Oxstones Investment Club™Loews Corp. Chief Executive Officer James Tisch is the dealmaker who won’t make a deal.
He has almost $50 billion to invest, including premiums from an insurance company his New York-based conglomerate owns. Yet Tisch hasn’t made a big purchase in five years, holding off even during the 2008 and 2009 financial meltdown, when the Standard & Poor’s 500 Index (SPX) fell more than 50 percent.
Tisch gives a musical answer when asked about acquisitions. “Do you remember Diana Ross and the Supremes?” he muses in his seventh-floor office on the East Side of Manhattan. He then breaks into a smooth, tenor rendition of one of the Motown trio’s 1960s hits.
“You can’t hurry love,” Tisch croons, slicing the air with his hand. “No, you just have to wait.”
Tisch, 59, says he won’t rush into any big purchase, partly because hungry private-equity firms are driving up prices. Other U.S. corporate chieftains are equally reluctant. The companies in the S&P Industrial Index, which excludes financial firms and utilities, are holding a record stash of more than $1 trillion and, like Loews, are using some of their cash to buy their own shares rather than taking on new enterprises in a shaky economy.
Even while counseling patience, Jim Tisch and his management team have outperformed the value investor and serial acquirer to whom they’re often compared: Warren Buffett. Since Tisch took over the top spot at Loews in December 1998, the firm’s shares have returned 8 percent annualized through the end of March, almost double the 4.3 percent return of the Class A stock of Buffett’s Berkshire Hathaway Inc. (BRK/A), a company more than 10 times Loews’ size.
Book Value
Growth in Loews’ book value per share — a metric favored by Buffett — has averaged 10 percent annualized from 1998 through 2011 compared with 8.1 percent for its Omaha, Nebraska- based rival.
“That’s validation of Loews’s ability to allocate capital,” says Fred Fialco, a portfolio manager at Torray LLC, a Bethesda, Maryland-based investment firm that owns Loews shares. “They know how to compound earnings.”
Jim Tisch guides Loews as part of a triumvirate. He’s president and CEO; his brother Andrew, 62, and their cousin Jonathan, 58, are co-chairmen. Together, they run a conglomerate with a $15.2 billion market capitalization as of April 10 that traces its origins to a single New Jersey hotel bought more than six decades ago by Jim’s late father, Laurence, and his late uncle, Robert.
21% Family Stake
Collectively, Jim, Andrew and their mother, Wilma, together with Jonathan and his mother, Joan, own 21.2 percent of Loews shares, worth $3.2 billion on April 10, according to government filings. Loews holdings of other family members haven’t been made public.
The company now oversees 17 luxury hotels in the U.S. and Canada, insurer CNA (CNA) Financial Corp., four dozen oil rigs and drill ships, a $2 billion natural gas exploration company, and pipelines that carry 11 percent of America’s average daily natural gas consumption.
Robert’s side of the family controls 50 percent of the Super Bowl champion New York Giants football team, run by Jonathan’s brother Steve. The Tisches also have their name attached to numerous New York institutions, including Tisch Hospital at the NYU Langone Medical Center, the Tisch School of the Arts at New York University and the Tisch Galleries at the Metropolitan Museum of Art.
Buffett is Spending
Today, Jim Tisch faces a choice. After spending $1.5 billion to buy back shares since 2008, he must decide whether to leverage Loews cash to go after the kind of beaten-down assets that have generated dramatic gains for him in the past.
Buffett has been spending: In September, he paid $9.7 billion for Wickliffe, Ohio-based Lubrizol Corp., a specialty chemical maker.
Tisch has been holding back.
“We have asbestos-lined pockets,” he says, using a favorite phrase. “We don’t let cash burn a hole in them.”
One reason Loews has outperformed Buffett — who was a friend and bridge partner of Larry Tisch — is that Jim Tisch, the consummate contrarian, bought such assets as rigs and pipelines near cyclical lows. He also was willing to divest assets — something Buffett seldom does — by selling watchmaker Bulova Corp. in 2008 for $263 million and spinning off tobacco giant Lorillard Inc. (LO) the same year.
Lorillard was a big contributor to Loews’s cash flow and profits and thus helped drive up its stock price from 1998 through 2008.
30% Buyback
Tisch’s readiness to buy his own stock has also distinguished him from Buffett, and has pushed up Loews shares. He has reduced the company’s publicly traded shares by about 30 percent since 1998, taking advantage of the stock often being priced at a deep discount to the value of the companies Loews controls.
In mid-April, the discount to the value of Loews’ subsidiaries and other holdings was more than 25 percent. Three of the units — Boardwalk Pipeline Partners LP, Diamond (DO) Offshore Drilling Inc. and CNA — are, like Loews itself, publicly traded.
“The market underestimates Jim Tisch’s skill as an allocator of capital,” says Michael Price, founder of MFP Investors LLC and an ex-Loews director. “If I owned Berkshire Hathaway, I’d sell it and buy Loews.”
Companies across the U.S. landscape are following Tisch’s lead, husbanding cash and buying back shares. As of the end of 2011, S&P Industrial Index companies had increased the cash they held for 13 consecutive quarters.
‘Corporate Uncertainty’
“The cash accumulation is the result of corporate uncertainty,” senior S&P Indices analyst Howard Silverblatt says. “Until they have a clearer picture of the economic climate and policies, they will continue to move slowly and invest slowly.”
Share buybacks by S&P 500 companies totaled $409.1 billion in 2011, up from $298.8 billion the year before. Last September, Buffett joined the parade, launching a share repurchase plan, though in a small way. In his Feb. 25 shareholder letter, Buffett said Berkshire had repurchased $67 million in shares — a tiny percentage of its $195 billion market capitalization on April 10.
“We like making money for continuing shareholders, and there’s no surer way to do that than by buying an asset — our own stock,” he wrote, adding that such purchases need to be made at a price that’s below the company’s intrinsic value.
Berkshire stopped buying when the stock reached 110 percent of book value.
Contrarian Investor
Tisch made his reputation as a contrarian value investor. In 1982, as a vice president in Loews’s investing department, he bought seven supertankers for $6 million each, less than their scrap value, and unloaded the last of them in 2004 for almost 10 times that amount. In 1992, he bought 39 offshore drilling rigs for about $372 million, half what a single new rig costs today. And it was on Tisch’s watch in 1999 that CNA turned a $9 million investment in telecommunications giant Global Crossing Ltd. into a $1.9 billion profit in three years.
“He learned at his father’s feet,” says Ray Dalio, founder of Bridgewater Associates LP, the Westport, Connecticut-based hedge fund, who remembers talking about global markets over lunch with Larry Tisch in the early 1980s. “I’ve watched it come full circle.”
Jim Tisch today oversees a vastly different company than the one run by his uncle and father — who was best known for his stint as CEO of CBS Corp. (CBS) Loews has majority control of three Houston energy companies: 50.4 percent of Diamond Offshore Drilling Inc.; 61 percent of Boardwalk (BWP) Pipeline Partners LP, a gas pipeline master limited partnership; and all of unlisted HighMount Exploration & Production LLC, a gas company operating in the Southwest.
Regency Hotel
Loews owns 90 percent of Chicago-based CNA and all of New York-based Loews Hotels Holding Corp., which is anchored by Manhattan’s 354-room Loews Regency Hotel.
In early March, a block east of the Regency, Jim Tisch leans in the doorway of the narrow, 16-desk Loews trading floor as the investment department, headed by Chief Investment Officer Richard Scott, begins its morning meeting. The 50-person team is charged with deploying $50 billion in assets.
First up is the U.S. Treasury desk: “The two-year auction went well; the five-year auction is today,” a portfolio manager says. “I think the auction should go fine.”
Later, an equities manager gives a report on computer maker Dell Inc. (DELL) “Revenues barely grew,” he says. “Earnings were soft; the stock is indicated down 5 percent.”
Three Money Pots
Scott, 58, who came to Loews from insurer American International Group Inc. (AIG), manages three pots of money. First is CNA Financial’s $44.4 billion of paid-in premiums, as of December 2011, which because of state regulations and rating company requirements are invested mostly in fixed income, even though 10-year Treasuries yielded less than 2 percent in mid- April.
“That’s not great for an insurance company,” Scott says.
The second pot is the $2.5 billion managed mostly for the pension plans of the Loews corporate office and CNA. The goal: beating a Loews-designed benchmark primarily made up of stocks and bonds. A big chunk of this money is in 30 hedge funds. The aim is to generate relatively stable gains, not to shoot out the lights, Scott says.
Third is Loews’ $3.6 billion of cash and liquid securities as disclosed in early March. That pool has three mandates, Scott says: to fund strategic acquisitions; to bolster portfolios or make bridge loans; and to make opportunistic investments.
Away from the trading floor, the Loews headquarters is a portrait of informality, as Tisch family members traipse through the building and employees gather for on-the-fly meetings.
‘Keep It Simple’
“We want to be as collaborative as possible,” says Andrew Tisch, who adds that face-to-face discussion is favored over memos and reports: “Keep it simple, open doors, shirt sleeves — and talk about it, don’t write about it.”
Observers say the Tisch clan is exceptionally close-knit. “There is such a family sense of respect,” says Loews board member Charles Diker, chairman of Cantel Medical Corp. (CMN) “There is a warmth that I’ve never seen elsewhere.”
Jim and Andrew occupy adjacent offices. Jim’s is a 19- by 17-foot (5.8- by 5.2-meter) space decorated with a brooding, black Richard Serra canvas, family photos and shelves of bric-a- brac he has picked up, including a trillion-dollar note from Zimbabwe and a replica of a New York street sign reading Jim Tisch Way. Cousin Jonathan, one floor below, oversees Loews hotels.
The three Tisches are equal members of the “office of the president,” which guides policy.
Never Overruled
“At the end of the day, Jimmy is the CEO and has the power to overrule,” says Andrew Tisch, who wears French cuffs and dark suits. “We’ve never been overruled. We find a consensus. We work very hard to work together.”
Family management has been part of the Tisch ethos for four generations. In 1946, Larry Tisch, fresh out of the U.S. Army, where he worked as a code-breaker for the Office of Strategic Services, a predecessor to the CIA, persuaded his parents to buy a faded hotel in the resort town of Lakewood, New Jersey. The brothers turned it around, with Larry handling the books and Robert schmoozing customers.
With the cash they generated, the Tisches were off, purchasing and renting run-down properties in the Catskills, Florida and Atlantic City, New Jersey. Beginning in 1949, the next generation of Tisches was born, seven siblings and cousins in all. The two families briefly lived together in a single house near Atlantic City, even sharing a checking account.
Loew’s Theatres
By 1959, Larry and Robert had found an underpriced company to buy: Loew’s Theatres, owner of 102 movie houses and the WMGM radio station in New York. After spending $10.5 million for a controlling 28 percent stake, in 1960 they sold the radio station alone for $11 million, according to “The King of Cash,” a book about Larry Tisch by Christopher Winans (Wiley, 1995).
In 1969, Loew’s also began selling off the theaters, and in 1970 it created holding company Loews Corp. (L), without the apostrophe.
The template was set: Find distressed or cyclical assets offered by motivated sellers, gain control and sell off unrelated businesses to earn back the original investment.
In 1968, Loews bought Lorillard. Larry Tisch said later that the tobacco company wasn’t cheap, yet they were able to get it for a package of Loews subordinated debt and warrants, with no cash expended.
“It was simply an acquisition that made a lot of sense,” says Andrew Tisch, who served as CEO and chairman. “It had excellent cash flow; it had excellent assets.” He says the furor over the health effects of cigarettes hadn’t yet begun. “It was a different world back then,” he says. “It was not a demonized business.”
CNA a Bargain
In 1974, Loews found another bargain: It paid a split- adjusted $2.50 a share for 51 percent of CNA, which in addition to selling insurance ran nursing homes and owned part of a dental equipment maker, which were soon sold.
Loews Corp.’s highest-profile purchase came in 1986, when it bought a 20 percent-plus stake in CBS. Larry Tisch ran it for nine years, selling divisions and raising hackles among journalists, especially in March 1987, when he fired 215 members of the news staff. In 1995, Loews sold CBS to Westinghouse Electric for $5.4 billion, generating a roughly $2 billion profit.
By that time, Jim Tisch had come of age. After earning a Master of Business Administration from the Wharton School of the University of Pennsylvania in 1977, he eventually went to work in the investment department at Loews. The 1982 supertanker deal whetted his appetite for energy assets.
Glut of Crude
In 1989, with the world swamped by a glut of crude, oil rigs were cheap. Tisch went looking to buy a single rig and ended up buying all of Diamond M Co. for what the Houston Chronicle reported as $59 million in cash and debt. Three years later, Diamond M spent $372 million for Odeco Drilling, owner of 39 rigs. Recently, a new rig cost twice that.
Beginning in 2003, Tisch made another series of sweet deals, this time with pipelines. Heavily indebted power companies were scrambling to unload assets to raise cash following Enron Corp.’s bankruptcy. In May of that year, Loews paid $1.05 billion to buy Texas Gas Transmission LLC from Williams Cos. The next year, Loews paid $1.14 billion for Gulf South Pipeline LP. The assets were combined and christened Boardwalk Pipeline, which was taken public in 2005.
As of April 10, the listed partnership units had a market value of $5.5 billion. Last year, Loews reaped $282 million in distributions from its various Boardwalk holdings.
Sum of the Parts
On a March afternoon, Tisch leans back in his chair and points to a fever line on his computer terminal. He’s wearing wire-rim glasses, an orange-and-green tie and a rumpled, white button-down shirt. The line on the screen shows the combined value of Loews positions in Boardwalk, CNA Financial and Diamond Offshore in real time.
The news isn’t good. As of April 10, the three add up to $35.52. Loews’s disclosed net cash and liquid securities at the time add $7.39 a share, which means that Loews stock, at $38.39 a share, is trading at a 10.5 percent discount to the value of the three listed companies, the cash and the securities.
To get to the full discount, one must add unlisted HighMount, which Arlington, Virginia-based BGB Securities Inc. says is worth $5.04 per Loews share, while Loews Hotels adds $1.79 a share and additional assets of Boardwalk contribute another $4.27. That adds up to $54.01, meaning Loews traded at a 28.9 percent discount to the sum of its parts on April 10.
One conclusion: Wall Street doesn’t respect Tisch’s asset allocation skills.
“I’m taking the view that we’re a failure at promoting the stock,” he says.
Devils and Angels
Tisch says he envisions himself as a cartoon character with a devil on his left shoulder and an angel on the right.
“The angel says, ‘Explain the Loews story to everyone; tell them about the discount,’” he says. “Then the devil is whispering, ‘Don’t do anything. Just file the 10-Ks, and the stock will remain cheap for you to buy back.’”
Loews share buybacks take advantage of the so-called conglomerate discount, in which the market penalizes holding companies because Wall Street now considers them too complex. On its website and at conferences, Loews tells potential investors that the discount makes the stock a bargain.
Conglomerates Unravel
In the 1960s and ’70s, conglomerates were popular among investors, who saw them as deft asset allocators. Companies with multiple businesses such as ITT Corp. (ITT) had price-earnings multiples of 20 or higher. That gave them the currency to buy cheap companies with their high-priced shares, says Bill Mitchell, editor of Spinoff & Reorg Profiles, an Irvine, California-based newsletter.
The dynamic has worked in reverse since then. Today, companies with a variety of businesses are selling or spinning them off. Loews’s shedding of Bulova and Lorillard follows the pattern. Jim Tisch says one reason Loews sold Lorillard is that Loews shares were being dragged down by investor worries over tobacco-related litigation.
The government crackdown on tobacco marketing landed Andrew Tisch in the congressional dock in April 1994. Andrew, who was Lorillard CEO at the time, testified along with six other tobacco executives before the House Subcommittee on Health and the Environment. In the course of the hearing, Oregon Representative Ron Wyden asked each of the seven whether he believed nicotine was addictive.
“I believe nicotine is not addictive,” Tisch said at the time. His six rivals all made the same or similar statements.
Danger in the Dark
As he contemplates his next move, Jim Tisch dwells on the downside of acquisitions. Last year, he told analyst Sam Yake of BGB Securities that buying a company is like entering a pitch- black room where all kinds of dangers lurk. By soaking up Loews stock at a discount to its market value, he’s buying shares of five companies he knows.
Scott Black, founder of Boston-based Delphi Management Inc., says the Loews lineup needs to generate more profit growth.
“The individual pieces are just not exciting,” says Black, who has owned Loews stock in the past. “There’s great asset value, but they can’t grow the earnings. Though Jim Tisch is a smart manager, we look for things with high returns on equity.”
Loews’s earnings were $0.92 a share in the first quarter of 2012, the same as the year ago period.
‘Like a Turtle’
Yake says that Loews’s current holdings are highly cyclical, and that the firm should hunt more aggressively for acquisitions.
“You can’t argue with success, but they move like a turtle with two broken legs,” Yake says.
One reason Loews hasn’t bought: competition from U.S. private-equity firms, which in April had access to $424 billion in capital to invest, according to PitchBook Data Inc., a Seattle-based research firm. As a result, the average leveraged buyout in 2011 was priced at 8.3 times free cash flow compared with 6.8 times free cash flow in 2009.
“The private-equity firms are the most motivated buyers out there,” says Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business. “They have a lot of money to put to work.”
Some investors say Tisch’s patience is to his credit.
“He’s not caught up in the frenzy,” says Israel Englander, founder of Millennium Management LLC, a New York-based hedge fund. “He’ll pick his spot.”
Troubleshooting
Meanwhile, Tisch is busy at the companies Loews owns. CNA Financial traded at more than a 30 percent discount to its book value on April 10. HighMount faces natural gas prices that dropped below $2 per million British thermal units in mid-April, down from a peak of $13.58 in mid-2008. And Diamond Offshore faces criticism that its rig fleet is among the industry’s oldest, averaging almost 30 years.
Jim Tisch and Diamond Offshore CEO Larry Dickerson say they have just been buying low and selling high. With oil demand and prices sky-high in 2008, rivals such as Hamilton, Bermuda-based Seadrill Ltd. (SDRL) ordered fleets of new rigs. Prices topped $750 million each, according to IHS Inc., an Englewood, Colorado- based research and information firm.
Diamond Offshore instead continued its program of overhauling its older rigs, stripping them to their hulls and refurbishing them with new gear. Cost: $300 million or less each. Tisch estimates that the rigs have 85 percent of the capabilities of new builds, at less than 60 percent of the cost. The rate to lease the rebuilt Ocean Victory peaked at $560,000 a day, close to what IHS says is an industry high of about $600,000.
Drill Ships
As new rig demand plunged in 2009 and the global economy contracted, Diamond Offshore bought two new rigs, Valor and Courage, for $490 million and $460 million at auction — 35 and 39 percent discounts from the 2008 high. They entered service in 2010 and 2011. Diamond also ordered three deepwater drill ships — BlackHornet, BlackHawk and BlackRhino — which will be delivered during the next three years at prices ranging from $590 million to $610 million, compared with a 2008 market peak of $775 million to $950 million.
With the money saved by postponing new builds, Diamond Offshore issued special dividends. Loews reaped $2.15 billion in payouts from 2006 to 2011. A recent Credit Suisse Group AG report ranks Diamond Offshore’s five-year, 31.9 percent return on capital employed as the best in the industry.
Says Diamond’s Dickerson: “We tower over our competition.”
Too Much Gas
Tisch hasn’t always caught the market low. In 2007, with gas at $6.19 per million BTUs, Loews paid $4.03 billion for gear and fields with 2.5 trillion cubic feet of proven gas reserves or equivalent. By mid-2008, gas prices had more than doubled.
“We thought we were brilliant,” Tisch says.
Then the market turned. The debut of hydraulic fracturing, or fracking, in which sand and chemical-infused water is injected into rock under pressure to release hydrocarbons, dramatically increased production and sent prices plunging to $2.03 on April 10. Loews gas subsidiary HighMount, largely by controlling costs, is making money anyway; it earned $62 million in 2011 on revenue of $390 million.
Tisch predicts that prices will rise as power producers switch from oil and coal to cheap gas.
CNA has been a longer-running headache. The man in charge of revamping it is CEO Thomas Motamed, who joined the firm from insurer Chubb Corp. (CB) in January 2009. When he arrived, underwriting at CNA had been so consistently poor that it wouldn’t have posted any profits during the previous 15 years if it hadn’t reaped investment gains.
Insurance Mess
“Anything that came under the door from agents that had a big dollar sign on it, they wanted to write,” Motamed says.
Motamed hired new management. He has refocused on selling property and casualty insurance to seven key markets: construction, financial, health care, manufacturing, technology, professional services and small business.
“Directionally, they’re improving,” Bank of America Merrill Lynch insurance analyst Jay Cohen says. “They still have a long way to go.”
If CNA Financial, based on its April 10 price, were to improve so that it traded just at the industry average of about book value, it would add $3.5 billion to Loews’s worth. Tisch says the insurer has turned a corner.
“It’s been a very long corner,” he says.
Hotels are now Loews’ smallest business, but they’re a sentimental favorite with Jim, Andrew and Jonathan. The trio got started working at Loews hotels, and they eat breakfast at Manhattan’s Loews Regency several times a week when they’re in town, greeting customers that on one recent morning included former Citigroup Inc. (C) chief Sandy Weill and New England Patriots owner Robert Kraft.
Hotel Expansion
Jonathan Tisch, who oversees the hotels, has big plans for them. He expects there will be 30 within 10 years, to take advantage of global growth in travel.
“We need to be in cities like Boston, Chicago, San Francisco and Washington, D.C.,” he says.
Loews is also investing in the next generation of Tisches. Jim’s son Benjamin, 30, manages a portfolio for Loews that seeks to profit from global economic trends, while Andrew’s son Alex, 33, evaluates prospective acquisitions.
Jim Tisch says it’s too early to talk about succession; he’s having too much fun.
“I love it; it plays very well into my adult-onset attention-deficit disorder,” he says, joking. “There’s always something new.”
And that next acquisition? As Diana Ross put it, “You got to trust, give it time, no matter how long it takes.”
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