Joe Kusnans Blog! Getting a dollar for 50 cents!

joekusnan.tumblr.com! Forbes, March 29, 1982

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Max Heine: Getting a dollar for 50 cents! Forbes, March 29, 1982!
Max Heine made money on bankrupt railroads in the Forties. And again in the Seventies. But today hes playing takeovers instead of troubled companies.!

years Mutual Shares has tended to perform better than most funds even in down markets like this one. Though Heine pursues them more aggressively than most fund managers, takeovers are just one element in his highly eclectic mix. He has been extremely successful in snifng out the trufes in railroad defaults like the Penn Central, reorganizations like the old Equity Funding Corp., and liquidations like San Juan Racing Association.! These offbeat categories make up about 13% of Mutual Shares portfolio. Most of the balance is tucked away in a collection of stocks that includes such esoteric items as National Presto Industries, a producer of pressure cookers and other housewares, and Keuffel & Esser, an old-line manufacturer of drafting equipment. There is one underlying element. Almost all of it defaulted bonds, preferreds like the Penn Central $5.27 convertibles and common stocks has been bought at deep discount. Max strategy, says an admiring associate, is to buy a dollar for 50 cents.! It is a strategy that has worked admirably. Between 1976 and last year, Mutual Shares net asset value rose to a peak of $49.62 a share, not including a total of $19.73 distributed in the shape of dividends and capital gains.! Results like that dont come without risk. There are no guarantees in the troubled waters Heine likes to sh. Portfolio turnover at Mutual Shares and Mutual Qualied Income, the short-term gain-oriented close Heine established a little less than 18 months ago, is higher than most. Heine, though, who gravitated to Wall Street after emigrating from Germany in 1934, is no gambler. Even his arbitrage plays are less speculative than they seem.! Heine didnt move into Supron, for example, until the terms of the takeover were out in the open. He bought at 33 ", knowing he had a better than 90% chance of tendering the stock at 35. The spread between those prices meant that Mutual Shares netted more than if Heine had put an equivalent amount of cash in a certicate of deposit. You have to look at the total concept, says Heine. If you buy cheap enough and you get value, youll almost always come out right.!

By Richard Phalon! Max Heine, the 72-year-old president of Mutual Shares Corp., has not put together one of the best records in the mutual fund business by stocking up on the Nifty Fifty and waiting for things to happen. He is an activist.! In the last couple of months, for example, Mutual Shares has been in the thick of the arbitrage crowd in takeovers as diverse as Marathon, Supron Energy, MGIC and Delta Queen Steamboat. There is more good news to come in the big premium buyouts shaping up for at least ve other stocks in Heines $135 million portfolio, including Arcata Corp., American Fletcher International and Mallincrodt Chemical.! Heine has a good nose for takeovers, all part of a highly individual style that helps to explain why over the

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Joe Kusnans Blog! Getting a dollar for 50 cents!

joekusnan.tumblr.com! Forbes, March 29, 1982

Heine certainly proved that thesis in Penn Central. He got into the road with 10- and 15-cent dollars in mid-1974, when most of The Street had given it up for dead. Bonds he bought for as little as $180 apiece produced a mix of almost $800 in reorganization securities that in turn multiplied many times in market value as the Penn Central worked its way out. Mutual Shares has taken a total of $4.4 million in capital gains out of some of its Central holdings in the last two years. It still owns better than $8 million worth of preferred and common.! That score is no accident. Toughminded research unearthed similar value in the defaulted bonds of the Boston & Maine and the Reading, among other roads. Mutual Shares also owns chunks of such other defunct carriers as the Erie; the Chicago, Milwaukee, St. Paul; and the Lehigh Valley. On the books at a cost of $2.9 million, they carry a market value of about $7.6 million.! Heine brought a rare perspective to the railroads in the Sixties and Seventies. He had been through it all in the Thirties and Forties. One of the rst brokers Heine went to work for was something of a crapshooter. His judgment went partially this way, the Mutual Shares president recalls. If you have a hunch and the next three ticks on the tape conrm it, then you should buy. I didnt like that so much, laughs the trim, energetic Heine, running a hand through his full head of white hair.! Left pretty much to run the business on his own, Heine found that prime railroad bonds going for 10 cents on the dollar were a lot more to his liking than hunches. The Erie and Seaboard were so broke, they were practically giving the bonds away, says Heine. As the economy turned out of the Depression and moved on to a war footing, earnings began to ow back into the roads, and the bonds began to move. I always stuck to the senior bonds never the juniors and so we came out well, recalls Heine. So well, in fact, that Heine was among the few people on The Street with the skills and perspective to repeat the ploy all over again in the Seventies.! Are there parallels with the Thirties to be found in the deep troubles of big corporations like Chrysler and International Harvester? Heine doesnt think so. Bankruptcies were the rule then, he says. Today they are the exception. In any event, Heine doesnt see any big investment opportunities yet, despite the bankruptcy level to which some corporate bonds have fallen. Why take the risk of buying International Harvester at 21%, he asks, when you can buy governments at 15%? Once they go broke, then you can see what exists.! Heine does not like to y blind. He will not make a move on a corporate restructuring without a detailed study of the reorganization in hand. He made a lot of money out of Equity Fundings reemergence as Orion

Capital, for instance, and is also cashing in on the liquidation of UV Industries.! Heine concedes, though, that he nds such situations a lot more difcult to analyze than the rails. He calls the $3 million he put into Food Fair Stores senior debt a mistake, even though no one else managed to foresee how the shape of the original reorganization plan would be altered so dramatically in the customary giveand-take between the different classes of creditors. In the end, Mutual Shares will probably show a small prot, but not fast enough to suit Heine. You never know quite where youre going with these things, he says.! Where does Mutual Shares go from here? Could it ourish without Heine and the stamp of his truly individual investment style? Can skills that have been honed by almost a half-century of experience be handed on? Heine thinks so. Who is his successor? Michael, he says, nodding in the direction of Michael Price, the 30-year-old University of Oklahoma graduate who is Heines deputy and a vice president of the fund.! Price, quick and articulate, has been working with Heine for the better part of eight years now, looking for new things to trade in mergers, reorganizations, whatever. Simultaneously juggling telephone conversations with a oor broker and a lawyer in Little Rock, Price describes his boss as a terric guy and a superb teacher. His self-condence suggests Heine has learned that investing in people is every bit as important as snifng out hidden values in the Erie 3 $ s of 2000. !!

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