An occasional activist battles a struggling chemical firm for management

• Enterprise: A chemical manufacturing firm working by means of two segments: metals and the specialty chemical substances.
• Inventory Market Worth: $78 million ($8.62 per share)

• Proportion Possession: 24.85%
• Common Price: $11.54
• Activist Commentary: Privet is an event-driven hedge fund based in 2007 by Ryan Levenson, former monetary analyst at Cramer Rosenthal McGlynn and SAC Capital. Privet is just not an activist however will use activism as a instrument once they assume it’ll add worth and can typically go on boards of corporations. UPG is a metals holdings firm primarily based out of Chicago with eight totally different manufacturers starting from metals and metal to area of interest merchandise. On March 3, 2020, Privet entered into a bunch settlement with UPG Enterprises for the needs of this funding.

Privet Fund LP initially filed a 13D on Synalloy Corp (SYNL) in September of 2016. In April of final yr, Privet supplied to amass the corporate for $20 per share (a couple of 40% premium on the time). In August, Privet up to date its earlier provide to amass the corporate to a proposal of $18.50 per share (a 32% premium to the closing worth of late April). The corporate rejected each takeover presents and on March Three of this yr, Privet entered into a bunch settlement with UPG Enterprises. On March 16, Privet and UPG (the group) delivered a letter to the corporate nominating 5 director candidates for election to its eight-person board on the June 30 annual assembly. The group expressed its perception that the corporate has been suffering from poor operational execution and capital allocation choices, restricted accountability for administration and an absence of technique for addressing company inefficiencies and waste. The group acknowledged that the present board lacks robust working expertise within the chemical substances and metals companies and believes {that a} change in management is required on the firm.

For Synalloy, the metals section accounts for 82% of the corporate’s complete income and has 4 totally different companies inside the section. The smaller specialty chemical substances section makes up the remaining 18% of the corporate’s complete income with two companies inside this section.

The group believes that the corporate possesses high-quality property which have important potential, however they should be managed correctly with higher execution and board oversight. As the corporate has grown by means of acquisitions, it has been unable to leverage bills and scale sufficient, inflicting margin erosion. Moreover, administration has not finished an amazing job of managing its provide chain or uncooked inputs – every quarter it experiences stock worth losses and the corporate has misplaced cash from stock prices in eight of the 9 previous years. This has resulted in an underperformance by the corporate in comparison with its closest opponents, proxy friends and related market indices over a number of time durations. The corporate has underperformed its proxy group (self-selected) by 31.7% and 44.5% over the earlier 1- and 5-year durations and by 28.9% throughout its present CEO’s tenure.

The group is asking on the corporate to revamp its working plan and this may very well be finished by leveraging sources, seeking to proceed to repair up property, enhancing margins and money movement, in the end rising the enterprise. Nonetheless, the present board has not proven any sense of urgency to create shareholder worth and will actually use some contemporary administrators. 

Privet has a historical past of selective, productive shareholder activism and isn’t a short-term activist. Primarily based on their activist historical past, they probably do need to create shareholder worth for shareholders. However primarily based on their historical past with this firm, it’s laborious to see why this isn’t them attempting to get management by means of a proxy battle when acquisition presents didn’t work. They don’t allege any egregious conduct that shareholders and ISS search for in majority management proxy fights. And their motives even look extra suspicious once they group up with an trade participant who competes with the corporate.

As a 25% shareholder, the group ought to actually get significant board illustration, and getting a majority is actually doable, even when it isn’t warranted below these circumstances. Eventually yr’s annual assembly, over 24% of votes had been withheld from every of the incumbent administrators, indicating robust shareholder discontent. Nonetheless, the corporate has cumulative voting, which might assure the group two seats in the event that they selected to surrender on majority and put all of their votes in the direction of two candidates.

Whereas that is prone to be shut, it’s laborious to see shareholders handing over management of the corporate at $9.64 per share to an investor who was lately rejected from shopping for the Firm for $18.50 per share.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio Supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.