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Jun 15 15

The Fire is Burning – OM Group Continued

by Cove Street Capital

Related: Plus ça Change, Plus C’est La Même Chose.

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The following is a letter by Wynnefield Capital Management to fellow shareholders of OM Group (OMG), released June 11, 2015:

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Wynnefield Capital Management, LLC
450 7th Avenue, Suite 509
New York, NY 10123
OMG’s Board Orchestrates a Decade of Disaster

 

Dear fellow shareholders,

Wynnefield Capital is an investment management firm focused on an equity small-cap value special situations strategy that practices constructive activism. The firm was founded by Nelson Obus and Joshua Landes in 1992. The principals and employees are the largest investors, representing about 20% of the Fund’s AUM. The investment manager holds core positions approximately 6-8 years.

We remain a shareholder of OM Group and intend to vote against the recently announced sale on principle.

On Monday, June 1, Wynnefield attended OM Group’s Annual Meeting of Stockholders in Cleveland, Ohio. That morning, we were stunned the existing Board of Directors agreed to sell the company out from under shareholders – especially given new Board members would be confirmed in just a few hours and that the company previously agreed (March 23) to activist FrontFour Capital Group, LLC demands, including Board seats and a renewed focus on operational improvements. To contrive an all-out sale during this transitional period is simply appalling. The Board made a mockery of corporate governance and effectively steamrolled shareholder rights. After rudimentary meeting procedure, management and the Board quickly exited the room – without a formal Q&A session (necessary given the sale agreement’s significance and ongoing poor financial performance) or ample time for shareholders to further discuss the aforementioned events.

Even more nefarious than the generous incentive via change-in-control provision, Mr. Joseph Scaminace, Chairman & CEO, exercised 174,995 shares on June 3 (two days after the sale announcement!), just 10 days prior to expiration. Many questions remain unanswered – about this transaction’s timing and price, as well as the Board’s and management’s creditability. It is egregious that executives and Board members agreed to pay too much for acquisitions – the most devastating purchase was VAC Holding GmbH in 2011, while selling our company substantially below full value.

For nearly a decade, OM Group’s management team’s greatest achievement was the massive destruction of shareholder capital. The complacent Board served as enablers by rubber stamping each whimsical M&A transaction with reckless abandon. The management team was grossly overpaid. Pay-for-performance tenets and basic business acumen were clearly absent in the halls of OM Group.

Given the horrid events described above, Wynnefield has the following requests:

1) The new Board must insure existing shareholders that a legitimate go-shop process takes place – including proof that the company’s sale was effectively marketed to other potential acquirers.

2) Wynnefield suggests institutional shareholders take notice of this Board’s horrible shareholder treatment and WITHHOLD votes for all Board members if their names appear on any future proxy.

As a reminder:

Board of Directors

* Joseph Scaminace – Chairman & CEO.          * Dr. Hans-Georg Betz.

* Richard Blackburn.                                        * Carl Christenson.

* Steven Demetriou.                                         * John McFarland.

* Patrick Mullin.                                               * Katharine Plourde.

 

Nominating and Governance Committee

* Katharine Plourde – Chairperson.                    * Dr. Hans-Georg Betz.

* Steven Demetriou.                                         * Carl Christenson.

 

Compensation Committee

* Steven Demetriou – Chairperson.                    * Richard Blackburn.

* Carl Christenson.                                           * John McFarland.

* Patrick Mullin.

 

Executive Officers

* Joseph Scaminace – Chairman & CEO (August 2005).

* David Knowles – President and COO (April 2013).

* Christopher Hix – VP and CFO (January 2012).

* Valerie Gentile Sachs – VP – General Counsel and Secretary (September 2005).

* Gregory Griffith – VP, Strategic Planning and Development (May 2012).

* Michael Johnson – SVP, Human Resources (November 2010).

 

Other Company Board positions

* Joseph Scaminace: Cintas Corporation (NASDAQ: CTAS), Parker-Hannifin Corporation (NYSE: PH) and The Cleveland Clinic Foundation.

* Dr. Hans-Georg Betz: Executive Advisor of Advanced Energy Industries, Inc. (NASDAQ: AIES).

* Richard Blackburn: The George Washington University.

* Carl Christenson: Altra Industrial Motion Corporation (NASDAQ: AIMC).

* Steven Demetriou: Aleris International Inc., Kraton Polymers (NYSE:KRA).

* John McFarland: Weldon, Williams & Lick, Inc.

* Patrick Mullin: The Andersons, Inc. (NASDAQ: ANDE).

* Katharine Plourde: Pall Corporation (NYSE: PLL) and Albany International Corporation (NYSE: AIN).

 

Very truly yours,

Wynnefield Capital Management, LLC

By: /s/ Nelson Obus

Nelson Obus, Co-Managing Member

 

ABOUT WYNNEFIELD CAPITAL, INC.

Established in 1992, Wynnefield Capital, Inc. is a value investor specializing in U.S. small cap situations that have company- or industry-specific catalysts.

 

Jun 4 15

Plus ça Change, Plus C’est La Même Chose.

by Cove Street Capital

(Translation: Another Weasel-like Deal Where Public Shareholders are Sold-Out.)

The topic for today is the deal announcement on May 31st that the OM Group (NYSE: OMG) decided to sell itself to the private equity firm Apollo Group for $34 a share. We own approximately 1.5% of the shares outstanding at an average cost of roughly $28 purchased within the last year, so the transaction beats a sharp stick in the eye…but not by much. Here is what we find offensive:

1. The basic premise of any sale of a public company should be: is the upfront premium reasonably equal to or does it exceed the present value of the operating plan? The answer here, as we will detail below, is grossly no.

2. As we have noted many times in many places, there is an inherent conflict of interest when a management team leads a sale to a private equity firm. Joe Scaminace, the CEO, has had a ten year adventure which has resulted in nearly zero shareholder value creation. After a very recent activist campaign that barely lifted the stock from deserved lows, he and the Board decided to sell the company to Apollo the day before the new Board was to be elected. Arguably, the first action of the Board in our opinion would have been to replace the CEO, who has demonstrated a complete lack of capital allocation skills, limited ability to set a proper strategic direction and absolutely no operating ability.

3. We are using this schematic for valuation (Note: We are ignoring corporate costs because we feel they would likely almost all go away—see comments on the Platform deal “synergies” below—if this company were sold to one more strategic buyers.):


In other words, Apollo pays us $34 a share, and then sells off the electronic chemicals and organics business at what looks like a very healthy multiple to Platform Specialty Products—who then says there is $20mm in savings on top of the $28mm of trailing EBITDA that OM was earning. Ouch for us. We then use a 10.5x multiple for chemical business that is staying with OM and a 9.8x multiple for the very nice and niche Battery Technologies business. That leaves Apollo essentially paying 1.7x for the core VAC business and that is 1.7x times an EBITDA number that is 40% below what OM thought they were paying for when they bought VAC in 2011. Conclusion? Apollo has one of the best PE teams in the chemical space and this is at least the 4th deal I have seen them do over 20 years that screams “Please let me work there.”

The other obvious conclusion is that this is a lousy deal for shareholders. The present value of a new CEO running this company properly and getting the benefit of a better European economy sometime in the next three years exceeds a $34 number by 30% in our estimation.

4. I cannot remember a recent deal with a public company where there was NOT a conference call for shareholders to understand the motivation and math of the deal. This is called “hiding.” So the real story will not be available until after the go-shop expires and the proxy comes out. There are also no details on what is financially motivating our CEO in this transaction, but our guess is that this deal maximizes his self-interest.

5. “But we have a go-shop clause, so if the company is worth more, we will see it.” Experience has shown that in most cases this a “phone it in” effort. Neither the investment banker nor management is highly motivated to do the work for a real auction once they have a deal in hand. Prove us wrong Mr. BNP Paribas and Deutsche Bank.

This deal is a poster child for the unwritten rule of the thumb for acquiring public companies: “Offer just above the number where you will legitimately be sued.” It works perfectly when shareholders have been suffering for years and are willing to take a scrap to be done with it. Nice work Apollo.

We are reviewing our options internally.

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The opinions expressed herein are those of Cove Street Capital, LLC and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing. The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that the security discussed in this report is or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the security discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data.Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in security mentioned herein. Cove Street Capital, LLC is a registered investment advisor. More information about us is located in our ADV Part 2, which is available upon request.

 

May 14 15

One More Look at Currency

by Cove Street Capital

by Ben Claremon | Research Analyst

As of the huge currency moves the world has witnessed over the last year or so, the topic of currency hedging has recently become very pertinent to both investors and companies who generate sales overseas. For anyone who has not been paying close attention to the how much the dollar has strengthened, here are a couple of eye-opening data points.

  • The Euro/US Dollar rate closed at 1.07 on April 20th 2015, down from 1.38 in April of 2014—a 22.4% decline
  • The Yen/US Dollar rate closed at .0084 on April 20th 2015, down from .0097 in April of 2014—a 15.5% decline

Aside from making it much more attractive for Americans to travel to Europe and Japan, such large currency moves have significant impacts on US-based companies that have substantial sales abroad. Specifically, it is not uncommon to see companies forecasting revenues to be down 20% or more in their European divisions. Unsurprisingly, the term “constant currency” is showing up much more in press releases and on conference calls. In other words, companies are trying to get people to focus on what sales would have been if the currency had not declined as dramatically.

What matters more to us is whether actually business is being lost to non-US competitors as a result from an immediate pricing improvement and we would argue that the answer is yes, as no human or machine can adjust effective pricing that quickly and for that large of a move.

The second and really more interesting thing is whether a US-based investor should hedge currency when he purchases a non-US security.  After all, we would consider ourselves relative geniuses on the company and the value, not per se the macro currency trade, so why not hedge out the currency and let our genius prevail unobstructed by pithy macro trends?  To help answer that, we turn to our quant friends at GMO for an answer (see attached PDF). The conclusion may surprise you and may cause you to think twice about the logic of investing in currency-hedged ETFs.

May 14 15

Summer Reading List

by Cove Street Capital

All the Light We Cannot See — Anthony Doerr

Churchill — Paul Johnson

Hitch-22: A Memoir — Christopher Hitchens

How Life Imitates Chess: Making the Right Moves, from the Board to the Boardroom — Gary Kasporov

The Limits of Strategy: Lessons in Leadership from the Computer Industry — Ernest Von Simson

Mr. Bones: Twenty Stories — Paul Theroux

My Brilliant Friend — Elena Ferrante

Old Masters and Young Geniuses: The Two Life Cycles of Artistic Creativity — David W. Galenson

On Such a Full Sea — Chang-rae Lee

So We Read On: How The Great Gatsby Came to Be and Why It Endures — Maureen Corrigan

Talent is Overrated — Geoff Colvin

May 14 15

Things That Make Sense to Us…

by Cove Street Capital

…That Were Written By Other Guys

May 14 15

Atul Gawande, Money Manager

by Cove Street Capital

I have no idea how this guy has a life when I merely glance at his bio—but that is not our concern. Substitute “money manager” instead of doctor and his commencement speech becomes worth thinking about. And his new book, Being Mortal, is a stupendously important book for anyone that is a certain age…or merely has parents.

May 4 15

CSC Strategy Letter | Number 20 | Don’t Bring a Knife To a Gun Fight

by Cove Street Capital

CLICK HERE to download Cove Street Capital’s May 2015 Strategy Letter Number 20, “Don’t Bring a Knife To a Gun Fight”

Apr 23 15

The Good News is We Are on the “Public” Side

by Cove Street Capital

Managing $163 billion is not easy. What this piece points out is:

  1. It’s generally right.
  2. “Private” or “Alternatives” are a good idea only when practiced in small size and in small distribution. What is clear is that “alternative” investing as practiced institutionally is neither.
  3. Public pension math is a problem. Focusing solely on the asset part of the equation leaves one susceptible to the problems NY—among many others—is facing. The sad fact is that the liability side is where the bigger money is and that solution is beyond our political pay grade.
Apr 23 15

This is a Great Response

by Cove Street Capital

“Logic and experience indicate that barring investments in a major, integral sector of the global economy would—especially for a large endowment reliant on sophisticated economic techniques, pooled funds, and broad diversification—come at a substantial cost,” wrote Harvard President Drew Faust last year, explaining the University’s refusal to join the divestment brigades.

“I also find a troubling inconsistency,” she added, “in the notion that, as an investor, we should boycott a whole class of companies at the same time that, as individuals and as a community, we are extensively relying on those companies products and services for so much of what we do every day.”

Apr 23 15

Confessions

by Cove Street Capital

I have been an on-again, off-again subscriber of the Journal of Applied Corporate Finance (and a predecessor) for more than 20 years. It is worth reabsorbing every few years because our ears get so full of the conventional, PR-driven crap that pours out of corporate America. Then you subscribe again, ask the management team in front of you to hold for a minute, run to the other room and throw this down and say “Don’t talk to me again until you have read this.” It’s a living.