The Globe and Mail (Canada)
September 28, 2007 Friday
THE LONE RAIDER;
George Armoyan has suddenly emerged as Canada’s activist investor
extraordinaire. His problem now? He’s too successful
by JOHN DALY
Unless you run an underperforming mid-size Canadian company or income
trust, the name George Armoyan might not scare you.
But if your business is on the ropes and Armoyan calls up to request
a meeting, you’ll want to freshen up your resumé. Yves Simard, the
CEO of the ailing swimwear chain Groupe Bikini Village, was well
aware of Armoyan’s reputation when he arrived at the retailer’s HQ
outside Montreal one day this past spring. The chain was facing an
uncertain future as one of the remnants of the collapsed clothing
retailer Les Ailes de la Mode, brainchild of Montreal entrepreneur
Paul Delage Roberge.
Simard chuckles as he recalls his nervousness prior to the four hours
of meetings he and Roberge had with Armoyan. "It was not the
earthquake that we expected, but [Armoyan] dropped on the table what
he had to drop," says Simard.
Over the past three years, the 47-year-old Armoyan has been on a
tear, seizing control of a dozen mostly beaten-up but asset-rich
companies, including Versacold Income Fund, a refrigerated
warehousing/trucking outfit; Royal Host Real Estate Investment Trust,
a hotel owner and franchisor; and General Donlee Income Fund, which
makes aircraft components. Armoyan’s modus operandi is the same in
almost every case: He quietly starts accumulating shares through his
principal public investment vehicle, Clarke Inc. Then, when he
crosses the 10% threshold that requires him to publicly disclose his
holding, he demands seats on the target’s board of directors and
input into management. The goal is to gain control and then engineer
a turnaround, or sell off the company for a profit as soon as
opportunity knocks.
Armoyan has no tolerance for what he calls "bullshit and
bureaucracy." But he offers managers in his sights a carrot: "I tell
them, ‘My objective is to make you guys as rich as possible-as long
as shareholders become rich too.’" If the managers don’t play ball,
he tells them, "Your talents should be used elsewhere." And he’ll
wage a proxy fight to replace unco-operative directors, if necessary.
In the case of Bikini Village, Armoyan, Simard and Roberge eventually
hammered out a strategic plan. Then, at the company’s AGM in June,
shareholders elected three Armoyan-backed candidates to the board.
Simard stayed on as CEO, but, in August, Roberge reverted to being
just a director, and textile executive Mardiros Ounanian, who is also
Armoyan’s brother-in-law, was named chairman. Armoyan was in the
driver’s seat yet again.
The mere news that Armoyan has taken a position in a company is now
enough to prompt copycat investors to start buying, which drives up
share prices-what one analyst called the "Armoyan Effect." And now
that Armoyan has relocated from Halifax to Bay Street, the deals are
getting bigger. The maverick raider wants to transform Clarke into a
mainstream player with a stock market value of $1 billion by 2010.
So is it time to tone down the bad-boy image? "A lot of people are
pleasantly surprised when they first meet me," Armoyan says. "I don’t
have horns." He may not want word to get around. After all, being
abrasive has worked fabulously well to date.
Armoyan has been searching for angles and opportunities since he was
a kid. He was born in 1960 in the Syrian port city of Tartous, the
first of three children. His father, Sami, was a watchmaker, and his
mother helped out in the shop. As a boy, George set up a little stand
in front of the store to sell candy. "Even then, I enjoyed trading
and negotiating," he says.
Armoyan’s grandparents, Armenian Christians, fled Turkey following
the genocide of 1915, when an estimated 1.5 million Armenians died.
Armoyan speaks Armenian, Arabic and Turkish-although he only visited
Armenia for the first time this past summer. However, he says, "two
Armenians inspire me": One is Calouste Gulbenkian, who gained
renown-including the sobriquet "Mr. Five Percent"-for his deftness as
a middleman between Western oil companies and Turkish and Iraqi oil
interests after the First World War. The other is billionaire
corporate raider Kirk Kerkorian.
In 1976, Armoyan’s father sent him to live with an aunt and uncle in
Boston; the rest of the family followed a few years later. When it
came time for George to go to university, the family couldn’t afford
Harvard or other elite U.S. schools, but Lebanese friends in Halifax
suggested the city’s own Dalhousie University.
Armoyan studied civil engineering, although he wasn’t all that wild
about it. For one thing, campus social life-eating suicide wings and
drinking beer-was a lot more fun. And he had other interests. While
in school, he managed a 32-unit apartment building in which his
parents had invested. "I did everything in that building," he
recalls. "I vacuumed the hallways, I collected rent, I broke up
fights on Saturday night."
In class, Armoyan liked courses such as economics and law much better
than engineering. Still, he says, the engineering training proved
useful later on in the real estate business. And it gave him his yen
for hard assets. "I like ‘stuff,’ " he says. "I like to feel and
touch."
Armoyan’s penchant for bottom fishing also revealed itself soon after
he graduated in 1982. Interest rates were at double-digit levels, and
all kinds of businesses were on the ropes. One of his first deals was
to buy the assets of a bankrupt three-store camping goods chain, The
Outdoor Experience. "I liquidated them over a week or two and made
good money," he says. "I took that money and put it toward my first
real estate deal."
The real estate market was also in a slump, but Armoyan plunged in
through his family’s small private company, the Armoyan Group. He
soon found he had a profitable niche and an outsized reputation. Even
now, some people in Halifax mistakenly say Armoyan was principally a
home builder in the 1980s and ’90s. In fact, what he did was buy
land, subdivide it and prepare it for development (putting in roads
and sewers), then sell off lots to home builders or individuals.
Often the lots were smaller than in established neighbourhoods
nearby, which riled homeowners worried about declining property
values.
Armoyan soon managed to become perhaps the most hated developer in
town, often forging ahead with projects before he received permits
from city hall. This led to frequent blow-ups with residents and
local politicians. "Most of it was to do with cutting trees," Armoyan
says with a shrug. "I was in such a hurry. But I never broke the
law." Well, maybe he came close back when he started out. "I kited
cheques for a while," he admits.
Armoyan couldn’t resist firing back at his opponents, both at
municipal council meetings and in the media. When one resident
complained about an excavator ripping up land near his home, Armoyan
told a reporter the guy was "a pain in the ass, and you can quote me
on that."
The low point came after the Armoyan Group built several schools in
new neighbourhoods in the ’90s as part of a provincial public-private
partnership. That program gave him a cut of cafeteria revenues. In
2001, it was reported that some education officials had accused
Armoyan of trying to extend the deal into a realm where it had no
business being-the chocolate bars, brownies and other items sold in
schools for charity.
Armoyan sued the education department and a local paper for
defamation. In the end, he says, the dispute was settled through a
renegotiated contract that gave him other considerations in exchange
for giving up the concession rights.
Does he have any regrets from those wild early days? Yes and no. "I
wish I hadn’t had the conflicts," he says. On the other hand, "I
thrived for publicity." Thanks to the media coverage, he says,
"people knew about my projects, and I sold them without any
advertising."
Even some of Armoyan’s closest friends roll their eyes a bit over his
tendency to blurt out whatever he’s thinking. "Some of us tease him
that we’ve never read articles about anybody else where the word
‘shit’ comes up," says Michael Bregman, the former owner of the
Second Cup coffee chain, now CEO of Toronto-based Tailwind Capital,
which has invested in deals alongside Armoyan. "He doesn’t swear a
lot, actually, but whatever word comes out, comes out."
That combative streak, which gained Armoyan so much notoriety in
Halifax, would soon vault him onto a bigger playing field.
Armoyan probably wouldn’t have won control of Clarke-or even heard
much about it-if then-chairman and CEO Roy Rideout hadn’t pissed him
off so much. In 2000, Armoyan had accumulated a small stake in
Halterm Income Fund through another private holding company, Geosam
Investments (named after his two sons, George and Sam, now 14 and
13). Armoyan thought Halterm’s terminal and cargo-handling operation
looked promising, and wanted to increase his holding. But one thing
bothered him: Halterm had farmed out the management contract to
Clarke, which shared the same ownership.
Armoyan says Rideout refused to sell that management contract. Even
now, Rideout declines to discuss what happened
According to Armoyan, after Rideout balked, he began researching
Clarke and noted that its share price had been stalled near $2 for
years (price adjusted for subsequent stock splits). Armoyan began
buying stock. When he reached a 16.6% holding, he demanded a seat on
Clarke’s board. The directors then renewed a takeover defence-a
poison-pill provision that would be triggered when any shareholder
raised his interest above 20%.
Armoyan was livid, and rallied other shareholders to vote down the
poison pill at Clarke’s annual meeting in August, 2002. A few days
later, he raised his stake to 27%. And he kept the pressure on. That
October, Rideout, then in his mid-50s, retired. The following April,
Clarke announced that Darell Hornby, who had succeeded Rideout as
CEO, was leaving "to pursue other opportunities."
Armoyan then took over as CEO himself. He quickly installed new
managers and cut costs. In 2004, he sold off Clarke’s logistics
services business-which co-ordinated all aspects of cargo shipments
for clients-for almost $50 million. Over the past three years,
Clarke’s share price has tripled.
But to conclude from all this that Armoyan is interested in running a
trucking firm, or any of the day-to-day operations of the other
companies he’s bought into, would be a mistake. Clarke is now mainly
an investing company-an "aggressive, entrepreneurial, activist
catalyst investor," as Armoyan wrote in the company’s annual report
for 2006. He’s too busy looking for the next takeover target to worry
about the little stuff.
There is method to Armoyan’s impatience. The deals he’s made since
taking control at Clarke aren’t identical, but there’s a pattern. He
and a handful of advisers start by looking for companies or sectors
that have had their share or unit prices battered. He’s approached
mostly mid-size companies so far, those with a stock market value of
around $50 million to $150 million. That is deliberate-those
companies tend to fly below Bay Street’s radar screen because they’re
too small for analysts to cover, and institutional investors shy away
because the shares aren’t widely traded.
After Armoyan picks a target, he looks for hard assets on its balance
sheet. He immediately values intangible or soft assets like goodwill
or a brand name at close to zero. He’ll also engage in a little
covert intelligence-gathering if necessary. "We find out a lot of
things by talking to people’s competitors or pretending to be
customers," he says.
Armoyan then usually acquires a stake of 10% to 20%, which is enough
to press for seats on the board and to make managers wake up and take
notice. Why not go for more than 50%? Buying smaller portions allows
Armoyan to spread his money among more deals and also avoid many
regulatory complications. Plus, with companies of this size, it can
be difficult to unload a majority stake on the open market if things
don’t work out.
Once Armoyan has effective control of a company, he looks to achieve
one of two objectives. One is for Clarke to be a sort of mini-Onex
and engineer a turnaround
One of his earliest successes was Vaquero Energy, a Calgary-based
junior oil company. He bought in at 57 cents a share in 2003, and set
about fixing the place by providing management with fresh capital.
Two years later, after Vaquero also got a boost from soaring oil
prices, a rival took over the company for about $7 a share.
Then there are what Armoyan calls "opportunistic"
investments-companies that he figures have been undervalued by the
market, and which he’s happy to sell for a profit as soon as someone
makes a fair offer. Vancouver-based Versacold Income Fund, which owns
and operates refrigerated warehouses in the Americas and Australia,
turned out to be one of those. Armoyan bought up close to 20% of the
company’s units in 2006 and eventually secured several seats on the
board. Versacold’s unit price had been stuck below $9 for years.
In May of this year, Armoyan bought more Versacold units. The board,
which had launched a "strategic review," continued talking to
interested buyers. Within days, Armoyan had received a takeover bid
from, suitably enough, Iceland. Eimskip Holdings Inc. offered $12.25
a unit; the $515-million deal closed in August. Brent Sugden, who is
staying on as Versacold’s CEO, says it was a good thing Armoyan was
so aggressive: The sale was concluded before the stock market started
melting in July. "Had it not been for George, we would have still
been going through a process that would be mired in the current
marketplace," says Sugden.
Even some owners and executives who have left companies in Armoyan’s
wake are impressed by the results he’s achieved. In 1999, Armoyan
started buying and selling small amounts of shares in Calgary-based
hotelier Royal Host, which owns 37 properties under several banners,
including Best Western and Hilton. In 2005, he raised his stake to
17% and began pushing the founding Royer family for changes,
including boosting distributions to investors and buying back units.
In May, 2005, Armoyan cranked up the pressure. Minutes before Royal
Host’s annual meeting at the Metro Toronto Convention Centre, Armoyan
took then-CEO Greg Royer aside and told him that he was nominating an
alternate slate of directors. That slate prevailed, and Royer stepped
down as CEO the next year. Armoyan brought in veteran hotel executive
Mike Jackson, who moved fast to improve operations. "Impatience is a
virtue in my mind," says Jackson, who left amicably in August.
Greg Royer says he has no hard feelings, either. "I’m happy as can be
about Royal Host," he says. Its unit price has climbed to $7 recently
from a low of near $4 in late 2003. "Thanks, I hope, to some of the
things that I did and some things George did, it went up 50% in
value."
Of course, a raider’s life is easier when fire-sale prices prevail.
The turmoil in the income trust sector over the past couple of years
has afforded Armoyan some unique opportunities, particularly after
federal Finance Minister Jim Flaherty’s bombshell announcement last
October that he was eliminating the trusts’ tax advantages. "The
dislocation resulting from the changes in the legislation, and even
before that, created a vast opportunity, and George exploited it,"
says Michael Bregman. But Bregman adds that Armoyan is no one-trick
pony. "His style is applicable elsewhere."
Not every Armoyan foray has been pro- fitable, however. In 2005, he
bought a small stake in Hip Interactive Corp., a Mississauga-based
video-game maker and distributor. It went into receivership just a
few months later. Although it was a digital business, Armoyan says
Hip had hard assets, including inventory and manufacturing
facilities. The trouble was that some of its financial results had
been falsified.
No one in the markets has taken much notice of this reversal. In his
report- "The Armoyan Effect"-published in April, Michael Mills, an
analyst with Halifax-based Beacon Securities, followed the share
prices of 17 companies Armoyan has invested in recently. On average,
within five days of Clarke’s announcing it had acquired an interest,
the company’s share price jumped by 12.3%.
That worries Armoyan a bit. "People shouldn’t expect all of a sudden
that the Holy Spirit will come along," he says. In fact, this past
spring, the Armoyan Effect actually aggravated a dispute he had with
the government of Newfoundland.
In April, Armoyan quit the board of FPI Ltd., the struggling
Newfoundland fish processor, after running afoul of another
Rideout-Fisheries Minister Tom Rideout-and just about everyone else
on the Rock. Armoyan and Halifax seafood magnate John Risley had each
acquired 15% of FPI, the limit for outsiders under provincial law.
They wanted more, but the government refused to lift the
restrictions. "It’s a frustrating place to do business, with
government interference," Armoyan griped, and said he’d sold his
shares.
That prompted Rideout to ask securities regulators to investigate the
unusually heavy trading in FPI stock during a price run-up in March
and April, when the copycats were piling in. Armoyan dismissed the
whole thing as a "vendetta," saying he’d done nothing wrong.
Apart from such fireworks, the copycats can make it more expensive
for Armoyan to buy more shares in a company once he has crossed the
10% threshold that compels disclosure. The smaller and less liquid
the company, the bigger the lift in share prices. That could make it
hard for Armoyan to find bargains in the latest slumping sector to
catch his attention: oil and gas services. Gas producers, in
particular, have been drilling a lot less lately, but Armoyan figures
that things will pick up again. "It’s a depletable asset, and they
have to replace reserves," he says.
Yet Armoyan isn’t going to be satisfied by merely picking up a few
more medium-size companies, no matter how cheap he gets them. While
not a major force on Bay Street yet, he’s actually lived in Toronto
since 2003. He wanted his two sons to have the best possible
education, so he rents a large house in Forest Hill across the street
from their school, Upper Canada College. His landlord is also his
neighbour: Ted Rogers.
True, Armoyan shifted Clarke’s headquarters from Toronto to Halifax
in 2005, and the staff of 30 people there includes his key takeover
advisers. Armoyan says he made the move because he wanted to reward
the city that gave him his start. For his own part, he only needs to
be in Halifax once a month. It’s more important for him to be "where
the deal flow is."
The main reason for that is that he’s now operating mainly through
Clarke, -which is to say, using more of other people’s money. Last
November, Clarke raised $115 million for new acquisitions by selling
convertible bonds on which it has to pay 6% interest. That’s a big
nut to cover, given the turmoil in the markets this past summer.
Armoyan isn’t fazed. "If I can’t make 6% on the cash that I have, I’m
in the wrong place," he says.
Armoyan is also dealing regularly with bigger players than he has
formerly. "Do you want to have a big piece of a small pie or a small
piece of a big pie?" he asks. "A small piece of a big pie is better."
Somehow, however, Armoyan seems destined to stay hungry. At his new
offices in Toronto, it’s basically just him and his assistant in a
generic high-rise in the shadow of the bank towers at Bay and King.
And he’s still doing an awful lot of work himself. On an afternoon in
early August, he looks weary; he’s been back in Canada for a week
after a month-long trip to Europe and the Middle East with his wife
and sons. But he was on his BlackBerry practically every day. Today,
he’s operating on about two hours’ sleep-his flight from Montreal the
night before was delayed until after midnight, and he was in the
office at 7 a.m. for a board meeting. "I’m like a zombie," he says.
Yet he’s already set his sights beyond Bay Street. The biggest pie of
all is south of the border. Armoyan has met with, and invested in, a
small New York private equity firm, with a view to identifying
opportunities. "In the United States, they are very competitive, more
driven by a buck," he says. Is that intimidating? "I can handle
myself."