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from Outstanding Investor Digest's July 31, 2000 Edition

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LONGLEAF PARTNERS FUNDS'
MASON HAWKINS, C.T. FITZPATRICK & STALEY CATES

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Bargain-priced franchises won't stay undervalued for long.
    Cates: The second catalyst is merger and acquisition activity. This one is heating up quite rapidly and isn't surprising given widespread undervaluation among the "old economy" stocks. In the last few months alone, two of our Partners Fund's companies have seen this. Aetna received an unsolicited $70 bid which they turned down. But that may not necessarily be the end of that saga. And Nabisco Holdings, prompted by a Carl Icahn bid for sister company, Nabisco Group, is apparently in play. That's not something we're that excited about because we did not

    [Editor's note: Just five days after the annual meeting, UniCredito Italiano Group agreed to buy another Longleaf Partners Fund holding - Pioneer Group - for $43.50 per share in cash, which was a 40% premium to its previous close and a 250% premium to its Year 2000 low].

Some catalysts come from within - like restructuring....
    Cates: The third catalyst is restructuring activity. GM is a great example here. We're in the middle of a share exchange whereby they're swapping some of their controlling shares in Hughes Electronics, whose main business is DIRECTV, for GM shares. This is a huge transaction that in one fell swoop sells a huge chunk of Hughes for a good price, avoids any capital gains on that sale and buys in around 15% of their own shares. Some on Wall Street wanted this restructuring to go even further to a full spin of Hughes, but we like this way better.
    Other strong candidates for a major restructuring within our portfolio include the following:
    Canadian Pacific [CP/NYSE] - where it's hard to envision the railroad and its 87% ownership in PanCanadian Petroleum not somehow being restructured in a year or so. That's because the railroad deal moratorium that came in the wake of the Canadian National deal will go away. And that should be a catalyst there for a lot of reasons.

    [Editor's note: Despite the recent extension of the moratorium on railroad mergers, Longleaf informed us that they still believe it will eventually go away.]

    Cates: Georgia-Pacific Timber Group [TGP/NYSE] - which is a great, shareholder-oriented company that we believe will consider all different kinds of ways to get much higher end value to shareholders than is possible in their target stock structure today.
    Aetna, where if things go the way the board wants, will be restructuring into two separately traded pieces - the HMO and the financial services business.
    And UCAR, who recently filed to do an IPO of GRAFTECH - which supplies graphite for use in Ballard's fuel cells. If fuel cell technology catches on to the extent that Ballard's $6 billion market cap implies, then GRAFTECH will be a huge part of UCAR's future value.

Mgm'ts arbitraging valuable assets against cheap shares.
    Cates: The fourth catalyst that we anticipate could be dubbed a partial liquidation, which arbitrages the very strong private market values of hese companies' assets with their absurdly low public market prices. These companies are not in full liquidation mode and they have healthy and growing enterprises. But as long as there's this massive disconnect in the market between stock price and private market value, they're going to sell assets for fair prices and buy the remaining similar assets in their own companies via share repurchase.
    TrizecHahn [TZH/NYSE], for example, just announced the sale of their mature Canadian office buildings for a multiple of over 12 times cash flow. They'll use much of the proceeds to then repurchase their own shares - effectively buying their higher growth U.S. office properties that they already own for 8 times cash flow. This process could and should continue until either the market recognizes the underlying value or we end up with a smaller enterprise, an even smaller share base, and a much higher remaining value per share that could also be monetized at the end of the process even more easily than the Canadian assets were.
    Georgia-Pacific Timber sold significant western timber acreage for $2,000 an acre and over 13 times cash flow - and they'll be using those proceeds to buy back their own shares and the remaining trees that they already own for 8 times cash flow and $500 per southern acre vs. the $1,000 an acre it should command.
    Host Marriott [HMT/NYSE] sold the Boston Ritz-Carlton for a multiple of over 14 times cash flow. And they've used the proceeds to buy in their own shares representing the remaining Ritz Carltons and other high quality hotels for only 7 times cash flow.
    So our Funds are very undervalued, those values are rapidly building via unprecedented share buybacks and our partners are taking actions to get us paid....