Large IKON (IKN) Holder Steel Partners II Recommends Recapitalization Through $850M Self Tender Offer
A Copy of the Letter:
Dear Matthew: (CEO)
I appreciate the opportunity to have had several candid and open discussions with you and Bob over the last few months. As you know, Steel Partners II, L.P. ("Steel") is the third largest shareholder of IKON Office Solutions, Inc. ("IKON" or the "Company"). We beneficially own 12,456,300 shares, or approximately 10% of the outstanding common stock of the Company. We began investing in the Company over three years ago because we believed and continue to believe that the Company is a true leader in the document management and solutions industry, which has the potential to greatly improve profitability.
We commend management for its efforts that have resulted in improved operating margins and a simplified capital structure. We also recognize and commend the Company for expanding the Company's existing share repurchase program. However, we believe that the Company's common stock continues to trade below its intrinsic value and your balance sheet remains highly inefficient. We therefore recommend that the Company capitalize on its operating momentum and utilize the strength of its balance sheet to pursue a public recapitalization at $17.50 a share. This represents a 20% premium to the 20-day closing average of the shares.
With the Company's excess cash and a conservative debt financing package, the Company should be in a position to self tender for at least $850 million of common stock, or approximately 39% of its outstanding shares at the aforementioned price per share. Based on our discussions with several leading investment banks, we believe this refinancing is highly achievable in a short period of time.
The proposed recapitalization would provide immediate liquidity at a meaningful premium to the current share price for your shareholders who elect to tender. We believe it will be well received by the shareholders who desire liquidity. It would also be accretive immediately, and more so in the long term. As a long term shareholder, Steel would commit not to tender into this offer. Importantly, in addition to lowering the Company's cost of capital and enhancing its EPS growth, this recapitalization would result in a strong and flexible balance sheet that would support the Company's long term strategic vision.
We have enclosed for your review a brief summary of the proposed transaction which includes an estimate of IKON's EPS and implied share prices at various valuations with and without a recapitalization. Clearly, if management believes it will achieve its business plan, shareholders will be significantly better off if the Company changes its capital structure and executes the recapitalization.
If the Company is unwilling to pursue a recapitalization now, we strongly recommend that IKON and its Board take all immediate steps necessary to fully explore other strategic alternatives for maximizing shareholder value. In particular, we believe the Company is ideally situated for an outright sale and that a sale process could result in the Company receiving offers from financial and strategic buyers at a premium to the current market price. Steel anticipates it would participate in any such sale process. Based upon substantive discussions with financing partners, Steel believes that it could obtain all necessary financing commitments within a very short period of time.
We look forward to continuing discussions with you and the other members of the Board on enhancing shareholder value. We trust that the best interests of all shareholders will continue to remain of paramount importance.
Warren G. Lichtenstein