Its been a very bad month in a pretty bad year for clothing retailer Ted Baker (LSE: TED). And with the latest news that the fairly aggressive hedge fund Toscafund has increased its holding in the company to 12%, I am looking at it once again to work out what I think will become of the share price.
Two for the price of one
The dramatic and unexpected departure of senior management is rarely good for a firm, and last week Ted Baker suffered the news that both CEO Lindsay Page and Executive Chairman David Bernstein will be leaving the company. The firm made it clear that their replacements Rachel Osborne and Sharon Baylay respectively, are only temporary measures.
Understandably this hurt the stock, and has led to the usual talk that Ted has been “plunged into crisis”, which given the troubles it has already been suffering, is perhaps not much of an overstatement. Indeed, Mr Page has only been in the role since April, when previous CEO and Founder Ray Kelvin quit amid controversy over inappropriate behaviour.
Even worse for Ted Baker shares, though perhaps somewhat less unexpected, was the warning that full-year profits may fall by as much as 90% to just £5m — a level not seen since the 1990s. In a similar vein, the company saw its share price drop almost 20% to its lowest level in 10 years.
A bargain for some
Toscafund Asset Management certainly noticed the drop, and presumably considered it to be a bargain, increasing its holding in TED to almost 12%. Four days before the announcement, Toscafund held a 5.9% stake in the company, which it increased to 11.9%, placing it as the second largest shareholder after Mr Kelvin.
These kind of big-player share moves can often mean trouble for the average investor, and in this case its potential impact, if any, is uncertain at best. Since the departure of Mr Kelvin, there has been much speculation that he may try to take the company private in order to reinstate himself in some way.
The controversy over the reasons he left has always been something of a barrier in the way of this possibility – expectations being he would find it difficult to find private equity investors who were willing to take on the bad press. As hedge funds generally care less about controversy, if Toscafund becomes a potential ally for Mr Kelvin, it may help this agenda.
On the other side of the argument, however, is that this particular fund has a history of buying cheap companies that it thinks it can help fix and turn around. This increased holding may be an indication that it thinks Ted Baker could be that sort of opportunity. That said, most long-only funds have generally been decreasing their positions in TED, while the latest official data shows short selling activity in the shares is on the up. Toscafund’s position is certainly a contrarian one.
Investing now, I think, is perhaps too much of a risk for me. While the brand and clothing lines are generally well respected, there is still a reason the company has been doing so poorly – sales have been bad. The risk of the stock being taken private is still far from over. Cheap the shares may be, but I am not quite sure I would call them a bargain just yet.
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Karl has no position in any of the shares mentioned. The Motley Fool UK has recommended Ted Baker. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.