Monday, August 27, 2007

SLS Management Wants Fleetwood Enterprises (FLE) Sold to Champion Enterprises (CHB)

In a 13D filing on Fleetwood Enterprises Inc. (NYSE: FLE), 11.8% holder SLS Management disclosed a letter to the company saying the time is right for the Board to immediately explore consolidation alternatives to maximize shareholder value. The firm believes the best available alternative is a sale of the Company to Champion Enterprises, Inc. (NYSE: CHB).

A Copy of the Letter:
As you know, SLS Management, LLC beneficially owns approximately 11.8% ofFleetwood Enterprises, Inc. ("Fleetwood" or the "Company"). We commend the Company's CEO, Elden Smith, for recognizing that the Company has significant intrinsic value and for the steps he has taken to unlock that value sincere placing Ed Caudill in 2005. Despite these efforts, however, the Company has remained unprofitable over the past two fiscal years and has still not optimized its cost structure. We strongly believe for the reasons detailed below that the time is right for the Board to immediately explore consolidation alternatives to maximize shareholder value. We believe the best available alternative is a sale of the Company to Champion Enterprises, Inc. ("Champion").
While we understand that the Company's inability to earn a profit owes much to prior management, more must be done to drive profitability. Specifically, there remains ample room to reduce the cost structure, bringing it more in line with that of Fleetwood's peers. In fact, Fleetwood's public competitors have by and large been able to generate positive margins and net income despite the cyclical nature of the industry and the current challenges that the industry faces. A single statistical SG&A comparison between the Company and Winnebago Industries,Inc. ("Winnebago") highlights the Company's cost structure woes. In fiscal year2007 in the motor home division, SG&A, inclusive of warranty costs, was $110M onrevenues of $961M (11.5%). During the same period and with lower sales than Fleetwood, Winnebago's SG&A, inclusive of warranty costs, was $60M (7.1%). Even allowing for differences in the way the two companies operate, this comparison demonstrates the Company's bloated cost structure.
We have repeatedly encouraged Fleetwood's management to address its cost issues,and though we are frustrated with the pace of change, we are supportive and encouraged by steps taken to start to right size the cost structure such as the recent decision to reduce the manufacturing footprint of the Company. However there remains significant opportunity to cut SG&A costs at the Folding Trailers and Travel Trailers units and the failure to do so at this point is frustrating.
While we believe the Company's latest efforts to restructure its RV group wil leventually support the profitability of this unit, this is not enough. We believe the only practical way the Company can unlock the potential in its manufactured housing unit is by dramatic reductions in capacity. Fleetwood's manufactured housing business has the capacity to manufacture 40,000 homes per year. Based on the Company's current market share, the industry would have to ship 300,000 units a year in order to absorb Fleetwood's capacity. This goal is quite simply unattainable in any realistic investment time frame. The latest2007 estimates have the industry shipping between 95,000-110,000 HUD code homes.In total, we estimate industry capacity at somewhere around 200,000-250,000 units.
Industry overcapacity is clearly not only a Fleetwood issue. We have repeatedly urged Fleetwood's management to rationalize capacity. In response, we have been told that there is only so much capacity to take out before the Company starts to exit markets. Since this is the same answer that every other industry player gives, massive overcapacity is not surprising. The only sure path to capacity reductions is through consolidation. We have therefore encouraged Fleetwood management to explore consolidation alternatives. We believe the best alternative available is a sale to Champion structured in a tax-free merger transaction.
The most uniquely compelling aspect of the combination of Fleetwood and Champion is their ideal overlap of manufacturing facilities. Out of fourteen states where Fleetwood has one or more plants, Champion also has facilities. We believe that the synergies and efficiencies of this combination would result in combined annual savings in excess of $60M. Our assumptions are as follows:
- A tax free share exchange is done at a 1:1 or slightly higher basis for Fleetwood shareholders
- The combined company closes at least 11 plants without exiting any market.
- The combined company saves $14M from elimination of management at those plants.
- The combined company saves additional $6M of SG&A from elimination of manufactured housing redundancies
- The combined company would be able to operate at 80% capacity utilization up from current 40-50%, thereby resulting in combined annual manufacturing efficiencies in excess of $40M.
- Our assumptions do not include extra savings that could result from elimination of corporate overhead.
We believe a strategic combination between Fleetwood and Champion Enterprisewould create more than $600M in value for shareholders of both companies. We think the value creation for Fleetwood shareholders alone would be approximately$3 per share, more than 30% increase from where the stock is trading today.According to the latest SEC filings a significant percentage of Fleetwood shareholders are also Champion shareholders. Therefore we believe that our fellow shareholders would be quite comfortable with this share exchange and with Champion's management.
For the reasons we have detailed, we believe it is in your shareholders' best interests to immediately pursue consolidation alternatives to maximize shareholder value. We look forward to continuing discussions with you and your management team, and we trust that the best interests of all Fleetwood's shareholders will remain of paramount importance. We must, however, reserve the right to take any action we deem appropriate to protect the interests of shareholders.

Scott L. Swid
SLS Management, LLC

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