% or so.

But it’s a highly engaged, experienced board, investors, business operators, corporate governance experts. It’s a great board of directors, and they’re doing smart things. They’re buying back stock. They’re making wise investments. I think that Aimia is in a point of transformation that the market is yet to fully recognize. I think that it’s in the process of happening. The coverage was just picked up by Jefferies. Jefferies is a fairly sizable investment bank, but it’s the first US investment bank broker to pick up cover to the company. They came out with, I think, a $9.5 target price on the stock, which is still in the low $3 range Canadian.

I would like to see them move to a dual listing on the NYSE. We proposed that, and I think they’re considering it. When I say them, I guess I should say us because I’m on the board now. But I think that’s something that could reasonably help the liquidity in the shares and also the visibility and the valuation because it does seem like small caps in Toronto trade at a very sizable discount to similarly sized small caps on the NYSE, maybe even a 20% or so differential.

Given that the investor base in Aimia has transferred so much to US base value investors who followed our lead, I guess, into the company, I think that it would be great to have a New York Stock Exchange listing for them to traffic in the shares. And maybe that would entice some others to join in.

So, it’s a really good group of shareholders that are coalescing around this name. You would know. You like almost everybody in the value business. So, if you were to look through the shareholder roster, you would see a lot of names that you recognize, and really high-quality guys like David Marcus of Evermore Global, formerly of Michael Price’s Mutual Shares. A lot of really smart guys have found this thing as appealing as we find it. So, I do think there’s a unique opportunity here and it’s incredibly exciting because we get to be involved.

I’ve always been investing in these things as a passive investor. When I bought the Icahn thing, I knew that Carl was going to do what he was going to do and I was just going to be along for the ride. Some things I agreed with, some things I didn’t agree with, but most of the things worked and that’s why ultimately it worked out. I was involved in with Leucadia before that. I was involved with Harbinger Group with– a bunch of these holdco types of investment vehicles that ultimately were dependent upon the investment acumen of basically one guy, one guy who is the sole decision-maker.

Aimia will be a little bit different because even though I’m the chief investment officer now, it’s an investment committee. So, I can’t just push a button and do what I want to do with Aimia. I think a lot of investors are probably happy about that, given our trailing five-year track record. I think that having some controls on me probably makes the investing public a little bit less nervous about Aimia, but it’s a really smart group on the Investment Committee. Guys like Mike Lehmann used to work at Third Avenue Value under Marty Whitman for many years and Gabelli before that. So, it’s a really good group and I think that it’s heading in the right direction. I’m really excited about the investment they made in Clear Media.


Aimia Acquires Stake in Clear Media Limited

Clear Media had been a Mittleman Brothers holding for many years. We had owned it for, I think, seven and a half years, made about a 16% CAGR. The company was basically in a buyout situation that we would ultimately not be able to participate in just as regular shareholders because they wanted to buy the whole thing. And if we didn’t acquiesce, then we would have had fight appraisal rights, and that would not work in Hong Kong probably.

Clear Media is an amazing business. It’s the one of the largest outdoor advertising firms in China. The buyout group is led by the CEO himself, by Jack Ma’s Ant Financial, by JCDecaux, one of the largest outdoor advertising, the largest in the world, and a Chinese private equity fund that’s basically owned by the state. So, it’s a super blue-chip group of investors. And now that Aimia has bought that stake and owns another–

Basically, Aimia was able to acquire near 11% stake in the company just over the 10% necessary to block a forced merger and so that stake will survive. Our clients, Mittleman Brothers’ clients who own a big position in Aimia will benefit from that, and Aimia will benefit from that. I think that was an incredibly well-timed investment on their part because the business itself seems to be rebounding in China. I think there was a bottom maybe a couple of months ago, and it’s been turning up pretty sharply there in terms of the outdoor ad spin. So, we’ll see. I would imagine that by the time the Beijing Winter Olympics come around in 2022, that this business will be doing very well and we’ll be very happy to have Aimia as an owner.

Tobias: What’s the structure of Aimia now? Your brother is the CEO, you’re CIO. Mittleman Brothers, the entity is now a wholly owned sub, is that the way it works?

Chris: Yeah. And Mittleman Brothers will just be Mittleman Brothers. It’s not going to be– there are different models here. Mittleman Brothers itself will just continue to manage the money that Mittleman Brothers manages. It’s not going to be the manager of Amia’s money. Obviously, Aimia could send us some money to manage that we’ll be happy to receive an account from them, but that’s not the way it always works in these situations. For example, Fairfax Financial, which is controlled by Prem Watsa. In 1992, Prem’s money management firm, Hamblin Watsa, had been for years managing all of the float of that company. And in 1992, to resolve the conflicts of being managed by an outsider who’s actually the controlling shareholder of the firm, they bought Hamblin Watsa, bought it inside of Fairfax, and they continue to manage all of Fairfax money. That’s not the goal here with Mittleman Brothers.

Mittleman Brothers would continue to manage its clients’ money, but Aimia will manage its own money and obviously I will advise Aimia as to how to go about doing that. So, it’d be a little bit of a different dynamic there and definitely a separation between the two entities, which is good because I think the clients at Mittleman Brothers don’t want to see a change coming in terms of my being able to operate the way that I have and shareholders of Aimia probably don’t want to see somebody given carte blanche to do whatever he wants there.

Tobias: You view it as a permanent capital vehicle, something like an Icahn Equity Partners, Berkshire, Fairfax, that style of–?

Chris: Yes. I think so, because it’s set up that way. When you think about it, it’s got a nearly $200 million of net cash, no debt. The only liability is this perpetual preferred stock, which is somewhere– I think the blended interest rate on the two different tranches is like 5.4%. Because it’s perpetual, it doesn’t really– it’s almost equity. In a truest sense of the word, it really is equity because we don’t have to buy back and it’s equity at a very low cost of equity. When you think about what equity financing normally requires, it’s definitely not 5.4% and a tax loss asset.

When I bought with into Icahn’s thing, there were no tax assets. There was cash and income, but no tax assets. Danielson Holdings is probably a good example. Danielson Holdings was a Marty Whitman, Sam Zell joint venture. There was a burnt-out old insurance company that I bought in the late 90s. It had like a billion dollars of NOLs and some cash. They turned that into Covanta, which is now CVA I think on the New York Stock Exchange, a waste energy company.

The point is that having the tax assets and the cash makes a big difference. So, when you look at what’s going on in the world today with SPACs, everybody’s doing SPACs, they love SPACs. People pay 100% on the dollar for the genius of the guy who’s going to pull the trigger. With Aimia, maybe you don’t have a genius at the helm, but somebody who’s a little bit smarter than average and you’re getting it at like less than half of what its NAV is.

It’s better than just that, because we get the tax assets too. So, when Aimia goes about looking for acquisitions, and Aimia is ultimately going to buy something that generates enough cash flow to the holdco that we can sustain it that way, we’ll be in a better position because taxable income that we might purchase will be nontaxable to us for a number of years. And so that can make us paying seven or eight times EBITDA a lot better economically than it would be for someone else and so I think it gives us a competitive advantage.

So, that’s part of the reasons it’s so exciting, is that we’ve got a lot of flexibility and the structure is perfect for this. Obviously, we’re competing with a lot of SPACs that are of similar size, if not bigger, but I think that we’re competing with a bit of an advantage actually.


The Time That Berkshire’s Share Price Dropped Almost 50%

Tobias: Just one of the things that I noticed in your note, the most recent one. You talked about Buffett when he got control of Berkshire, I didn’t realize this. From ’69 to ’75, Berkshire’s share price almost halved over that period of time. Do you want to tell that story?

Chris: Sure. Well, that was something– I don’t know where I first read about that, but I was surprised too. I delved into it more deeply over the years just because it’s a period in Buffett’s coming up that doesn’t get a lot of attention because it’s not super amazing. It’s like, “Oh, well, his stock went from 42 to 38 after hitting as high as 93.”

Tobias: Kind of predates the letters too.

Chris: Yeah, the letters were actually going on, but they just weren’t publicized. So, there were letters and you can get them but they’re not part of the more highly publicized chunk of letters. And it was more complicated, messy time for Berkshire. If you read, there’s a book called The Snowball, by Alice Schroeder, I think her name is. I had known of her since my days at Paine Webber, UBS because she was an insurance analyst. She, I think, was one of the first ones to pick up coverage at Berkshire. It’s amazing that Berkshire didn’t have a sell-side research report on it until I think she picked it up in the late 90s after all the success that they had, which just shows you like the way Wall Street works.

I looked into this, and I was amazed to see that– part of the reason that he was maybe having trouble getting a good valuation was that he was involved in some messy situations. Washington Post was going through a period where they were under US government pressure. I think Nixon was trying to cancel their broadcast license on TV stations down in Florida. He himself was under investigation by the SEC for insider trading– I think it was not insider– I think it was technically market manipulation or securities fraud because they had been bidding in the open market for a certain security at an unusually high price in a way to try to help people who wanted to sell it.

There was nothing nefarious about what he was doing and it was actually done out of an abundance of goodness on his part but because it technically tripped into what the SEC deemed to be securities, fraud or manipulation, they had a very stressful period where they had to negotiate some kind of a settlement or center or something like that. It worked out that his reputation was saved. He didn’t have– it didn’t go to the next level. But it was a time that was difficult.

Harry Brent Sold Berkshire Too Early

I just thought it was interesting, because think about yourself as an investor in that if you were there. Six years is a long time to wait. I thought what was really telling you about it was that one of his best friends, that guy, Harry Brent, who had been, I think, roommates within New York City. A friend of 15 years, you know, he tells Warren Buffett, “Look, I can’t handle this thing going under 40. Tell me it won’t go under 40.” And Buffett is telling him, “I can’t tell you that.” So, he sells it just above 40, half of his Berkshire stock just because he couldn’t take the psychological pain of having it been cut in half and going any further.

You think about the magnitude of these decisions, what that decision meant, and it’s just incredible. Who would have known that from this messy conglomerate that’s such an amazing thing would develop? But that’s the beauty of this business, is that you could be wrong for a huge period of time and then be so right that it makes it all worthwhile in the end. I think that’s a very encouraging message for value investors, is that not to be– listen, you don’t want to bury your head in the sand and just be– guys who held on to Sears, Kodak, JC Penney too long obviously suffered. There are times when it does become obvious that you need to move on. But it’s not always so obvious. So, I do think that period in history is something that people should study and look into more because it’s really interesting to think of how hard it must have been for some people to stick with that investment, even though that was exactly the right thing to do.

Tobias: I think it’s Harry Brent who was the gentleman who did the scuttlebutt for Buffett in his American Express position, so he features very heavily in the Buffett legend.

Chris: Yep, that was the name.

Tobias: Even Harry Brent couldn’t hold on. It just shows how hard it is.

Chris: I know. It’s incredible. I actually had a client, I won’t name him, but a client of mine who was an investor in Berkshire in those years, and he had told me that he had had difficulty holding on to the shares because his bank wanted him to put up more equity for a home mortgage or something like that. And he was under a lot of pressure from his wife to sell some, and he didn’t do it. Obviously, everyone’s very thankful for that now. So, yeah, it’s interesting. There are a lot of stories like that in history.

Tobias: It wasn’t Buffett sandbagging to buy a little bit more of that period?

Chris: No, because he wasn’t buying, I think, more Berkshire stock during those years. He was buying more– During those years, he was buying pieces of companies in the open market, but he wasn’t buying Berkshire stock. They also were buying Blue Chip Stamps. So, when you think about that period, he was on the board, he, Charlie Munger, and Rick Guerin on the West Coast who had given them the idea. They started buying Blue Chip Stamps in late ’69. This is interesting, because this is one of the reasons why I wanted to do Aimia, is that I had had this fantasy of having a Blue Chip Stamps, a loyalty program with a lot of float that I could invest– [crosstalk] and I thought I’ll never have that happen. It’ll never happen to me, but I just thought someday maybe.

Buffett’s Genius In The Dying Blue Chip Stamps

Blue Chip Stamps was one of a couple of these kind of programs. There was S&H Green Stamps, which ended up with Leucadia, and that made them a ton of money. But Blue Chip Stamps was a program that had a lot of float, but it was dying. I don’t think Buffett or Munger, Guerin realized how fast it was going to die. So, from 1969, almost immediately, they lost their biggest customer, which was like Safeway, the grocery store chain, and so the stock got cut in half. They bought more. They built their stake from 10% to 20%, 30%.

Over time, they became a controlling shareholder. And over time, Blue Chip Stamps did very well, despite the fact that their gross billings dropped like 80% during 10 years, and it was all basically just investing the float. So, they took Blue Chip Stamps float, they invested in companies like Pinkertons, the security guard service, they bought See’s Candy. They did a lot of things that ultimately compounded the net worth of Blue Chip Stamps by something like 15%, 16% over the course of 10 years. That was a very good thing for a business that was ostensibly dying.

I think that was kind of what was going on in the 70s there and maybe that was a bit of a distraction for Berkshire shareholders or thing like, “Well, is he with Blue Chips? Is he with us? How does this work out?” Ultimately, they merge the two things. People don’t remember this, but Munger himself was not actually part of the Berkshire family until they merged Blue Chip Stamps into it. Blue Chip Stamps, I think, they got up to 60% of the stock by the late 70s, early 80s, and I think by 1982 or 83, they merged Blue Chip into Berkshire, and in doing so got Munger. So, Munger officially became part of Berkshire in that merger because he had been, I think, chairman or vice-chairman of Blue Chip Stamps. So, it’s interesting, the history. That part of it doesn’t get studied as much. But I think that’s the most interesting part because so many critical decisions made there were ultimately life changing for people that stuck with it.

Tobias: Yeah, it’s a fascinating story, Chris. We’re coming up on time. If folks want to get in contact with you or follow along with what you’re doing, what’s the best way to do that?

Chris: Sure. I think the website has a contact information. If you go to www.mittlemanbrothers.com, there’s various ways of reaching either me or Evan Newman, our business development guy, and we’re very responsive. There’s like an info@mittlemanbrothers.com, email address. We follow up with almost everyone who has a question, so I’d be happy to receive inquiries that way.

Tobias: That’s great. Chris Mittleman of Mittleman Brothers, thank you very much.

Chris: Thank you.

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