TPG-Axon Capital buys CNX, M, OUTR, and DDS and decreases positions in ROC, GNC, and WYN—13F Flash C

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TPG

TPG-Axon Capital Management LP (TAC) is a privately owned $4 billion hedge fund firm founded by Dinakar Singh in February 2005, in partnership with private equity firm Texas Pacific Group. TPG-Axon Capital Management is based in New York, with additional offices in Hong Kong and Tokyo.

In this six-part series, we’ll go through some of the main positions TPG-Axon Capital traded this past quarter.

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

The fund started new positions in Consol Energy (CNX), Macy’s Inc. (M), Outerwall Inc. (OUTR), and Dillard’s Inc. (DDS) and it decreased positions in Rockwood Holdings Inc. (ROC), GNC Holdings Inc. (GNC), and Wyndham Worldwide Corp. (WYN).

Why buy Outerwall Inc. (OUTR)?

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Shares of Outerwall surged in October after JANA Partners reported a 13.5% stake in the company. In a 13-D filing on October 4, JANA stated it intends to have discussions with Outerwall’s board and management regarding a review of strategic alternatives, including exploring a strategic transaction, selling or discontinuing certain businesses, or pursuing a sale of the company. Outerwall saw shares declining in September after it lowered its 3Q 2013 guidance for Redbox, stating that rentals and revenue were not up to expectations. It said its promotional strategy for Redbox adversely impacted net revenue per rental more than anticipated and increased the consumer trend toward single-night rentals.

It recently announced the conclusion of its review of its New Ventures business segment and said it will discontinue three new venture concepts, Rubi, Crisp Market, and Star Studio. In addition to savings from the reduced spending in New Ventures, Outerwall said it’s implementing actions to reduce costs by approximately $22 million annually, beginning in 2014, primarily through workforce reductions across the enterprise. It also announced a $350 million expansion of its existing senior secured credit facility, which will enable the company to meet its previously announced target leverage ratio in 1Q 2014.

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In 3Q 2013, revenue increased 9.3%, to $587.4 million, compared to $537.6 million for 3Q 2012. The increase was driven primarily by Redbox segment revenue of $491.7 million and New Ventures segment revenue of $16.0 million, which included revenue from the ecoATM business. Redbox revenue increased 7.0%, compared to $459.5 million for the third quarter of 2012. This was attributable primarily to Redbox kiosk installations in 2012 that continue to ramp and a 2.1% increase in same-store sales. Coinstar, formerly known as Coin, segment revenue was $79.6 million for the third quarter of 2013, compared to $77.6 million for the same period last year.

CFO Galen C. Smith said the company remains focused on driving profitable growth and maximizing free cash flow by creating greater operating leverage in its core businesses and reducing costs across the enterprise. It expects to repurchase $195 million of its common stock in 2013, which would result in the company returning more than 100% of its free cash flow in 2013, exceeding its target. In terms of outlook, it expects consolidated revenue between $2.298 billion and $2.323 billion for full-year 2013 and between $2.298 billion and $2.323 billion for 4Q 2013. The company faces competition from Netflix (NFLX), Amazon.com (AMZN), and Hulu.

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Outerwall, Inc. is based in Bellevue, Washington. It has a network of movie and game rental kiosks as well as coin cashing machines. Formerly known as Coinstar, it has kiosks in neighborhood grocery stores, drug stores, mass merchants, malls, and other retail locations in the United States, Canada, Puerto Rico, and the United Kingdom, It provides automated retail solutions, including two core self-service kiosk businesses: DVD and video game rentals as well as coin counting. Its Redbox segment enables consumers to rent or purchase movies and video games as well as purchase event tickets. The company’s Coinstar segment owns and operates self-service coin counting kiosks, which lets consumers convert their coin to cash, a gift card, or an e-certificate. The company’s New Ventures segment focuses on identifying, evaluating, building, and developing innovative self-service concepts in the automated retail space, which includes coffee, refurbished electronics, and photo self-service concepts. The segment includes the recently acquired ecoATM, a San Diego–based company that makes automated kiosks for buying used phones and other electronics.

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TPG-Axon Capital Management, the activist hedge fund firm, provides its services to high–net worth individuals, pension funds, and banking institutions. It manages limited partnerships for its clients. The firm invests in the public and private equity markets across the globe. It typically invests in healthcare, pharmaceuticals, financial services, technology, energy, and basic materials and retail.

Founder Dinakar Singh served as a co-head of the Principal Strategies Department at Goldman Sachs until early 2004. He became a Partner at Goldman Sachs in 1998. Prior to this, he spent four years in Hong Kong, establishing the proprietary investing effort in Asia. He serves on the President’s Council on International Activities and is the Trustee of the Goldman Sachs Foundation. Singh has been a Trustee of Cold Spring Harbor Laboratory Inc. since November 2010. He is also the Founder and Chairman of the Spinal Muscular Atrophy Foundation. He graduated from Yale University in 1990.

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