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Walter breakup endorsed

The company's largest investor appears to take sides with another hedge fund, which has called for splitting its three divisions.

By SCOTT BARANCIK
Published May 27, 2005

The threat of a shareholder revolt at Walter Industries intensified Thursday when a second hedge fund with a big stake in the Tampa company agreed that breaking it apart makes sense.

Appaloosa Management LP said in a regulatory filing that Walter should unleash its "intrinsic value" by getting rid of its homebuilding and mortgage units or by rebuying some of its stock. The Chatham, N.J., hedge fund is Walter's largest investor, with a 15.3 percent stake.

Appaloosa's stance was not identical to that of Pirate Capital LLC. Pirate, a Norwalk, Conn., hedge fund, warned Walter on Wednesday to break up all three of its business units - coal mining, homebuilding and industrial products - or face a battle for control. It believes Walter's red-hot coal unit is being dragged down by the others.

But there was enough common ground Thursday to suggest that Pirate, with a 5.3 percent stake in Walter, could count on Appaloosa to support its call for change. Together, the two hold a 20.6 percent share.

One shareholder opposed Pirate's demand Thursday. Daniel Loeb, CEO of Third Point LLC, said in an e-mail that he does not share Pirate's view of Walter or believe breaking up the company is desirable, citing negative tax consequences. Third Point, a New York hedge fund, owns a 4.4 percent stake in Walter.

In an interview, senior vice president Joe Troy said Walter will do "what we think is right for all of our shareholders."

"We continue to discuss strategic alternatives and consult with our advisers with respect to each of our businesses and in the aggregate," he said.

Though Troy declined to say whether Walter had hired an investment bank, as Pirate demanded, his tone was less defiant than on Wednesday, when he defended Walter's board of directors and said the idea of breaking up the company's business units was old hat.

Hedge funds like Appaloosa and Pirate are new to Walter and have no seats on its board of directors, but they have aggressively bought its stock over the past year. Such funds hold more than a 33 percent stake.

Given the typically short-term view such funds take - Pirate's Loukas said Wednesday his fund holds most investments less than a year - their presence could make for a volatile future at the Tampa company, which began building low-cost homes in 1946.

Walter has not entirely ignored its hedge fund investors. Troy and CEO Don DeFosset met with Appaloosa representatives this week and a meeting with Pirate representatives took place this month.

But the company isn't knuckling under to the pressure.

On Thursday, Walter appointed two directors: airline executive Joseph Leonard and real-estate veteran Mark O'Brien, who, like DeFosset, is an alum of the former Allied Signal Inc.

Neither appointee appeared to be affiliated with Walter's hedge fund shareholders. Pirate's Loukas said Walter never ran the choices by his fund's managers.

"Their shareholder base has changed dramatically over the last six or seven months," he said of Walter. "It certainly would make sense for a representative or two of the new shareholders to be on the board of directors."

Scott Barancik can be reached at barancik@sptimes.com or 727 893-8751.

[Last modified May 27, 2005, 00:39:13]