Current Price: $1.90
Target Price: TBD
Upside: TBD
Expiration date: TBD
This is a speculative management buy-out, which is still at a non-binding stage. The company currently trades significantly above (3x) the initial offer price. Thus, for this special situation to play out, the buyer would need to increase the bid materially and the likelihood of that happening is not clear.
On the 19th of Nov’20, Steel Connect received a non-binding offer from its parent Steel Partners (owns 55% of fully diluted shares) to acquire the remaining STCN shares for $0.65-$0.72/share in cash and SPLP preferred units (ticker SPLP-PA). The offer is highly opportunistic and was made during the COVID lows, with a 60% discount to mid’19 price levels. The parent has a good track record of similar buyouts over the last few years. A special committee was formed in January and is still reviewing the transaction.
STCN shares currently trade at $1.90, while the highest levels were reached in mid-Jan’20 at $2.90/share. Clearly, the market considers the parent’s offer to be absolutely inadequate and sees considerable value in STCN even without the buy-out.
Two major questions here are what are the chances the buyer will proceed with the transaction, especially at multiple times the price of the initial offer, and what kind of downside protection investors have at the current valuation.
Overall, the arguments are quite mixed and although there are a few points supporting favorable development of the situation, the whole thesis gets a bit stuck on the valuation part and attractiveness of STCN at the current price levels. The company currently trades at 5.3x adj. TTM EBITDA/16% FCFE yield and given slightly declining revenues (potential to recover to pre-COVID levels) and unstable FCF conversion, it doesn’t look especially cheap. However, the company also has a material amount of NOLs – $2.1bn federal and $117m state. So, in the end, the attractiveness of STCN at current levels depends on valuation of those NOLs. Assuming generous $30-$50m value for NOLs, an increased bid from the parent looks quite possible.
The major risk is that SPLP could decline to pay multiples above the initial offer and wait again for more opportunistic timing.
The downside is difficult to predict. It is not clear if STCN share price would tumble if buyers’ offer is withdrawn – likely current price is based more on the company fundamentals than expectations of the higher offer. However, if the shares drop, I would nevertheless expect STCN to stay materially above the pre-announcement price levels (COVID-lows).
Business overview
STCN has around 62.8m common shares outstanding. SPLP owns 100% of preferred shares convertible into 17.8m common at $1.96/share and $14.9m convertible notes, convertible into common at $2.37/share. So the diluted share count sums up to 86.8m shares. SPLP owns 55% of the fully diluted shares and controls 52% of the voting power.
STCN operates two segments – IWCO (direct marketing) and ModusLink (supply chain management). The company provides very limited information on individual segments and their financial performance.
IWCO services include primarily paper mail marketing services and also various omnichannel (web, social, mobile) marketing. The segment was acquired in Dec’17 for $476m in order to leverage STCN NOLs.
We have been looking to acquire a profitable business with attractive operations and financials, and with a strong management team in order to leverage our approximately $2.1 billion in net operating loss carryforwards (NOLs) and cash.
At the time IWCO generated $82m EBITDA and $18.9m net income, so the acquisition was done at 5.8x EBITDA.
Recently, the company announced a transformation towards digital media, data analysis services with intentions to target financial services, and fintech industries. This seems highly positive, especially given the current tailwinds in those target industries.
ModusLink is STCN legacy business that offers various supply chain services (digital commerce, packaging, kitting & assembling) for consumer electronics, communications, computing industries. A turnaround plan for the troubled business was launched in 2016 when the business reported a $40.6m operating loss. The process looks somewhat successful – the company has exited some unprofitable operations, raised gross margins from 5% in 2016 to 19% in 2020 and lowered SG&A from $57m to $36m. TTM operating profit stands at $26m.
COVID outbreak had a negative impact on STCN businesses (especially IWCO). FYQ1 (October’20) showed revenues -25% YoY, net loss of $3.5m vs $4.8m profit in Q1’19 and EBITDA -38% YoY. FYQ2 (Jan’21) reported revenues -28% YoY, net loss $2.2m vs loss $3.6m Q2’19 and EBITDA -10% YoY.
Valuation
At the current price levels the company trades at:
Historical adj. EBITDA seems stable (see graph below), however, the conversion rate to FCF is jumping up and down making it difficult to estimate a normalized cash generation level going forwards. For example, despite rather stable adj. EBITDA, FCF in FY19 (ending July) was just $6.3m (and FCFE negative), in FY20 it was $60m, Q1 FY21 showed $25m and in Q2 FY21 it suddenly dropped to -$22m. Some of these movements can be explained by working capital investments and various one-off items, but not to a full extent.
Over the last year revenue was on decline due to COVID-19 impact as well as exit from the unprofitable businesses in the Supply Chain segment.
Segment level net revenue:
Segment level operating income:
What seems quite positive is that despite declining revenues, gross margin of STCN is actually increasing – 19% in FY19, 21% in FY20 and 24% in H1 FY21.
However, overall, 5.3x adj. EBITDA and 16% FCFE yield valuation doesn’t look that cheap for this business, especially taking into account the elevated leverage – 5x adj. EBITDA would drop the equity value to $1.60/share and 4.5x to around $1/share.
Some arguments in support of an increased offer
SPLP is a diversified holding company, which has a track record of similar minority buy-outs – DGTC in 2015 (owned 85%), COSN in 2015 (owned 80%), JPS in 2015 (owned 39%), SLI in 2016 (owned 25%), SXCL in 2017 (owned 64%) and HNH in 2017 (owned 70%). 2018 investor presentation indicates that SPLP has paid 6-8x EBITDA on average for their acquisitions.
The involvement of certain activists also adds confidence in a “fairer” offer price. According to the most recent filings Gabelli Funds own around 2.5m STCN shares. 400k of that amount has been held since 2015, while the majority of the rest of the stake was accumulated during H2’20, around / slightly above the offer price. SPLP has a history of facing substantial activist pushback on their opportunistic deals, including from GAMCO. For example, in 2016 SPLP proposed to acquire the remaining 36% shares of SCLC at $12.50/share. The offer was opposed by GAMCO (owned 12%) as a result of which SPLP raised the price 3 more times to $16/share, then to $17, and eventually to $17.80/share. In 2017 SPLP proposed to acquire HNH at a price range of $35-$37.10/share. Only 57% of minority shareholders participated in the transaction and the rest sued the company and won an additional $30m settlement (equivalent to an additional 30% premium or $10.76/share).
Aside from the operating business, STCN has $2.1bn federal and $117m state NOLs expiring from 2022 to 2038, which could be worth something to the parent. This article puts very high-value expectations on STCN NOLs claiming that SPLP will be able to use it for their own capital gains on the current AJRD merger ($200m profit). This seems highly unlikely. Although some amount of STCN NOLs could flow through to the parent (IRC section 382), I do not believe using NOLs to cover the capital gains is possible (however, I am not a tax expert). Anyways, the NOLs should have some value here and are likely to be worth around $30m-$50m ($0.34-$0.57 per STCN share) in an optimistic scenario.
Assuming the company will be able to continue generating cash-flow at FY20 levels and assigning $30m-$50m value for the NOLs, at the current price SPLP would be getting the remaining business at around 4.8x – 5.0x adj. EBITDA and 20%-23% FCFE yield. Valuation at this level leaves plenty of headroom for an increased offer.
Additionally, SPLP has to acquire only the remaining 45% fully diluted shares, while some of the amount would be paid in SPLP pref. shares. So the actual cash outlay SPLP would have to pay here is not that high if they are really serious about acquiring STCN and see considerable value in the NOLs.
Shareholders won’t accept a low price
Another positive aspect is that the privatization will require approval from the majority of unaffiliated STCN shareholders who are unlikely to accept a lowball price. In the preliminary offer announcement, it was stated that SPLP:
Will not proceed with the Proposed Transaction unless it is approved by the Special Committee and that the Proposed Transaction will be subject to a non-waivable condition requiring approval by the holders of a majority of the outstanding shares of common stock of the Issuer that are not owned or controlled by the Reporting Persons.
STCN minority shareholders are not very happy about SPLP control due to certain value-destroying transactions by the parent in the past (more on this in the “Risks” section below). In the 2019 annual meeting of Steel Connect minority sharheolders have clearly voted against re-election of two SPLP directors – W. Lichtenstein (STCN exec-chair, founder and exec-chair of SPLP) and G. Kassan (board member of STCN). Moreover, in April 2018 SPLP wanted to increase management’s incentive award plan from 5m shares to 11m shares. Most of the minority shareholders (11.8m shares) voted against the proposal.
Risks
The biggest risk is that SPLP will not agree to raise the price or that the increased offer would still end up below the current market price. SPLP has a somewhat shady history of self-dealing and destroying shareholders’ value. This adds some doubt on the legitimacy of their intentions and prospects of a “fairer” price, especially at multiples above the initial offer.
Certain examples of self-dealing via STCN:
- In December 2017, after STCN completed the acquisition of IWCO (major business segment now) and STCN shares skyrocketed 70%, the board (controlled by SPLP) decided to grant 5m shares (worth $12m+) to 3 SPLP affiliates for their “current and future services to the Company”.
- In April 2018, the board proposed to adjust the management’s incentive plan from 5m shares to 11m shares.
- In June 2019, the board approved $3.4m annual management services agreement with a certain SPLP subsidiary Steel Services.
On top of that, HNH takeover, which resulted in a $30m settlement, was highly questionable/shady as well. At the time SPLP was advised by Duff & Phelps and apparently, the transaction was subject to numerous fiduciary duty breaches. The court has essentially agreed with that (PR):
Chairman of the Handy & Harman Special Committee charged with protecting the interests of public stockholders was the friend and former roommate of the Chairman of Steel Partners Holdings and a former partner in the predecessor of Steel Partners Holdings; that the valuation of Handy & Harman was artificially lowered by using stale financial projections that underestimated the Company’s forecasts; and that the tender offer materials failed to inform public stockholders of other important facts regarding the merger.
A rather long silence of the current review period and the involvement of a controversial advisor (Houlihan Lockey) adds some uncertainty as well. Especially, when the special committee (should be some or all 4 independent directors) has previously approved various questionable self-dealing transactions by SPLP affiliates.
Yet another negative is that STCN has poison-pill plan, which prevents other companies from acquiring more than 4.99% of shares. This was implemented to preserve NOLs and was recently extended until 2024. It makes impossible for activists to build up larger stakes in the company.
Great article.
We believe SPLP is close to an agreement with STCN’s Special Committee and banker Houlihan Lokey. They have been in negotiations since January.
See SPLP 10-K where they paid $38mm in cash taxes in 2020. Taxable income is growing and tax rates are going up. Tax experts value NOLs at 6-7% in court which at $2.1B puts a downside value of $2.17/share. Given the faster utilization at SPLP, they are worth more like $3.00-4.00/share to SPLP.
Here is our latest piece on paths forward. Notice SPLP annual letter is late and likely pending an update on STCN negotiation.
We have publicly stated we will not support a tender offer below $4.00/share in cash. Other large shareholders believe STCN is worth $4.00-8.00 per share.
Steel Connect: 3 Paths Forward To $4+ Per Share
https://seekingalpha.com/article/4416359-steel-connect-3-paths-forward-to-4-per-share
What is the risk here that they will do reverse splits until it trades at $100k+ per share? And then make some lowball offer as they have shaken out all the retail investors.
A bit suspicious they are planning to do a 10:1 split according to latest PRE 14A filing. Why would they do that if they were going to buy out shareholders anyway?
I think this is actually a good sign. Probably means they really are serious about getting this done soon. If they offer SPLP preferred shares they will have to do a stock split anyway because offering fractional preferred shares would be pretty awkward. It also seems to indicate that the least they will offer is likely $22-23 per share (adjusted for split) since that is where preferred shares are trading now.
Enjoy our latest report on $STCN
Steel Connect: The $2 Billion King Of NOLs
https://seekingalpha.com/amp/article/4452673-steel-connect-the-2-billion-king-of-nols#click=https://t.co/pXl2rt6Hn9
Thanks Matt, couple of questions:
– You mention board update during the Annual Meeting – any further color from the meeting or maybe there is a transcript available? Also would you consider STCN’s special committee to be truly independent from SPLP? Jack Howard
– Any thoughts on the 1-10 reverse stock split? Why was that necessary at the time of the pending deal with SPLP?
– Not a tax expert, but can NOLs be used to offset capital gains from the sale of AJRD shares. Had an impression that these can be used only to offset profits from operations.
– You position STCN as a ‘compelling growth story’ across both segments, however the latest quarter (ending Apr’21) showed a continuation of declining in revenues. When is this expected to change?
Update on Steel Connect’s largest business. SPLP likes this business, wants to consolidate the industry, and is investing in new talent and tech to grow with tailwinds in Digital Marketing to existing customers. Hence, SPLP wants to buy all of STCN.
Historical IWCO EBITDA has been $80mm. With these investments, we believe IWCO could see $100mm EBITDA valued at 8x or $8.25 per STCN share net of debt. STCN paid $476mm for IWCO in 2017.
IWCO Direct Chooses HP PageWide Web Presses to Accelerate Direct Marketing – https://press.hp.com/us/en/press-releases/2021/iwco-direct-chooses-hp-pagewide-web-press-direct-marketing.html
PALO ALTO, Calif., Nov. 22, 2021 (GLOBE NEWSWIRE) — HP Inc. (NYSE: HPQ) and Steel Connect’s (STCN) IWCO Direct, a leader in US direct mail and other data-driven performance marketing solutions, today announced a strategic agreement for the supply of a fleet of HP PageWide Web Presses to drive the market for data-driven marketing communications solutions.
The multi-million-dollar investment by IWCO Direct in seven high-volume HP PageWide Web Presses is the cornerstone of a $50 million investment being made by the company to continue to grow their performance marketing business using primarily HP digital printing by 2023. The presses deliver next-level inkjet color quality and speed for a wide range of direct mail applications across a broad range of substrates such as letters, postcards, catalogs, and folded mailers.
I think it’s time to remove STCN from the active ideas. There has been no news about the takeover for 7.5 months and I think if SPLP wanted to buy STCN, it would’ve done it already. The argument regarding the recent HP printers purchase is a bit stretched – even if SPLP likes this business, they have full control over STCN anyways, doesn’t mean they want to buy it above current prices. We are removing STCN from active cases at a 16% loss in 8 months.
We believe the strategic alternatives process is nearing a conclusion, with potential tender offer for 100% of Steel Connect (SP owns ~55% today). The sale of Steel Connect’s businesses (IWCO Direct and ModusLink) and monetization of the company’s valuable $2 billion in tax assets (NOLs) could unlock $6.00+ per share in value. The combined company, with ~$2.5 billion of NOLs, ~$350-400mm in EBITDA and ~$250-300mm in FCF could be the largest and most valuable public NOL platform in the world.
This summer, Steel Connect and its Board settled a four-year shareholder lawsuit and surrendered shares previously granted to management and Board members. Given this important settlement and the fact that SPLP is nearing the completion of its 6.5mm share repurchase program (purchased ~$90mm at an average price of $14.53 vs. ~$37.00 last), we believe SPLP and STCN are coming close to announcing a deal.
Finally, SP management gets incentive comp based on the price during the last 20 trading days of the year, so they are highly incentivized to announce a deal soon. We have highlighted the “value accretion” from SPLP acquiring STCN, where SPLP’s $150mm in free cash flow in 2020 or $6.50 per share (on 23mm shares) jumps to $12-15 per share (on $37 stock) when adding STCN’s $60mm of 2020 FCF and the $38mm in cash taxes SPLP paid in 2020.
There will not be a press release on a deal…until they reach an agreement. The fact that their Special Committee and bankers Houlihan haven’t given in to a low-ball $2.50-3.00 offer is actually a positive. We continue to be patient long-term holders.
We’ve consolidated all our Steel Connect reports and our recent letters to the Board here:
https://www.hillandaleadvisors.com/steelconnect-news
Steel Connect reported earnings for the quarter ending Jan 31. After our firm requested an earning conference call, management again declined to be transparent with investors or accountable to the value destruction at IWCO Direct.
Here is a summary of the latest:
– IWCO Direct Marketing sales were $66mm or down -47% (!) vs. pre-COVID and down -27% vs. the worst COVID quarter. 10-Q mentions client exits but does not share that many of their printers were not working in the quarter (hence running under 50% of capacity). Capacity at peers has been sold out!
– IWCO EBITDA fell from ~$82mm when they bought it in 2017 to negative -$2-5mm in this latest quarter, leading to the disposition of the company’s largest business! Who on the Board and management is accountable for this?
– ModusLink seems to be a stable $10-20mm EBITDA business, despite sales being down -41% vs pre-COVID due to semiconductor shortage (?). Supply chain sales grew 23% in the quarter, so the worst should be over.
– For pro forma financials excluding IWCO, see March 3rd 8-K filing.
http://www.sec.gov/...
– The cash flow and balance sheet from this latest quarter are not relevant.
So What Is Steel Connect Worth?
– Net cash of $45mm (pro forma) or $0.57 per share
– ModusLink $100mm EV at 7x midpoint or $1.27 per share
– Tax Assets of $2.2 billion worth $120-200 million (NPV) or $1.50-2.50 per share
– Worth $3.30 – 4.30 per share, assuming 79mm fully diluted shares, including 18mm for convertible preferred. This reduced valued is after the value destruction at IWCO.
– After 16 months since SPLP offer, STCN Board has shown no tangible progress to maximize value, despite SPLP’s 53% ownership and desire to capture the $2.2 billion in NOLs.
Updates at : http://www.hillandaleadvisors.com
I’ll be voting no at this price.
March 24, 2022
Special Committee of the Board of Directors
Steel Connect, Inc.
2000 Midway Lane
Smyrna, Tennessee 37167
Members of the Special Committee:
Steel Partners Holdings L.P. (“Steel Partners”) is pleased to submit this revised non-binding
expression of interest in a potential combination (the “Proposed Transaction”) of Steel Partners
and Steel Connect, Inc. (“Steel Connect”), which alters and increases the consideration proposed
in our non-binding expression of interest of November 19, 2020. Under our enhanced proposal,
the stockholders of Steel Connect would receive cash consideration of $1.30 per share,
representing a premium of approximately 10% over the closing price of Steel Connect common
stock on the date immediately prior to the date hereof and about an 83% premium over the closing
share price on November 18, 2020, the day before our original proposal.
In arriving at the amount of cash consideration for the common equity set forth above, we have
considered a number of factors, including our understanding that the assets of Steel Connect
consist entirely of (1) ownership of the ModusLink Global Solutions subsidiary, (2) cash, and
(3) certain net operating losses.
Due to Steel Partners’ obligations under the federal securities laws, we intend to promptly file a
Schedule 13D amendment, including a copy of this letter, with the Securities and Exchange
Commission.
This letter does not constitute a contract, commitment, undertaking or other binding obligation or
limitation on the part of any person in any respect. In addition, this letter does not constitute an
offer or proposal capable of acceptance and may be withdrawn at any time and in any manner.
We are confident that the Special Committee will recognize the value of our enhanced proposal to
the Steel Connect stockholders, and we hope that the Special Committee will recommend our
proposal to the Board of Directors.
Sincerely,
Warren G. Lichtenstein
Executive Chairman
Steel Partners Holdings L.P
Another low ball offer after 16 months to see if the Special Committee would accept. They will reject as it substantially undervalues the company’s assets.
Small volume of the 40mm minority shares have traded. Basis of most shareholders is $2.00-2.50, so that may be the clearing price.
SPLP will need to raise its offer materially and even when Spec Comm proposes to shareholders, SPLP will need majority of of minority shareholders to vote for tender.
So What Is Steel Connect Worth?
– Net cash of $45mm (pro forma) or $0.57 per share
– ModusLink $100mm EV at 7x midpoint or $1.27 per share
– Tax Assets of $2.2 billion worth $120-200 million (NPV) or $1.50-2.50 per share
– Worth $3.30 – 4.30 per share, assuming 79mm fully diluted shares, including 18mm for convertible preferred. This reduced valued is after the value destruction at IWCO.
Updates at : http://www.hillandaleadvisors.com
So clearly the Special Committee is not recommending this lowball offer to shareholders, so SPLP will have to raise their offer in the near future to get access to the $2 billion in tax assets.
SPLP announced a $145mm business sale and will recognize a large gain, in addition to the $60-90mm of taxes owed this year. The tax assets are worth $2.00-3.00 per share, plus the cash and ModusLink get you to $4.00 per share.
SPLP wants and needs the tax assets, so look for an increased offer for STCN.
STCN Path Forward:
– hire banker and announce strategic alternatives process for ModusLink business with $10-20mm in EBITDA,
– sell ModusLink for $100mm and distribute proceeds and net cash on balance sheet of $2.00++ per share in dividend to all shareholders,
– issue STCN minority shareholders 5-year CVR that receives annual cash distribution of 50% of tax savings from STCN NOLs, estimated to deliver $3.00-6.00 per share of additional value to minority shareholders over next 5 years.
STCN Result : delivers $5.00-8.00 per share of value to STCN minority shareholders.
SPLP Result : acquires 100% of STCN for no cash outlay, in exchange for CVR issuance to STCN minority shareholders. Receives $2.00 per share dividend and $150-250mm of cash tax savings from STCN NOLs.
https://www.hillandaleadvisors.com/news
Cash offer of $1.35 per share confirmed, plus CVR for upside in value of sale of logistics business, attributes no value to tax assets. See our latest proposal to unlock value.
https://www.businesswire.com/news/home/20220613005334/en/
We have introduced a dozen private equity and strategic parties to the Special Committee’s banker at Houlihan to explore an offer for ModusLink, Steel Connect’s supply chain logistics business, along with interest in STCN’s valuable $2 billion in tax assets (NOLs).
Please reach out, [email protected], if you have other ideas or interested parties.
See our letter to the Board of Steel Connect:
– Offer from Steel Partners Substantially Undervalues the Company and Its $2 Billion in Tax Assets (NOLs)
– Hillandale Plans to Vote All Shares Against Proposed Merger
– Proposes Alternative Structure to Unlock the Value of NOLs for Minority Shareholders
https://www.hillandaleadvisors.com/news/hillandale-letter-to-steel-connect-board-71422
Steel Connect – Legal Update
One of the last hurdles for SPLP to advance the merger and take-under of STCN was the settlement of 2017 lawsuit, when SPLP issued 16% of STCN to themselves in a convertible preferred to acquire IWCO Direct. STCN bankrupted IWCO earlier this year and handed the keys to Cereberus.
The judge is not letting this one go. They want SPLP to fairly compensate STCN shareholders for this 2017 event.
So what does this mean for the merger?
– if the judge rules that SPLP granted themselves 16% when in control of STCN, the shares could have to be returned,
– if so, SPLP stake in STCN could fall from 52% to 36%
– SPLP may then, to get access to STCN’s $2 billion in tax assets, have to do a tender offer for up to 50% of STCN, instead of a merger. To get a tender of this size done, we believe shareholders could demand $2.00-2.50 per share.
Good news for minority shareholders as the dilution from the SPLP 2017 convert could be gone, and the tender price for their STCN shares could be up substantially! Stay tuned!
Chancery Orders $12M Steel Connect Settlement Reworked
By Jeff Montgomery
Law360 (August 18, 2022, 8:43 PM EDT) — In a rare “go back and try again” order, a Delaware vice chancellor on Thursday ordered reworking or more justifications for a proposed $12 million settlement of stockholder derivative suit challenges to an insider-tilted, $476 million acquisition of IWCO Direct by Steel Connect Inc. in 2017.
Vice Chancellor Morgan T. Zurn of Chancery Court said during a teleconference hearing that she had been inclined to reject the deal — which included a $2 million attorney fee — on multiple grounds but instead opted to give the parties time to reassess and renegotiate.
“I spent a considerable amount of time trying to get to a place where I view this settlement as fair and, frankly, I am struggling,” the vice chancellor said. As a result, attorneys for the stockholders were told to reassess their valuation of the deal’s “gives and gets” as well as assumptions that a group led by Steel Partners Holdings LP Chairman Warren G. Lichtenstein had demonstrable control along the way.
Later, the vice chancellor said: “I have concerns that plaintiff at best ‘sat, and at worst rolled over'” on claims put at risk by Steel Partners Holdings’ plans to take Steel Connect private, which would extinguish stockholder derivative claims. Those claims are the property of the company and subject to possible stockholder enforcement until the Steel Partners Holdings transaction closes and ownership of the claims transfers.
At stake is a settlement of a suit filed by Steel Connect stockholder David Reith, accusing Steel Connect of issuing $35 million in preferred stock to Steel Partners Holdings — a 36% shareholder at the time — to support an acquisition of marketing company IWCO Direct. In addition, equity grants given to three directors, including two appointed by Steel Partners, increased its holdings to 52%
The complaint alleged breach of fiduciary duty and unjust enrichment, among other counts. Overshadowing the litigation, however, were plans on the part of Steel Partners Holdings to take Steel Connect private, potentially extinguishing minority, independent stockholder rights to press company-owned derivative claims, according to a brief supporting the settlement.
Vice Chancellor Zurn said she had concerns about the range of reasonable values involved and the influence of the planned merger on evaluations of the settlement. In addition, the vice chancellor called for a “more meaningful” valuation of stockholder claims and settlement consideration, and guidance on how the settlement should be discounted in light of the Steel Partners Holdings merger, among other concerns.
From the bench, she referred to decisions by the late Chancellor William T. Allen, who counseled suspicion in some opinions. She also cited the 2010 ruling in Brinckerhoff v. Texas Eastern Products Pipeline Co. In that case, Vice Chancellor J. Travis Laster wrote that: “The lure of a premium transaction, the self-evident benefits of settlement to the controller and other defendants, and the prospect of an easy end to the litigation — coupled with a large fee — create powerful pressures.”
Among other terms, the Steel Connect settlement would require the institutional and individual investors to pay $2.75 million to Steel Connect as additional consideration for underpriced preferred shares that were awarded as part of the IWCO deal.
In addition, Lichtenstein, Steel Partners Holdings Director William T. Fejes and President Jack L. Howard would surrender 3.3 million of the 5.5 million shares of equity grants received as part of the IWCO transaction.
Also in the settlement are corporate governance reforms to assure Steel Connect stockholders independent review and checks on future equity compensation awards, and board control by directors not affiliated with Steel Partners Holdings.
Under the settlement, Steel Partners Holdings would have orchestrated acquisition of majority voting control without paying damages, or a control premium, Vice Chancellor Zurn said. The plaintiffs justified that in part by citing the court’s earlier finding that Holdings was “deemed” controller, the vice chancellor said. But the court said Holdings’ clout, at 36% at trial, “is not foregone.”
The vice chancellor also said, ‘I need more information on the value of plaintiffs’ claims as well as the value of consideration being offered in settlement.” Although attorneys for stockholders estimated the value at $25.16 million, “I believe the value of these claims is likely higher,” she said.
“I am not requiring the parties to submit an extensive valuation or a perfect valuation analysis,” the vice chancellor said, although the result must fall within a reasonable range. “That starts with providing me with a supporting basis for approving claims.”
Damage assessments, the court said, must attribute some value to control, “or explain why it was excluded.”
Counsel for the parties did not comment on the ruling afterward.
Donald Reith is represented by Andrew S. Dupre of McCarter & English LLP, and Eduard Korsinsky and Elizabeth K. Tripodi of Levi & Korsinsky LLP.
Warren G. Lichtenstein, Steel Connect Director Glenn M. Kassan, William T. Fejes Jr., Jack L. Howard, Steel Partners Holdings LP and SPH Group Holdings LLC are represented by John M. Seaman and Eric A. Veres of Abrams & Bayliss LLP and George M. Garvey of Munger Tolles & Olson LLP.
Steel Connect Inc. is represented by Andrea S. Brooks of Wilks Law LLC.
The case is Reith et al. v. Lichtenstein et al., case number 2018-0277, in the Court of Chancery of the State of Delaware.
https://www.law360.com/articles/1522318/chancery-orders-12m-steel-connect-settlement-reworked
What’s New At Steel Connect?
– after SPLP heard the concerning ruling from the Delaware judge last week, they decided to plow forward with the merger vote and set the date for Sept 30. SPLP’s goal appears to be to 1.) scare shareholders into voting for the lowball deal, 2.) which would then extinguish the ongoing lawsuit on SPLP / STCN management and Board members, where SPLP granted 16% of STCN in 2017 to themselves, while in control of STCN.
– STCN revealed in their letter to shareholders that they will generate another $104mm of NOLs this year, bringing the total of NOLs at stake for SPLP to $2.26B, available through 2042. Our estimate, based on a 21-50% cash tax rate, is that SPLP and its partners will save $163mm – $490mm in cash taxes. A bulk of those will be realized this year and next. See our July 14 letter to STCN Board and the table on NOL value.
– SPLP offered STCN shareholders a $0.15 per share max “tax CVR”, but our proposal of 20-50% of cash tax savings would be $0.88 per share, at 20% of $163mm on 37mm shares, and $6.60 per share at higher 50% tax share over the next 15 years. Yet SPLP only wants to share 1% on cash tax savings from STCN’s NOLs.
– Delaware judge will review materials and valuation from shareholders and lawyers this Thursday, Sept 1, related to outstanding STCN lawsuit against SPLP and STCN management and Board. Given the judge believes the claims are “higher than $25.16 million” or $0.67 per minority share (37mm), there could be 50% upside to the contemplated lowball $1.35 cash offer in the coming month!
Transcript from Judge – https://ir.steelconnectinc.com/static-files/82b856b9-3e9f-474b-a2b2-63bdfdc1f604
Updates at: https://www.hillandaleadvisors.com/news
Voting Week for Merger with SPLP
SPLP wants a deal (get NOLs and end lawsuit).
Bankers want a deal (fee).
Board wants a deal (to end this chapter).
Overlapping SPLP shareholders want a deal (want NOLs).
So who are the 20mm shares of the 37mm minority that will vote for the deal?? Most would be taking a loss on their shares.. 20% of shareholders don’t even typically vote their shares…
There’s likely a deal… but at a higher price. $2.00++??
Deal or no deal??
Tune in Fri Sept 30 at 12pm ET:
http://www.virtualshareholdermeeting.com/STCN2021
Whelp. No what?
Shareholders vote NOT to sell a business worth $1.30-2.00 per share today, $2.00+ in NOLs per share (discounted), plus $0.80 per share in cash for $1.35 per share. NO DEAL!
SPLP now working on Plan B to gain access to $2B NOLs as they have $200mm+ gain from pending sale of AJRD shares and $200mm of annual taxable income. SPLP could accelerate gains by selling non-core assets or converting into C-Corp too.
See our letter to Board regarding other paths forward, which could include the dropdown of SPLP cash flowing assets into STCN, in exchange for over 80% of STCN. At this point, SPLP could consolidate STCN financials and NOLS.
https://www.hillandaleadvisors.com/news/hillandale-letter-to-steel-connect-board-71422
Anyone still following this? Any updated thoughts welcome.
I don’t follow the situation that close, but my personal opinion for what it’s worth – I think that there is a decent chance Steel Partners end up screwing STCN’s shareholders one way or another. Their intention is likely to get control of STCN’s NOL’s. They have tried lowball offers. Now, they have announced a very weird transaction where Steel Partners has transferred certain marketable securities to STCN in exchange for 3.5m shares of Series E Convertible Pref. Stock. These prefs. are convertible to common shares (conditioned on shareholder approval, though Steel Partners owns roughly half of the shares), which would increase Steel Partner’s ownership to around 85%. See here https://ir.steelconnectinc.com/news-releases/news-release-details/steel-partners-and-steel-connect-close-exchange-transaction
Yes, they are screwing minority shareholders.
Shareholders rejected a $1.35 cash + CVR offer. So SPLP forced a dropdown of $200mm of fully valued AJRD stock in exchange for full access of NOLs. SPLP partners will not pay taxes for the next 20 yrs.
Where are the shareholder lawsuits and what’s the latest with Delaware Reith litigation?