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Texas billionaire's cruelest year

Harold Simmons, renowned investor and Republican attack-ad impresario, is taking a beating in the stock market.

By Roddy Boyd, writer
Last Updated: October 22, 2008: 1:18 PM ET

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Simmons has funded ad campaigns attacking Democratic candidates.

NEW YORK (Fortune) -- Renowned investor Harold Simmons is no wimp when it comes to a fight.

He played a central role in the development of leveraged buyouts and corporate takeovers and once tried to gain control of Lockheed Martin (LMT, Fortune 500). He's funded Republican candidates and conservative attack-ad campaigns, including the current one linking Barack Obama to one-time domestic terrorist Bill Ayers.

But these days the Dallas-based billionaire isn't only delivering punches, he's taking them - his empire hit hard by the stock market's general decline and by cost and demand issues related to his companies' industrial products.

Simmons' losses (or, more directly, losses by trusts controlled by Simmons) over the past year could amount to just over $4 billion, based on the trusts' ownership stakes in six publicly-traded companies as spelled out in the 2008 proxy statement for Valhi Corp. (VHI), one of Simmons' holding companies. The losses would amount to $2.7 billion so far this year, assuming Simmons' ownership interests haven't changed substantially from those listed in the proxy statement.

Simmons' operating companies are feeling pressure from the economy. According to Valhi's most recent 10-Q filing, demand for the component manufacturing done by one Simmons company, CompX International (CIX), is softening, as it is for chemicals produced by two other companies he controls, Kronos Worldwide (KRO) and Titanium Metals (TIE). Higher raw material and energy costs led to a 60% decline in the chemical group's operating income and a 13% drop in gross margins, the Valhi filing said.

Valhi's own financials are instructive in looking at the Simmons empire as a whole. The company hasn't made money since the first quarter of last year, and in the last twelve months it has reported cumulative losses of $73 million on net sales of $1.52 billion. Management noted in the quarterly report that operating income is slated to decline for both chemical and component units in the second half of this year compared with the same period in 2007.

While the company's liquidity, or its ability to meet its obligations, appears solid enough, its operating companies' free-cash burn is accelerating, going from $34.4 million in the first half of 2007 to $80.6 million in the first half of this year.

Simmons made his first fortune in 1973 when he sold a chain of drugstores he founded to Eckerd Corp. for $50 million. He gained national prominence in 1990 when he made a highly-public attempt to take over Lockheed Corp. after acquiring almost 20% of its stock. The attempt failed, but Simmons continued to build an empire of industrial and waste management businesses.

In the process, he became a regular on the Forbes 400 list of richest Americans, clocking in at No. 43 on the most recent list, with an estimated net worth of $7.4 billion.

Simmons, 76, has also become quite the political warrior. He has launched campaigns against the capital gains tax and has been a key funder of conservative media campaigns such as the 2004 Swift Boat Veterans For Truth series that attacked John Kerry's military record, as well as the anti-Obama series running now. Simmons also donated $100,000 to President Bush's 2005 inaugural ball.

Heavy buying by Simmons

After not buying a single share of Valhi last year, Simmons recently has become the biggest trader of the stock, with trusts he controls accounting for over 10.5% of its trading volume this year, according to SEC filings.

Insider share purchases have traditionally served as a signal to the market that a company's prospects are good because, the reasoning goes, no one else has the level of insight into future developments a senior executive does. Often, those purchases reverse stock slides and give a shot of confidence to other owners.

Because Valhi is 95% owned by Simmons trusts and other insiders, any buying Simmons does of Valhi at a higher price can produce a gain, at least on paper. Simmons' aggressive open-market purchases of Valhi have had the effect of popping the price until recently (see chart), when Valhi's stock price dropped to under $10 from a 52-week high of $32.47.

Ordinarily Simmons would run into regulatory issues buying as much stock as he has lately. But on September 19, the day the SEC suspended short sales on what would amount to over 1,000 stocks, it also suspended much of rule 10b-18, which governs the amount of stock companies and corporate insiders can purchase.

According to the SEC's Web site, the rule limiting purchases is intended to prevent a company or insiders from dominating the market for a stock via their buying. "An issuer dominating the market for its securities in this way can mislead investors about the integrity of the securities market as an independent pricing mechanism," the SEC states.

Under the rule an insider is only allowed to purchase 25% of a company's average daily trading volume of the previous 28 days. The average daily volume of Valhi shares trading over the past four weeks was about 74,300 shares, so before the rule was partly suspended, Simmons or trusts he controls would be allowed to purchase a little over 18,500 shares at one time.

On October 9, after a wild trading session that saw Valhi's share price drop $3.22 to $11.71 (and the Dow Jones Industrial Average plunge 678 points), Simmons wife purchased 100,000 shares, according to an SEC filing, or more than 33% of the day's volume.

Along similar lines, a Simmons controlled private trust, Contran, purchased 47,900 shares of Kronos on October 16. Ordinarily, it would have been able to purchase just over 5,000 shares.

Valhi's chief financial officer, Bob O'Brien, told Fortune that, "All purchases of Valhi common stock by Mr. Simmons are reported promptly and are made in full compliance with all applicable securities laws."

A question that merits some thought is how much exactly is a share of Valhi worth? A sum-of-the-parts valuation - adding up the value of a holding company's various equity stakes in its operating units and then dividing that by the number of shares - suggests that Valhi stock isn't exactly a storehouse of hidden value.

Even giving the privately held component of Valhi - Waste Control Specialists, a hazardous waste removal company sporting $3 million in sales and an operating loss - more than triple the valuation of its publicly traded competitors, Valhi shares would seem to be worth less than they trade for now.

The value of Valhi's stakes in its public operating units is just north of $831 million. Subtract the $667.3 million of preferred stock (which carries legal rights above common stock in the capital structure) and holding company debt, add in the company's cash and the $67 million estimated value of WCS, and divide by the 114 million Valhi shares outstanding and you get a net asset value of $1.44 per share.

One could argue that the shares deserve some multiple of that figure, but the company has a negative book value per share, and it has reported losses for the last four quarters running.

CFO O'Brien disagrees with Fortune's conclusions.

"We do not believe that the value estimate for Valhi's common stock as reflected in the information provided by Fortune magazine is accurate in any respect. Further, the means by which such value estimate was calculated by the reporter is extremely misleading."

O'Brien did not respond to a request to discuss the issue further.

Whatever you make of Valhi and Harold Simmons, it's clear that even at today's reduced prices, Warren Buffett and the value-investor set are unlikely to be sniffing around. To top of page

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