Schuff, can investors defeat a billionaire?

Americans love money.  A horrible person with no money is a horrible person.  A horrible person with a lot of money isn't all that bad.  As a country we have a love affair with money, it's practically indoctrinated that we should desire more, want more and strive for more.  There is common phrase that goes as follows "he who has the gold makes the rules."  In the United States whoever has the money does make the rules.

Yet for the love of money, riches and wealth we also love the underdog and David and Goliath stories.  The crowd cheers when the pauper defeats the rich man, we root for the underdog.  The story of Schuff (SHFK) is a David and Goliath type story, a billionaire and his holding company trying to squeeze out minority shareholders.

Two years ago I wrote about Schuff International, a steel fabrication business.  At the time the company's management had mortgaged the business to buy back half of their outstanding shares.  The company wasn't earning much at the time, but they're a cyclical and had considerable potential earning power.  Schuff had earned as much as $14.44 per share in 2007.  Since my post the company's operations and earnings have recovered.

In the latest fiscal year Schuff earned $2.94 a share and reported a backlog of $426m, an all time high.  The company is poised to earn $5-6 per share in 2014 given their backlog and run-rate.

The Schuff family had run the company for years.  The Schuffs sold their shares to HC2 Holdings (HCHC) at around $31 a share.  With the completion of this transaction HC2 Holdings became the owner of over 60% of the company.

HC2 is controlled by Philip Falcone, a storied billionaire.  Falcone made $1.7b shorting subprime before the crash in 2008.  He then invested in Lightsquared, a failed wireless venture.  In the meantime Falcone played fast and loose with his investors money and was fined and admitted wrong doing to the SEC in a 2013 settlement.

In the SEC settlement Falcone admitted to using investor money to pay his own personal taxes, secretly favored some customers over others, and engaged in illegal market manipulation forcing a short squeeze on a Canadian bond issue.  The SEC settlement is fascinating on a number of levels.  The first is that in most cases the SEC simply settles without an investor admitting wrongdoing.  In Falcone's case he admitted wrongdoing, paid a fine and was banned from the securities industry for five years.

I'm not privy to the terms of the ban, but I guess in the SEC's eyes investing via a hedge fund is different from investing via a private investment vehicle (HC2 Holdings).

HC2 Holdings recently commenced a tender offer to purchase the rest of Schuff's outstanding shares at $31.50.  Currently HC2 Holdings owns 70% of Schuff's shares and for the tender to be successful  either 15% of non HC2 shareholders need to tender, or the company needs to own at least 90% of Schuff.

My question is why would shareholders tender their shares?  If shareholders decide to tender they're giving up shares in a company that's trading at maybe 5-6x earnings, a rarity in today's market.  If they don't tender, and many others decide to do the same there's a chance that HC2 might raise their bid.

Why should investors let Falcone, someone who admitted to being a market manipulator to the SECtry to acquire shares from minority shareholders on the cheap?  Falcone has wealth, but what he doesn't have is the other 30% of Schuff shares, and it appears it will be hard to get those shares.

I know there are multiple investors out there trying to tally up share counts for tender abstainers.  One person reported 8% abstaining, another 6% abstaining.  These are larger fund holders, none of these are individuals like many readers on this blog.  It's possible that there is another 5-10% spread across many smaller holders.  I wouldn't be surprised if 15% of Schuff's shareholders read this blog, or will read this post.

I would encourage all of Schuff shareholders refuse to tender their shares to HC2 Holdings with the hope that HC2 would offer a fair amount for shares.  I would rather hold onto my shares than tender them to an unsavory character like Philip Falcone.  Falcone might own 70% of Schuff, but there is 30% that he wants that he still can't get.

If you're a Schuff shareholder hold onto your shares and refuse to tender them.  If you aren't a shareholder but are intrigued by this David and Goliath story please share this with media contacts to gain as much exposure as possible.  This story is perfect for the media, a billionaire with a history with the SEC tries to steamroll minority shareholders into a bad deal.

If you doubt the power of this blog it's worth reminding readers that digital words on this site were the catalyst for a closely held company to open up and hold an annual meeting and pay a dividend.  Let's hope there's a similarly successful outcome with Schuff.

If you are a shareholder and wish to abstain from tendering your shares and want one of the managers I mentioned to include your shares in the tally please email me.

Disclosure: Long Schuff

6 comments:

  1. I'm not tendering my shares, but I don't blame Falcone for trying. He accumulated 65% at $31.50 and the Schuff execs sold back another 7-8% at $27-28 last quarter (definitely a lack of liquidity discount). I'd hate to be forced out if he's able to acquire 90%. I'd blame the tendering shareholders more than Falcone though.

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  2. If he did acquire 20% and went for a short form merger, would he likely pay a higher price?

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  3. I tend to agree with Kevin. A lot of companies are doing this. Ash Grove was tendering at a price less than the ask (at least by the time Charles Schwab notified me).

    Seaboard, where the Bresky family owns about 75% the stock did tender about 3 months back with few takers.

    I think the end game is pretty clear....Falcone's group will want to go private. Even if he were to acquire 90%...he'd still have to make an offer subject to appraisal rights (assuming it is a Delaware corporation).

    A couple of Devil's advocate questions:

    If Execs are only getting 27 to 28 $/share......How can you argue it is worth more?

    Given's Falcone's history, is it a wise move to be an adversary of his (I think shareholders are his adversaries). A company would have to be selling at 30 cents on the dollar before I would roll the dice here. While I have done minimal work on Schuff....it does not seem like it is that far from Fair Value (based on what Schuffs are accepting for their shares).

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  4. I appreciate what you're trying to do here Nate, but you'd make your case better if you put some estimates of your fair value on SHFK so shareholders could see more clearly what you think they're giving up. Also, a bit more about appraisal rights would be of interest to many I'm sure.

    @Anon#2 short form merger would be at the same price as the last tender

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  5. HC2 has extended the offer until Sept 29. With the amount tendered so far, they would have 86% of the shares outstanding but they have not yet met the Majority of the Minority Condition.

    http://tinyurl.com/pm2st79

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  6. Schuff just sent out a letter saying they've signed a big contract which they estimate will increase revenues by at least 10% next year. They released this Friday afternoon and the HC2 offer expires Monday afternoon...sneaky

    http://www.schuff.com/files/1414/1176/0795/Supplemental_Letter_to_Stockholders_from_Special_Committee_of_the_Board_9-26-14.pdf

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