Thursday, May 31, 2007
Pardus Enters Confidentiality Agreement With Bally Total Fitness (BFTH)
Clinton Group Proposes $25/Share Recapitalization of Griffon (GFF)
Clinton Group said they have not received a meaningful response from the company with respect to the proposal.
The firm said, "Based on our analysis of comparable companies, it seems that the cost structure of Griffon can be reduced dramatically. If significant annual cost savings are outlined and a plan is undertaken by the restructuring firm to realize such savings in the near-term, then we believe the stock of Griffon should trade well north of the $25 tender price and offer significant long-term upside. For example, using a conservative 15x P/E multiple on a tax effected $20 million of savings divided by a share count reduced by 43% (through the recapitalization and Clinton Group's incremental equity investment) YIELDS IN EXCESS OF $9.00 PER SHARE OF INCREMENTAL VALUE."
A Copy of the Letter:
To Griffon Board Members:
We have recently attempted to discuss with management and its advisors anoutline of a PROPOSED $25.00 PER SHARE PUBLIC RECAPITALIZATION of GriffonCorporation ("Griffon" or the "Company"). Unfortunately, to date, we have notreceived a meaningful response with respect to the proposal. Therefore, we wouldlike to outline our transaction to the Board of Directors with the hope that wewill ultimately receive a favorable response to our proposal. We wouldappreciate a response within two weeks so that we can expeditiously finalize ourdue diligence with respect to arranging financing as well as appropriatelyaddressing structural issues with the Company.
We propose a $25.00 per share public recapitalization, led by Clinton GroupInc., where up to 50% of shares outstanding are purchased through a tenderoffer. Each existing shareholder would be entitled to have a minimum of 50% oftheir current holdings purchased if proration is required.
The sources of financing for the recapitalization are expected to be as follows:
- $395 million 1st lien bank financing
- $130 million 2nd lien bank financing
- Approximately $65 million incremental capital from Clinton Group, or its affiliates and co-investors.
At less than 5.0x total debt to EBITDA, we believe this is a reasonable andflexible debt financing proposal for the Company. We have been in discussionswith several major financial institutions regarding the debt financing, andbelieve this financing to be easily obtainable. Compared to relevant corporaterefinancing and leveraged buyout transactions in the current marketplace, thiscapital structure is actually conservative.
The proposal is contingent on:
- Clinton Group initially appointing a majority of the directors to the board, who will be subject to annual elections thereafter;
- Adoption of the governance modifications articulated in our previous letter, including board declassification, to be implemented for the benefit of all shareholders;
- Mr. Blau to be designated Non-Executive Chairman with any associated change of control payments deferred until he no longer remains a member of the Board of Directors;
- Engagement of a restructuring firm to manage the Company on an interim basis focusing on cost reductions related to corporate overhead, segment SG&A, manufacturing, distribution, product sourcing, product rationalization and other areas designed to greatly improve the profitability of Griffon's businesses. We have been in contact with a firm who is willing to commence this engagement on an expedited basis;
- Completion of due diligence, and funding, by major financial institutions with whom we have had discussions regarding financing terms and structure; and
- Equity incentive plans created for the management teams of the individual subsidiaries.
We believe that undergoing a levered recapitalization by utilizing the strengthof the Company's balance sheet, coupled with executing a turnaround in Griffon'sstruggling business segments and rationalization of corporate overhead, willultimately create tremendous value on a per share basis over the long-term.
Offering both attractive rates and favorable terms, the current debt financingmarkets further suggest that now is the opportune time to employ leverage toreduce the Company's cost of capital while executing on a strategy that willprovide existing shareholders with partial monetization of their shares at apremium to today's market price and the upside in Griffon's "turnaround."
Based on our analysis of comparable companies, it seems that the cost structureof Griffon can be reduced dramatically. If significant annual cost savings areoutlined and a plan is undertaken by the restructuring firm to realize suchsavings in the near-term, then we believe the stock of Griffon should trade wellnorth of the $25 tender price and offer significant long-term upside. Forexample, using a conservative 15x P/E multiple on a tax effected $20 million ofsavings divided by a share count reduced by 43% (through the recapitalizationand Clinton Group's incremental equity investment) YIELDS IN EXCESS OF $9.00 PERSHARE OF INCREMENTAL VALUE.
We look forward to hearing your response to our proposal and meeting withmembers of the board and its advisors to discuss our proposal in detail.
Clinton Group Inc.
Wednesday, May 30, 2007
Riley Investment Wants ESS Technology (ESST) Liquidated
RIM believes that the shares are undervalued and that the current restructuring should be expedited with the ultimate resolution of a liquidation of the company. RIM believes that a liquidation of the company could result in a 100% appreciation of ESST shares, however that value deteriorates every day the company functions in its current structure.
RIM believes that the current operating model is flawed, will lead to continued shareholder deterioration and that the Board of Directors’ oversight has not been in shareholders’ interests. RIM is also concerned that the company may make an acquisition that will further deteriorate the remaining equity value. RIM said it has attempted to communicate these concerns with the company and will more fully describe their position in a letter to the Board in the next 48 hours. RIM will consider all options including nominating a new Board or tendering in the open market for more shares.
Tuesday, May 29, 2007
Breeden Capital Accumulates 9.71% Stake in ACCO Brands (ABD)
Breeden Capital, run by former SEC-chief Richard Breeden, recently targeted Applebee's (Nasdaq: APPB), winning a board seat and pushing for a strategic review, which the company said has yielded several non-binding, preliminary proposals to acquire the company.
ACCO Brands is a leader in select categories of branded office products. The company's brands include Day-Timer, Swingline, Kensington, Quartet, GBC, Rexel, and Wilson Jones, among others.
Chapman Capital Discloses 7.4% Stake in Building Materials (BLG), Urges Sale
2 Sara L. Beckman ownership stake: precisely 18,653 (vs. 16,890 year/year) shares per BMHC 2007 Proxy Statement.
3 Eric S. Belsky ownership stake: precisely 1,519 (vs. 0 year/year) shares per BMHC 2007 Proxy Statement.
4 James K. Jennings, Jr. ownership stake: precisely 17,100 (vs. 15,600 year/year) shares per BMHC 2007 Proxy Statement.
5 Norman J. Metcalfe ownership stake: precisely 7,519 (vs. 3,000 year/year) shares per BMHC 2007 Proxy Statement.
6 David M. Moffett ownership stake: precisely 1,500 (vs. 0 year/year) shares per BMHC 2007 Proxy Statement.
7 R. Scott Morrison, Jr. ownership stake: precisely 26,700 (vs. 24,200 year/year) shares per BMHC 2007 Proxy Statement.
8 Peter S. O’Neill ownership stake: precisely 41,996 (vs. 40,180 year/year) shares per BMHC 2007 Proxy Statement.
9 Richard G. Reiten ownership stake: precisely 32,809 (vs. 28,454 year/year) shares per BMHC 2007 Proxy Statement.
10 Norman R. Walker ownership stake: precisely 0 (vs. NA year/year) shares per BMHC 2007 Proxy Statement.
12 Mr. Mellor sold 71,491 and 28,509 BMHC shares at approximately $26/share November 17-21, 2007 for a total of $2,605,393.
13 Source: BMHC 2007 Proxy Statement.
15 The U.S. Census Bureau reported that sales of newly constructed homes rose 16.2% in April 2007 to a seasonally adjusted annual rate of 981,000 homes, the largest monthly gain in 14 years.
17 BMHC’s regional markets experienced a single family building permit decline of 37% (vs. a 31% national rate decline) in the three months ending February 2007.
18 SelectBuild transaction highlights include the following (Target Revenue/Acquisition Price/Acquisition Date): 27% interest in Riggs Plumbing (N/A, $10.5MM, 3/28/2007), Willis Roof Consulting ($90.0MM, N/A, 06/30/06), Davis Brothers ($110.0MM, $43.3MM, 8/1/2006), Azteca (N/A, $1.5MM, 4/1/2006), Boulder's West (N/A, $6.7MM, 4/1/2006), Benedeti Construction ($145.0MM, N/A, 1/11/2006), MWB Building Contractors ($80.0MM, $57.1MM, 1/11/2006), 20% stake in WBC Construction (N/A, $31.4MM, 1/1/2006), HnR Framing & Home Building Components ($140.0MM, $72.6MM, 10/18/2005), Campbell Companies ($200.0MM, $85.6MM, 8/31/2005), Gypsum Construction (N/A, $5.9MM, 9/1/2005), 20% stake in WBC Construction (N/A, $24.8MM, 8/1/2005), 51% interest in BBP Companies ($100.0MM, $10.4MM, 7/1/2005), 73% interest in Riggs Plumbing (N/A, $19.2MM, 4/19/2005), 51% interest in RCI Construction (N/A, $4.9MM, 1/27/2005), 51% Interest in A-1 Building Components (N/A, $2.3MM, 9/1/2004), 49% interest in KBI Norcal (N/A, $14.0MM, 8/9/2004), 67% Interest in WBC Mid-Atlantic (N/A, $5.1MM, 10/1/2003), BMC West (N/A, $5.1MM, 6/1/2006), 60% stake in WBC Construction (N/A, $24.0 MM, 1/1/2003), and 51% interest in KBI Norcal (N/A, $7.1MM, 6/24/2002).
19 Valuation Assumptions (Chapman Capital research): 14-20% (cycle trough-peak) gross margins reduced by 6-10% (cycle peak-trough) SG&A loads, capitalized at 16-17% ROI.
21 HD Supply reportedly has expended approximately $8 billion buying the estimated 39 companies in its composition, in an effort to leverage Home Depot’s $70 billion supply chain.
22 Home Depot reportedly has retained Lehman Brothers, Inc. to conduct a strategic review of HD Supply, including its sale in part or entirety.
23 Masco acquired on May 1, 2007, Erickson Construction Company (turnkey framer) and Guy Evans, Inc. (millwork, interior and exterior door, window and bath hardware installer) for an estimated .8-1.0 times a combined $200 million in anticipated 2007 revenues, roughly in line with the valuation placed on Masco 2001 acquisition BSI Holdings. In 2002, Masco acquired Service Partners LLC (insulation installer) and other smaller businesses for $1.2 billion.
24 Leonard Green & Partners, L.P. reportedly gained 2.5 times its $88 million investment for a 60% stake in White Cap Construction Supply Inc. upon its acquisition by Home Depot in 2004; Warburg Pincus, LLC and its affiliate JLL Partners are the private equity backers to Builders FirstSource, Inc. (Nasdaq: BLDR), having a 50% combined ownership stake as of March 27, 2007.
Bradley Pharmaceuticals (BDY) CEO Offers to Acquire Company for $21.50/Sh
Shares of BDY closed at $18.44 on Friday.
Bradley Pharmaceuticals confirmed the receipt of the bid and said they have formed a special committee to review the offer as well as other strategic alternatives.
Friday, May 25, 2007
Ditech Networks (DITC) Holder Riley Investment Management Requests Dutch Tender Auction
The firm said if the company was unable to purchase the requisite number of shares, they suggested that the remaining cash should be returned to shareholders via a dividend. The firm also stated that it may seek representation to the Board of Directors.
A Copy of the Letter:
Riley Investment Management has been a shareholder intermittently for the last six years and currently owns or has beneficial ownership of approximately 5.8% of Ditech’s common stock. We are writing you to express our view regarding the most efficient way to return value to your shareholders. We believe our view is prevalent in the financial community.
Since your public offering in June 1999, Ditech has accumulated losses of over $80 million. During this time the Company has spent over $110 million in stock and cash on acquisitions and invested $188 million in R & D. The current enterprise value of approximately $140 million ($114 million if you present value the Company’s N.O.L. carry forward) suggests a high degree of investor skepticism towards Ditech as a profitable investment. This skepticism has been well earned. Historically, the Company has chosen to hoard its cash, has diluted its shareholders and has consistently disappointed its investors. The fact that 3.7 million of the approximately 4.0 million shares of stock owned by Company insiders consists of options is particularly disconcerting. As investors have paid real dollars and lost real money, management and the Board have collected fees and salaries, issued options and sold stock. In particular, we believe that the $135 million in cash on the balance sheet the Company has maintained is inappropriate and detrimental to the creation of shareholder value.
However, over the last six months we have become more encouraged about Ditech’s business fundamentals and believe the Company is well positioned for consistent, strong cash flow and operating profit as its customer base increasingly diversifies. In fact, our analysis suggests that Ditech could be at an EBITDA run rate of $25 million in the next couple of quarters and possibly up to $35 million in the near future with continued customer wins (specifically a third domestic carrier that the Company has indicated it may close).
Given the Company’s excessive cash and improved financial condition, we believe that the Company would go a long way to reestablishing credibility with investors by immediately conducting a dutch tender auction and/or dividend that will result in a return of at least $100 million to shareholders. Specifically, the tender price per share should be between $9 and $11. If the Company is unable to purchase this amount of shares, then the remaining cash should be returned to shareholders via a dividend. After the tender or dividend, the Company would still be in an enviable position of having over $40 million in cash while potentially generating $20 to $35 million per year in free cash flow. We believe this is a reasonable course of action. The Company’s argument that it “needs” to have $100 million in cash on the balance sheet to market to its customer base in our opinion does not hold water. Ditech has been around now for enough years and generates enough cash that in our opinion carriers will be more than comfortable with our proposed balance sheet. In fact, one could clearly argue for a larger return of cash given our belief in the Company’s ability to generate cash going forward.
At the high end of the dutch tender auction range, the Company’s enterprise value would be $165 million. Before the April quarter, which is considered an aberration because of the Company’s international results, Ditech had been generating between $3.7 and $2.9 million in EBITDA per quarter for the last three quarters. Just annualizing those numbers results in approximately $12 million in free cash flow. Accordingly, at a tender price of $11 per share, the Company would be purchasing the shares at a free cash flow yield of 7.3%, higher than the interest rate the Company is earning on its cash. However, if our analysis proves to be correct and the Company’s free cash flow rises to $20 to 35 million, the Company would be buying the stock at a free cash flow yield of 12.1% to 21.2%, respectively—clearly a much better investment than cash. From an earnings perspective, with a self-tender, if EBITDA is $25 million, earnings per share would increase to approximately $0.63 from $0.56, and at $35 million EBITDA, earnings per share would increase to $1.02 from $0.95. From a non-GAAP perspective, which we believe is the preferable focus, this transaction would be accretive even at $16 million in EBITDA.
As stated above, we believe an EBITDA of $25 to $35 million is a reasonable projection. The Company has publicly stated that its operating model calls for operating profit of 20% to 30%. This is higher than the Company’s more recent non-GAAP profit margins of 12%. However, we believe that Ditech’s operating model is highly leveragable and that the majority of incremental gross profit will fall directly to the bottom line. Given 70% gross margins and roughly $45 million in annual cash operating expenses, it is easy to see that quarterly revenues need only approach $23 million for Ditech to garner 21% EBIT margins—not to mention $5 million in quarterly free cash flow. Accordingly, we concur that the Company’s target operating model is achievable as revenues increase, and believe further that the Company should be able to generate substantial free cash flow as Ditech’s revenue approaches $30 million per quarter.
In this regard, we believe that generating $30 million in quarterly revenues is achievable in the near future. The following sets forth our assumptions in our model for the Company’s revenue:
- $14 million quarterly revenue contribution from Verizon, the Company’s largest customer. This is reasonable considering that Verizon has been averaging $13.5 million per quarter in revenues over the last twelve months ($15 million in the most recent quarter), which is up almost 20% from the preceding 12-month average.
- $6 million quarterly revenue from the Company’s international business. Our assumption is even more conservative than the Company’s projections. Ditech’s international business has averaged $7.3 million per quarter year-to-date before its announcement that 4th quarter revenues would be approximately $2.5 million due to a delay in negotiation agreements in closing transactions. The Company has suggested that international business should bounce back in the June quarter, but our sense is that it should be closer to a $6 million revenue run rate per quarter.
- $2 million quarterly revenue from the Company’s PVP business. The Company’s PVP business has been slower than anticipated, but the Company has characterized this opportunity as having “tremendous upside” and that activity levels around this product set has been “tremendous.”
- $8 million quarterly revenue from new customers. Using existing numbers, the Company already has a $22 million run rate before any new carriers. The Company has indicated “some real optimism about being able to close the third” large, domestic wireless carrier in a recent conference call. When asked on the conference call if the new domestic customer could be as big as Verizon you said the following “…we could certainly see the opportunity ending up at that level. I’m not prognosticating that today, but we’re really excited.” Given our assumptions above, for Ditech to achieve quarterly revenues of $30 million, the new carrier would need only to generate $8 million per quarter--approximately 60% of Verizon. This seems achievable if not conservative.
Our analysis does not address operating expenses, to which we do not have detailed access. However, history has shown that when an existing long-term CEO leaves, expenses are typically reduced. We would suggest to the new CEO a full analysis of services and expenses. One example would be to replace PWC with a regional auditor. We have found this typically to reduce costs by at least 40%, which in the case of the Company would result in a savings of approximately $250,000.
It is possible that our analysis of the Company’s business is overly optimistic. Even if this were in fact the case, the Company’s decision would be simple – dividend out at least $100 million in cash in a special dividend to shareholders, representing $3 per share.
Ditech is at a critical juncture in its history. In 1999, shareholders entrusted the Company with over $75 million in cash through an IPO at $11 per share and a secondary at $51.50 per share. While insiders and VC investors took this opportunity to sell over $75 million of stock in the secondary and subsequently more through open market sales, investors have seen their shares decline 84% in eight years. Now, the Company’s fundamentals appear to be improving and the Company has the opportunity to bring on a new CEO that understands and is committed to shareholder value and is cognizant of the shareholder base. He or she must realize that the dollars on the balance sheet are those of shareholders and must not think that accepting a position at Ditech is akin to receiving carte blanche with these dollars. We believe it is time to enhance shareholder value by returning cash to your shareholders.
We look forward to discussing this possibility and our other thoughts to increase shareholder value with the Board in the near future. Moreover, we may seek representation on the Company’s Board. We have appointed directors to over 12 boards in the last three years and have had a high success rate in recognizing shareholder value through our contributions on various boards.
Bryant Riley, Managing Member
Thursday, May 24, 2007
Loeb's Third Point LLC Lowers Stake in Acorda (ACOR) to 4.1%
In his original 13D filing, Loeb requested that Acorda's Board of Directors retain an investment bank and pursue a process to sell the Company.
Knightspoint Partners Raises Stake in Sharper Image (SHRP) to 21.1
From the 'Purpose of Transaction' section of the filing:
"The Reporting Persons may in the future take such actions with respect to their investment in the Issuer as they deem appropriate including, without limitation, seeking additional Board representation, making proposals to the Issuer concerning changes to the capitalization, ownership structure or operations of the Issuer, and, subject to compliance with applicable securities laws, purchasing additional Shares, selling some or all of their Shares, engaging in short selling of or any hedging or similar transaction with respect to the Shares or changing their intention with respect to any and all matters referred to in Item 4."
Earlier today, Sun Capital doubled their stake in Sharper Image to 19.8%
Elliott Associates Wants Packeteer (PKTR) To Entertain a Sale of the Company
From the Purpose of Transaction section of the filing:The Reporting Persons expressed to the Board their views that: i) the Issuer has leading technology in one of the fastest growing segments of the networking market, but has proven unable to capitalize on such technology; ii) the business segment in which the Issuer operates is becoming increasingly competitive; and iii) the Issuer’s technology may prove extremely valuable to a larger acquirer looking to enter the wide area network optimization market or to supplement its current product offering. The Reporting Persons believe that prompt action by the Board to commence a sales process is necessary.
Sun Capital Doubles Stake in Sharper Image (SHRP)
The firm disclosed, "Pursuant to a purchase agreement dated May 16, 2007, between SCSF Equities and Richard Thalheimer Revocable Trust Established 3/6/89, SCSF Equities purchased 1,490,000 shares of Common Stock on May 23, 2007 directly from the Thalheimer Trust, at a purchase price of $9.25 per share, in a private transaction that was unanimously approved by the disinterested members of the Issuer’s Board of Directors."
Wednesday, May 23, 2007
Pirate Capital Lowers Their Stake in GenCorp (GY) to 6.8%
Tuesday, May 22, 2007
Loeb's Third Point Want PDL BioPharma (PDLI) Chairman Removed
In the past, Third Point demanded the company terminate CEO Mark McDade, add three shareholder representatives to the PDLI Board and retain an investment bank to explore strategic alternatives for the Company.
Monday, May 21, 2007
Chapman Capital Lowers Stake in eSpeed (ESPD) to 6%
Chapman has been pushing the company to sell. In April, the company's controlling stockholder, Cantor Fitzgerald, L.P., rejected a $12.00/share acquisition proposal from Tullett Prebon Plc.
Kerkorian's Tracinda in Talks with MGM MIRAGE (MGM) to purchase the Bellagio, City Center; Also To Pursue Strategic Aternative Related to MGM
Tracinda also wishes to pursue strategic alternatives with respect to its investment in MGM MIRAGE which may include financial restructuring transactions involving all or a substantial portion of the remainder of the Company. Tracinda has made no decision with respect to any such restructuring transactions and reserves the right not to engage in or approve any transaction.
Major Middle East Cement Player Sawiris Discloses 9.9% Stake in Texas Industries (TXI)
In the filing the firm said, "The Reporting Persons intend to actively monitor efforts by management to increase stockholder value. The Reporting Persons may also decide in the future to propose a transaction whereby all or a portion of the Issuer be sold, and in connection therewith the Reporting Persons may seek to participate in such transaction or seek to acquire control of the Issuer in a negotiated transaction or otherwise. If the Reporting Persons should acquire control of the Issuer, they may transfer all or part of their holdings to affiliated or unaffiliated persons. The Reporting Persons also may seek in the future to have one or more representatives elected to the board of directors of the Issuer or to propose other matters for consideration and approval by the Issuer’s stockholders or board of directors."
Mr. Nassef Sawiris is Director and the Chief Executive Officer of Orascom Construction Industries (OCI) a leading cement producer and construction contractor active in emerging markets. OCI is based in Cairo, Egypt and employs more than 40,000 people in 20 countries. The OCI Cement Group is the largest cement producer in the Middle East and a leading regional cement exporter.
Texas Industries, Inc., together with its subsidiaries, engages in the production and supply of heavy building materials in the United States. It operates in three segments: Cement, Aggregates, and Consumer Products.
NOTE: Texas Industries has been up today prior to the filing on takeover speculation.
MMI Investments Plans to Vote Against the Acquisition of Acxiom (ACXM)
The firm said, "We do not believe this price represents fair value for our shares and note that it is: below what we believe to be a reasonable LBO valuation; significantly less than the price Acxiom would command were it valued at the mean multiple of LTM EBITDA in what we believe to be precedent transactions; and nearly 20% below the price Acxiom would command if it were valued at the LTM EBITDA multiple from ValueAct’s last offer for the company in 2005, prior to ValueAct’s joining the Acxiom Board."
A Copy of the Letter:
Dear Members of the Board:
Brencourt Advisors Dissatisfied with Vertrue (VTRU) Takeover Offer; Says Stock Worth Much More
In the letter, Brencourt said the current $48.50 offer price is too low. The firm sees a fair value for the stock above $60.
The firm said the Board should reconsider its recommendation of the One Equity offer and also encourages the Board to re-visit a leveraged recapitalization of the Vertrue's balance sheet and to use those proceeds to fund a special dividend to shareholders.
A Copy of the Letter:
Brencourt Advisors, LLC ("Brencourt") is one of the largest shareholders of Vertrue Incorporated ("Vertrue" or the "Company"). We are writing to inform you of our dissatisfaction with the current offer price by the One Equity Partners consortium ("One Equity" or the "Sponsors") and our intention to vote against the merger offer. We believe that the current offer significantly undervalues the strong growth that Vertrue is experiencing and is a sub-optimal alternative to other strategies that deliver superior shareholder value.
THE CURRENT OFFER IS TOO LOW
Brencourt's position is that the current $48.50 offer price is too low. In examining the materials the Board reviewed in support of this bid, namely the Jefferies Broadview ("Jefferies") analysis set forth in the Company's preliminary proxy statement on file with the SEC, we believe that there were major flaws in Jefferies methodology which undervalued Vertrue's shares.
For example, Jefferies calculated a weighted average cost of capital ("WACC")that was too low. Jefferies estimated that Vertrue's WACC was 16.5%, comprised of a 17.8% cost of equity and a 9.25% cost of debt. We fail to see how Jefferies could have arrived at these numbers. Aside from the fact that Jefferies used a7.8% market risk premium (versus a market standard 5%), we believe the 2.3%"Size Premium" for the cost of equity is ridiculous. Using Jefferies' beta of1.4x, we believe the cost of equity should be 11.7%. Jefferies calculated the cost of debt based on the coupon of the Company's publicly issued debt. However,prior to the $48.50 offer, Vertrue's 9.25% senior notes were yielding 7%. Using this correct cost of debt (7%) would result in a WACC of 10.2%. Based on MANAGEMENT'S OWN PROJECTIONS, this more realistic WACC would imply an equity value over $60, A 25% PREMIUM TO THE CURRENT OFFER. If one were to apply 10.2%WACC to Jefferies' "NPV Sensitivity" chart, fair value for our shares would be above $70.
We believe that the other valuation methods employed by Jefferies were flawed as well. While Jefferies correctly pointed out that there are no other truly comparable public companies to Vertrue, they drew incorrect inferences from theSOLE precedent transaction in the universe: Apollo's purchase of Cendant Corp'sMarketing Services Division ("Affinion"). First, that transaction occurred in July 2005, NEARLY 2 YEARS AGO. Since then, valuations have gone up for nearly every company, especially for less understood business models like Vertrue.Second, Jefferies did not adjust for certain one-time items that raised the Affinion acquisition multiple from 6.25x to 7.1x (please see the debt prospectus for the transaction).
In similar fashion, Jefferies does not properly calculate the acquisition multiple implicit in the Vertrue transaction. Jefferies reports that $48.50represents 8.9x TTM EBITDA, ostensibly a fair multiple, especially with respect to the Affinion transaction. However, this methodology ignores timing differences in marketing spend that have artificially depressed TTM EBITDA,thereby raising the transaction multiple. As you yourself stated on the 2Q07(December quarter) conference call, "I want to point out that it's important to note when comparing our performance to last fiscal year, our year-over-year results reflect both a strong first half in fiscal '06 and an increased marketing investment in the first half of fiscal '07". The results for the March2007 quarter demonstrate your point. In that quarter, adjusted EBITDA rose to$25.4 from $18.4 million in 3Q06.(1) Thus, based on management's projected June2007 EBITDA, the implied transaction multiple would only be 7.2x.
Furthermore, Jefferies does not accord Vertrue the premium multiple that it deserves vis-a-vis the Affinion acquisition. Vertrue, through its established online platform and Management Service segment, has better growth prospects than Affinion. A company with higher growth deserves a higher multiple. Therefore,the 7.2x multiple used to arrive at a $48.50 price is not quite the "gift" that the Jefferies analysis suggests. In fact, based on management's projected high teens EBITDA growth, Vertrue should trade in the 10-13x range. Even if we discounted that valuation to a 9x multiple, we still arrive at a fair value for the stock above $60.
We also find fault with the IRR returns of this transaction. If one were to take management's projections and use the same entry/exit multiples, One Equity will realize a mid 40% IRR over a 5-year horizon. This analysis includes all fees and expenses and does not consider One Equity re-levering at various stages of the investment to take dividends out of the Company. Although we understand that new buyers need an adequate return to compensate them for long-term risk, mid 40% is far higher than the 15-20% IRRs that private equity sponsors typically accept incurrent markets. At even a 30% IRR, the implied share price would be above $58,20% HIGHER than the current offer.
Finally, we take issue with Jefferies analysis that this offer is fair because it represents a 20% premium to the pre-NY Post article price of $40.12. While we do not believe that the premium offered to shareholders has any relevance to the ACTUAL value of our shares, we regard Jefferies analysis as incomplete. Nowhere does Jefferies account for the technical selling caused by Vertrue's converts that are struck at $40.37. Historically, the stock price has been capped by convert holders who hedge their stock exposure above that strike price.Likewise, Jefferies does not mention that the Company raised its guidance on January 24, 2007, THE SAME DAY that the NY Post reported the company was up for sale. We fail to see how Jefferies could not attribute any of the appreciation in the stock to that. Therefore, based on the $43.82 closing price on January24th, this transaction represents a mere 10.8% premium. How is that fair to shareholders based on Jefferies analysis?
We believe that there are other ways to increase shareholder value other than by accepting a low ball bid for the company. We believe that the Board should reconsider its recommendation of the One Equity offer in the light of the points we make above and the existence of alternative, value-enhancing transactions. In particular, we encourage the Board to re-visit a leveraged recapitalization of the Vertrue's balance sheet and to use those proceeds to fund a special dividend to shareholders.
We understand the Board's reluctance to approach the debt markets considering the Company's experience in 2004. However, much has changed in the market since then. Affinion's experience in the debt markets is a directly relevant example for Vertrue. At the end of 2005, Affinion launched a bond offering to partially fund the acquisition by Apollo. In similar fashion to Vertrue's 2004 offering,Affinion found that the capital markets were not receptive to its offering and consequently, the underwriting banks were forced to hold a large portion of the issue in a bridge facility. In order to move this bridge facility off their balance sheets, the underwriting banks educated the investment community on Affinion's business model to create demand for a new bond issue. In April 2006,the bond issue was placed as 11.5% subordinated debt.
Over the next several months, Affinion met expectations and that same debt appreciated substantially. Today, that 11.5% subordinated issue yields 8.8%despite Affinion being levered 5.2X. Furthermore, in January 2007, Affinionre-levered its balance sheet to 6.4X and used the $350 million of proceeds to buy back preferred debt and dividend to Apollo an amount in excess of Apollo's initial equity investment.
We believe Vertrue should draw upon Affinion's experience for the benefit of its own shareholders. Based on current market conditions and management's projections, Vertrue could issue debt to fund at least a $30 dividend while still maintaining a healthy balance sheet with significant free cash flow. We assess that based on a price to earnings ratio between 12.5 and 13.5x, the proforma stock price, including the special dividend, would be 25-35% higher than the $48.50 offer. We further suggest that if market conditions one year from now are similar and management meets expectations, Vertrue could issue more debt to fund ANOTHER special dividend to shareholders, while allowing current shareholders to maintain their ownership in the Company. We would note that given the size of One Equity's financing package, the Sponsor's bankers believe that this leveraged strategy for Vertrue is entirely feasible.
Looking at the proposed 1st lien / 2nd lien financing structure One Equity will use for its transaction, we hypothesize that one year from now One Equity will be in a position to take advantage of the cheap call protection of its debt and re-lever the Company, and dividend most, if not all, of its equity investment to itself. Clearly, we don't need a private equity company to do what we as shareholders can do for ourselves.
At this point, I would like to note that Brencourt remains a strong supporter of the Company, its management and its prospects. However we strongly urge the Board of Directors to re-consider its endorsement of the current $48.50 offer.We do not believe that the proposed transaction adequately compensates us for our shares. Otherwise we remain prepared to further defend alternative means that deliver greater shareholder value.
William L. Collins
Chief Executive Officer
Brencourt Advisors LLC
Large Everlast (EVST) Holder Burlingame Expresses Concerns About Stock Offering
Yorktown Avenue Capital Discloses 7.3% Stake in Goldfield (GV)
The firm said it does not have any plans or proposals which relate to, or could result in, any of the matters referred to in paragraphs (a) through (j), inclusive, of the instructions to Item 4 of Schedule 13D.
Value Act Capital Lowers Stake in Avaya (AV) to 3.9%
Thursday, May 17, 2007
Loeb's Third Point Boosts Stake in CV Therapeutics (CVTX) to 9.9%
In a pretty standard disclosure, Loeb's firm noted that they presently do not have any plans or proposals that relate to or would result in any of the actions required to be described in Item 4 of Schedule 13D.
Yesterday, we noted that Loeb was building the new stake. Link
Shamrock Activist Value Fund Discloses 5.2% Stake in Reddy Ice Holdings (FRZ)
The firm said it has no current plans or proposals with respect to the Company or its securities of the types enumerated in paragraphs (a) through (j) of this Item 4 to the form Schedule 13D promulgated under the Act.
Wednesday, May 16, 2007
Loeb's Third Point Shows A Number of New Positions in Latest 13F
Some interesting new positions from the filing:
Acadia Pharmaceuticals Inc. (Nasdaq: ACAD) 350,000 shares
Alexion Pharmaceuticals Inc. (Nasdaq: ALXN) 400,000 shares
Alkermes, Inc. (Nasdaq: ALKS) 750,000 shares
Ariad Pharmaceuticals Inc. (Nasdaq: ARIA) 1,600,000 shares
ATP Oil & Gas Corp. (Nasdaq: ATPG) 2,000,000 shares (already known from 13G)
BearingPoint (NYSE: BE) 3,000,000 shares
Burlington Northern Santa Fe Corp. (NYSE: BNI) 325,000 shares
Candela Corp. (Nasdaq: CLZR) 1,275,000 shares (already known from 13D)
Charming Shoppes Inc. (Nasdaq: CHRS) 2,200,000 shares
Coleman Cable, Inc. (Nasdaq: CCIX) 666,667 shares
CV Therapeutics, Inc. (Nasdaq: CVTX) 1,350,000 shares
DepoMed Inc. (Nasdaq: DEPO) 325,000 shares (already known from 13G)
FMC Corp. (NYSE: FMC) 700,000 shares
General Motors Corporation (NYSE: GM) 1,000,000 shares
Granite Construction Inc. (NYSE: GVA) 1,350,000 shares (already known from 13D)
Kansas City Southern (NYSE: KSU) 2,000,000 shares
MDS, Inc. (NYSE: MDZ) 1,350,000 shares
Norfolk Southern Corp. (NYSE: NSC) 1,250,000
Northern Orion Resources Inc. (AMEX: NTO) 7,600,000 shares
Onyx Pharmaceuticals Inc. (Nasdaq: ONXX) 1,080,000 shares
Talisman Energy Inc. (NYSE: TLM) 3,750,000 shares
Tronox Inc. (NYSE: TRX) 900,000 shares
DG FastChannel (DGIT) Discloses 13.2% Stake in Viewpoint (VWPT)
DG FastChannel announced the equity investment and partnership with Viewpoint earlier in the month.
Shamrock Activist Value Raises Modine Manufacturing (MOD) Stake to 6.37%
Tuesday, May 15, 2007
Buffett Discloses New Stakes in NSC, UNP and WLP
Burlington Northern Santa Fe (NYSE: BNI) 10,024,876 shares (already disclosed)
Norfolk Southern (NYSE: NSC) 6,362,800 shares
Union Pacific (NYSE: UNP) 10,513,100 shares
Wellpoint (NYSE: WLP) 979,700 shares
The full report is available at the main site: Link
Eddie Lampert Buys Up 15M Shares of Citigroup (C)
The stake was disclosed after confidential treatment of the stake expired on May 15, 2007. From the filings its looks like March, 31 2006 was the first quarter the stake was required to be disclosed.
The full report is available at the main site: Link
JANA Nudges Alcoa (AA). Possibly Ingersoll-Rand (IR) Too
Icahn's Latest Targets
Carl Icahn's Icahn Management fund released its latest 13F today for the quarter ended March 31, 2007.
The filing showed news positions in:
Anadarko Petroleum Corp. (NYSE: APC): new 3,105,520 share stake
CSX Corp. (NYSE: CSX): new 2,675,680 share stake
Pride International Inc. (NYSE: PDE): new 4,588,000 share stake
Motorola Inc. (NYSE: MOT): new 9,360,000 share stake (already disclosed in proxy fight).
The full report is available at the main site: Link
Relational Investors Discloses "Confidential" 5.1M Share Stake in Analog Devices (ADI)
Relational maintained its 5.1 million share stake in ADI from 12/31/06 to 03/31/07, according to its new 13F.
In the firm's new 13F for the quarter ended 03/31/07 , Relational Investors also disclosed a new 14.2 million share stake in Sprint-Nextel (NYSE: S) (WSJ report in April noted the position). The firm also closed out its stake in Ceridian (NYSE: CEN).
Relational Investors is best known for its push to remove Home Depot's (NYSE: HD) CEO Bob Nardelli.
Monday, May 14, 2007
Loeb's Third Point Discloses 8.7% Stake in Candela (CLZR)
A 13G filing indicates a "passive" stake, but Loeb is known as an activist investors. On Friday, Loeb also disclosed a new 5%+ stake in DepoMed Inc. (Nasdaq: DEPO).
Candela manufactures, and distributes innovative clinical solutions that enable physicians, surgeons, and personal care practitioners to treat selected cosmetic and medical conditions using lasers, aesthetic laser systems, and other advanced technologies.
ValueAct Capital Accumulates 7.3% Stake in Advanced Medical Optics (EYE)
Loeb's Third Point LLC Discloses 8.2% Stake in DepoMed (DEPO)
Depomed, Inc., is a specialty pharmaceutical company with two approved products on the market and multiple product candidates in its pipeline.
Friday, May 11, 2007
Monarch Activist Partners Discloses 6.1% Stake in Orbit International (ORBT)
The firm said it believes that ORBT's stock price is significantly undervalued and intend to communicate with management in order to explore measures to enhance shareholder value.
Loeb's Third Point Raises Stake in Nabi Biopharmaceuticals (NABI) to 11.4%
Third Point has representatives on the board of directors of Nabi as part of a 2006 settlement.
Lyondell (LYO) Soars After Billionaire Blavatnik Buys Rights on 8.3% and May Seek Acquisition
Large Wendy's (WEN) Holder Highfields Capital Urges Sale
In late April, Wendy's announced the formation of special committee of independent Directors to review strategic options to enhance shareholder value.
Highfields Capital is the largest shareholder of Wendy's.
Thursday, May 10, 2007
Loeb's Third Point Lowers its Stake in Martin Marietta Materials (MLM) to 4.5%
Loeb has never showed a fully activists stance with the MLM investment since the original 13D was filed in December 2006.
In the February amended 13D filing, the firm disclosed a cost basis of about $95 per share for the 2,750,000 shares held at that time (also held options). Today the stock is at $144.65.
Wednesday, May 09, 2007
Relational Investors Adds Almost 4M Shares of National Semiconductor (NSM)
Clinton Group (GFF) Raises Stake in Griffon (GFF) to 8.3%; Wants Goldman Mandate Focused on Sale or Recapitalization
In an amended 13D filing on Griffon Corp. (NYSE: GFF), Clinton Group disclosed they raised their stake in the company to 8.3% (2.48 million shares) from 7.2%. The firm also disclosed a letter to the board of directors expressing disappointment over the extent of the company's decline in earnings and its inability to responsively adjust cost structures, particularly in light of the performance of other industry participants during the same period.
The firm also notes that Goldman Sachs was retained to explore strategic alternatives, but wants the Board to narrow Goldman Sachs' mandate to be either a sale of the business in whole or in parts or some form of public recapitalization.
The firm also said the Board has not yet addressed any of the "management entrenching" issues that we outlined in their most recent letter.
The firm concluded, "Fortunately, management appears to be actively seeking alternatives and we are waiting for such changes to be announced. However, if management and the Board fail to ultimately announce significant restructuring savings across the entire organization and demonstrate a good faith effort in addressing shareholders' concerns regarding governance, or the Company fails to pursue meaningful shareholder value enhancing alternatives, we will be compelled to seek a change through direct shareholder means."
A Copy of the Letter:
To Griffon Board Members:While a decline in Griffon Corporation's ("Griffon" or the "Company") earnings were widely anticipated due to the currently weak new home construction and home resale markets, the inability of the Company to responsively adjust its cost structure within an appropriate time frame was, at a minimum, a huge disappointment.
The under performance was particularly disheartening in light of what competitors facing the same headwinds have accomplished within the same period. When one peruses the results of other building products related companies, one would find that in reaction to tough industry conditions, other industry participants have been engaged in ongoing restructuring and cost rationalization programs,resulting in a continued and reasonable level of profitability, albeit at a lower level. For example, Masco Corporation's recently reported operating profit margins dropped only to 8.9% from the previous year's 11.2%. Its installation segment generated an operating margin of approximately 5% and its cabinets business posted an operating margin of over 10%. In stark contrast, Griffon reported losses in both its Garage Door Segment and Installation Services Segment.
Further, Griffon's fiscal second quarter unallocated expenses grew year over year while Masco's SG&A expenses dropped by $20 million. And while Griffon used cash during the quarter, Masco returned $361 million to shareholders through share repurchases.
While Griffon management spoke on the earnings call of COMMENCING cost cutting initiatives in April, Masco announced a COMPLETED 16% cut of its workforce in the first quarter.
We raised the issue in our previous letter about what we believe to be clearly an untenable corporate situation. Namely, Mr. Blau continues to serve as Chairman and CEO of two public companies. Now it seems clear that while Mr. Blauhas been dealing with competing bids relating to Aeroflex Inc, the operations of Griffon have suffered.
After raising the issue of shareholder value maximization and strategic alternatives available to the Company in our first letter in December 2006, only now, almost 5 months later, do we hear that Goldman Sachs has been officially retained to explore such alternatives. As management collected millions in cash and received grants for large amounts of shares, the stock of Griffon has floundered. During an exceptional bull market, Griffon's stock has actually declined over a period stretching greater than two years.
Given the distracted management, and "mini-conglomerate" corporate structure where management ostensibly oversees three unrelated businesses for huge remuneration, we urge the Board to narrow Goldman Sachs' mandate to be either a sale of the business in whole or in parts or some form of public recapitalization aided by a qualified financial sponsor that can lead the business rationalization and profit improvement for the benefit of all shareholders. We would be more than happy to look to participate in various structures that might be contemplated.
Finally, despite the Company's recent poor performance, the Board has not yet addressed any of the "management entrenching" issues that we outlined in our most recent letter. Since these governance issues are unrelated to performance or market conditions, we do not understand why none of our proposed changes have been implemented. The only positive relates to avoiding reinstituting an entrenching shareholder rights plan.
Fortunately, management appears to be actively seeking alternatives and we are waiting for such changes to be announced. However, if management and the Board fail to ultimately announce significant restructuring savings across the entire organization and demonstrate a good faith effort in addressing shareholders' concerns regarding governance, or the Company fails to pursue meaningful shareholder value enhancing alternatives, we will be compelled to seek a change through direct shareholder means.
We appreciate management's apparent receptiveness to solutions as articulated on the recent earnings call and to that end we are happy to discuss our ideas further. Please feel free to call us any time at 212-XXX-XXXX.
CLINTON GROUP, INC.