SHFK - Schuff International

[Kraven]

The NYPost is on it! Haha

 

http://nypost.com/2014/08/29/falcones-tactics-in-buying-steel-company-draw-fire/

 

Well, the NY Post is sort of like a newspaper.  It's got a good sports page anyway.  Nevertheless, this was a very minority shareholder friendly article.  I don't know how much Falcone cares about negative publicity though.  He's certainly had his share.  At the very least though it shines some light on the lowball bid and hopefully raises some awareness among those who aren't normally aware of these things.

[wknecht]

Whopper article on HC2.

 

http://seekingalpha.com/article/2466975?source=ansh $HCHC, $SHFK

[Tim Eriksen]

HC2 has extended offer in order to try and reach the 90% ownership level.  They have achieved majority of the minority.

http://finance.yahoo.com/news/hc2-announces-extension-expiration-time-120000142.html

 

Today Special Committee releases positive update on new contract:

http://finance.yahoo.com/news/special-committee-schuff-international-provides-195620871.html

 

I would think that means approximately another $60 million in revenue this year.  Since the contract could involve additional larger phases, there is potential for $60 to $100 million of additional revenue in both 2015 and 2016.

 

Why are some people tendering?

[Tim Eriksen]

Per the NY Post HC2 has surpassed the 90% threshold and will force out minority shareholders presumably at $31.50 per share.  Schuff earned $9.8 million in the first half of 2014, or $2.36 per share.  Those earnings include the impact of $2.1 million of change in control and former executive compensation (equal to $0.50 per share pre-tax).  Those earnings do not include the recently singed contract either which should generate $40 million or more in additional revenue in the 2nd half of the year.   

 

Falcone is paying $124 million for a cyclical business that earned over $200 million after tax over the last ten years.  That is over $5 per share annual average based on current share count.  On top of that the company had more debt then so interest cost averaged $6.5 million per year versus $2.5 million now.  That on average negatively impacted earnings by $1 per share pre tax per year. 

 

Time to get a refresher on appraisal rights in Delaware.  HC2 has to pay fair value and I believe cannot include a minority or liquidity discount. 

[watsa_is_a_randian_hero]

we need to fight this.  Tim - I saw many lawsuits announced today.  I am a small shareholder here...only 300 shares.  While I don't have a lot financially at stake, it pains me to see this company being taken over on the cheap, especially if Falcone forces investors to sell, and especially coming from a guy who was banned from the securities industry.

 

feel free to pm me to discuss this more

[watsa_is_a_randian_hero]

I wrote all three of the lawfirms that have issued PR's on this:

 

http://finance.yahoo.com/news/shareholder-alert-levi-korsinsky-llp-185900280.html

http://finance.yahoo.com/news/shareholder-alert-brower-piven-announces-182936102.html

http://finance.yahoo.com/news/lawsuit-alert-andrews-springer-llc-130200831.html

[Tim Eriksen]

As shareholders, we have three options.

1.  Sell at the market (which is higher than the cash out price) and hope we still retain right to proceeds from a lawsuit. (Full disclosure I do have a bid out above the market price)

2.  Take the lower merger price assuming it virtually guarantees we can participate in the lawsuit

3.  Pursue appraisal. 

 

There is no reason for each of us to duplicate our efforts.  If anyone is already pursuing appraisal and has an idea of what it would cost, please contact me. 

 

Tim

[wknecht]

Maybe a mistake but I sold at market a little bit ago. I wasn't at all familiar with the process and didn't want to get squeezed out.

 

Have you gone through this before and have some reasonable estimate of the chances? If you're buying I assume you view the odds as favorable relative to the premium but how did you reach that conclusion? It seems like a harder sell since all the insiders sold. I guess though you don't have to attach a large probability to the 57-101 price range in the press for the math to start working.

[Tim Eriksen]

Maybe a mistake but I sold at market a little bit ago. I wasn't at all familiar with the process and didn't want to get squeezed out.

 

Have you gone through this before and have some reasonable estimate of the chances? If you're buying I assume you view the odds as favorable relative to the premium but how did you reach that conclusion? It seems like a harder sell since all the insiders sold. I guess though you don't have to attach a large probability to the 57-101 price range in the press for the math to start working.

 

There is an administrative firm that takes care of the process, for a fee of course.  A lawyer will have to handle filings and representation in Delaware courts.  In the past you were on your own and unless it was a meaningful amount you really had no recourse.  Today you can group with others to reduce costs.  I have never gone through it before.  I don't what to walk through the analysis in this forum but will if you email me. 

[Tim Eriksen]

HC2 reported earnings tonight.  It is a pain to try and back into what Schuff earned.  My first back of the envelope was to sue proforma net income plus non-controlling interest (presumably due to HC2 not owning 100%) minus their historical non-controlling interest.

HC2 reported pro-forma net income for Schuff of $19.28 million ($4.91 per year end number of shares), non-controlling interest of $3.57 million less historical NCI of 0.25 would add another $3.3 million $0.84).  So approximate earnings of $5.75 per share ish. 

 

And HC2 still wants to force out shareholders at $31.50.  5.5x earnings.  Good luck with that.     

[watsa_is_a_randian_hero]

HC2 reported earnings tonight.  It is a pain to try and back into what Schuff earned.  My first back of the envelope was to sue proforma net income plus non-controlling interest (presumably due to HC2 not owning 100%) minus their historical non-controlling interest.

HC2 reported pro-forma net income for Schuff of $19.28 million ($4.91 per year end number of shares), non-controlling interest of $3.57 million less historical NCI of 0.25 would add another $3.3 million $0.84).  So approximate earnings of $5.75 per share ish. 

 

And HC2 still wants to force out shareholders at $31.50.  5.5x earnings.  Good luck with that.   

 

I calced $5.93 adjusted earnings, so same ballpark.  That is earnings...I'm trying to figure out EBITDA multiple implied by $31.50.  How much cash is at the Schuff level?  Do you see that anywhere? 

 

Anyone notice how HCHC has been flying high (up 200%) and SHFK is stagnent?  Granted, HCHC was levered and therefore more risky, but this is ridiculous. 

 

I didn't buy HCHC on the premise Falcone was a thief and would eventually cheat their shareholders too, but it has been doing well so far.  Those should be our gains though. 

[watsa_is_a_randian_hero]

to my prior question on EBITDA multiple, they have to have more cash then debt at this point, just based on the other numbers (capex, earnings, etc).  Say net debt is 0 or lower, then EBITDA multiple is at $31.50 is 2.65x or lower. 

[Tim Eriksen]

to my prior question on EBITDA multiple, they have to have more cash then debt at this point, just based on the other numbers (capex, earnings, etc).  Say net debt is 0 or lower, then EBITDA multiple is at $31.50 is 2.65x or lower.

 

See Exhibit 99-2 in the 8-K filed March 23, 2015:

For the twelve months ended December 31, 2014, Schuff had revenues of $526.1 million, Adjusted EBITDA of $45.8 million and $19.3 million of capital expenditures, which includes $8.4 million of financed equipment purchases. As of December 31, 2014, Schuff had cash and cash equivalents of $14.0 million, total indebtedness of $13.0 million and $46.1 million of availability under its revolving credit facility.

 

Proforma results would be $1 to $ 2 million higher due to some severance less gain from sale of company aircraft.

 

It will be interesting to see what HC2 does.

Option 1 is to do the force out around $32 and have a large number of shares go to appraisal.  For simplicity, a reasonable argument for the shareholder side in appraisal would argue $5.93 in earnings plus a 3% growth rate, discounted at 9%.  (I would actually argue for a higher growth rate for the next few years and a lower discount rate).  So shareholders argue for about $88 per share.  HC2 almost has to argue the force out price of less than 6 times earnings.  Odds are high HC2 would lose.  So shareholders win and gross $88 plus 5% annual interest.  Assuming 24 months that is nearly $97 per share.  Attorney fees would be about 35% of gain leaving about $73 per share.  HC2 would also face a suit from those who tendered and likely pay that price for the shares acquired in the prior tender. 

 

Option 2 is to recognize that possible outcome, and try to cut out some of the attorney fees.  Get a conservative fair value opinion of around $60 and do the force out at that price, assume most accept due to time value of money and settle lawsuits at that price.  The more that accept the harder appraisal becomes.   

 

Option 3 is to do nothing and distribute to remaining shareholders on the same basis as HC2.  In other words dividend out most of the profits.  I can't think of any examples of this ever occurring. 

 

I think they will choose option 1 and come to regret it.         

[watsa_is_a_randian_hero]

to my prior question on EBITDA multiple, they have to have more cash then debt at this point, just based on the other numbers (capex, earnings, etc).  Say net debt is 0 or lower, then EBITDA multiple is at $31.50 is 2.65x or lower.

 

See Exhibit 99-2 in the 8-K filed March 23, 2015:

For the twelve months ended December 31, 2014, Schuff had revenues of $526.1 million, Adjusted EBITDA of $45.8 million and $19.3 million of capital expenditures, which includes $8.4 million of financed equipment purchases. As of December 31, 2014, Schuff had cash and cash equivalents of $14.0 million, total indebtedness of $13.0 million and $46.1 million of availability under its revolving credit facility.

 

Proforma results would be $1 to $ 2 million higher due to some severance less gain from sale of company aircraft.

 

It will be interesting to see what HC2 does.

Option 1 is to do the force out around $32 and have a large number of shares go to appraisal.  For simplicity, a reasonable argument for the shareholder side in appraisal would argue $5.93 in earnings plus a 3% growth rate, discounted at 9%.  (I would actually argue for a higher growth rate for the next few years and a lower discount rate).  So shareholders argue for about $88 per share.  HC2 almost has to argue the force out price of less than 6 times earnings.  Odds are high HC2 would lose.  So shareholders win and gross $88 plus 5% annual interest.  Assuming 24 months that is nearly $97 per share.  Attorney fees would be about 35% of gain leaving about $73 per share.  HC2 would also face a suit from those who tendered and likely pay that price for the shares acquired in the prior tender. 

 

Option 2 is to recognize that possible outcome, and try to cut out some of the attorney fees.  Get a conservative fair value opinion of around $60 and do the force out at that price, assume most accept due to time value of money and settle lawsuits at that price.  The more that accept the harder appraisal becomes.   

 

Option 3 is to do nothing and distribute to remaining shareholders on the same basis as HC2.  In other words dividend out most of the profits.  I can't think of any examples of this ever occurring. 

 

I think they will choose option 1 and come to regret it.       

 

How does one exercise appraisal rights?  If I am a relatively small shareholder, is this worth it?  Can I add myself to other lawsuits that exist already?  Do i have risk if I do nothing (Ie, if other larger shareholders exercise appraisal rights and win, will I lose out because I did nothing, or will they be forced to pay me the higher price also?)?

[KJP]

to my prior question on EBITDA multiple, they have to have more cash then debt at this point, just based on the other numbers (capex, earnings, etc).  Say net debt is 0 or lower, then EBITDA multiple is at $31.50 is 2.65x or lower.

 

See Exhibit 99-2 in the 8-K filed March 23, 2015:

For the twelve months ended December 31, 2014, Schuff had revenues of $526.1 million, Adjusted EBITDA of $45.8 million and $19.3 million of capital expenditures, which includes $8.4 million of financed equipment purchases. As of December 31, 2014, Schuff had cash and cash equivalents of $14.0 million, total indebtedness of $13.0 million and $46.1 million of availability under its revolving credit facility.

 

Proforma results would be $1 to $ 2 million higher due to some severance less gain from sale of company aircraft.

 

It will be interesting to see what HC2 does.

Option 1 is to do the force out around $32 and have a large number of shares go to appraisal.  For simplicity, a reasonable argument for the shareholder side in appraisal would argue $5.93 in earnings plus a 3% growth rate, discounted at 9%.  (I would actually argue for a higher growth rate for the next few years and a lower discount rate).  So shareholders argue for about $88 per share.  HC2 almost has to argue the force out price of less than 6 times earnings.  Odds are high HC2 would lose.  So shareholders win and gross $88 plus 5% annual interest.  Assuming 24 months that is nearly $97 per share.  Attorney fees would be about 35% of gain leaving about $73 per share.  HC2 would also face a suit from those who tendered and likely pay that price for the shares acquired in the prior tender. 

 

Option 2 is to recognize that possible outcome, and try to cut out some of the attorney fees.  Get a conservative fair value opinion of around $60 and do the force out at that price, assume most accept due to time value of money and settle lawsuits at that price.  The more that accept the harder appraisal becomes.   

 

Option 3 is to do nothing and distribute to remaining shareholders on the same basis as HC2.  In other words dividend out most of the profits.  I can't think of any examples of this ever occurring. 

 

I think they will choose option 1 and come to regret it.       

 

How does one exercise appraisal rights?  If I am a relatively small shareholder, is this worth it?  Can I add myself to other lawsuits that exist already?  Do i have risk if I do nothing (Ie, if other larger shareholders exercise appraisal rights and win, will I lose out because I did nothing, or will they be forced to pay me the higher price also?)?

 

To get the benefit of an appraisal proceeding, a shareholder must individually perfect his appraisal rights.  The procedures for doing so will be outlined in the proxy materials you receive in connection win any short-form merger.  There is likely to be one consolidated appraisal proceeding in which the fair value of the shares is determined. 

[Tim Eriksen]

There are groups that can help.  For example:

http://www.shareholderforum.com/shfk/

 

They have a contact email at the bottom of the page.  It is my understanding that it is not the cost for a small shareholder to join that is the problem rather the process to get the shares handled properly by the broker. 

[Tim Eriksen]

Schuff paying a $2.34 special dividend.

http://finance.yahoo.com/news/schuff-international-pay-cash-dividend-210500363.html

 

HC2 should release earnings early next week.  That should provide insight into Schuff's performance.

[watsa_is_a_randian_hero]

Tim - any thoughts on the decline on 100 shares after the dividend?  Someone just getting blown out by a margin call on other recently declining securities? 

 

That is my thought.  My fear is with the short-form merger HC2 may now try to use this 100-share trade as justification for their price

[Tim Eriksen]

Tim - any thoughts on the decline on 100 shares after the dividend?  Someone just getting blown out by a margin call on other recently declining securities? 

 

That is my thought.  My fear is with the short-form merger HC2 may now try to use this 100-share trade as justification for their price

 

It looked to me that it was mainly liquidity.  For a few days there was no inside bid - meaning there was only one bid in the market.  While it is not showing in the historical record, I saw a trade for 200 shares at $2 a few days back.  (Maybe that trade was reversed)  That can happen on highly illiquid stocks.  I immediately put in a low bid in case it happened again and then someone else topped it, so I raised it again, etc.  If the company does a force out the price will likely be low regardless.  $31.50 is absurd.  If they chose to try something in the 20's it just become more absurd and leads to more shareholders exercising appraisal. 

 

The interesting news was the dividend.  I think it is very possible that HC2 knows that they will get hit hard in appraisal and a potential class action suit from shareholders who tendered.  By paying a dividend HC2 can still milk the stock for cash, but we get to participate too. The dividend was equal to just six months earnings.  It is possible that they will pay another in six months, meaning the annual dividend rate could be around $4.70, which is more than a 15% yield.

 

If they force out, most shareholders will go to appraisal where I think they will have to pay above $70 per share.  HC2 is borrowing at over 10%.  So simple economics says it is better for them to keep things as they are and have SHFK pay a dividend. 

 

     

[watsa_is_a_randian_hero]

Yeah...my reaction to the dividend was similar, that they may be realizing that is the path of least resistance. 

[watsa_is_a_randian_hero]

Another dividend - same amount.  Do you think we should start expecting this quarterly?  8)

[wachtwoord]

This is still supposed to be trading right? I wanted to put in a small buy order @$32 but see (in Interactive Brokers) that the order stays blue ("order is being held and monitored) instead of green ("active on [Exchange name]"). I have a few other OTC buy order outstanding and they look fine (so nothing wrong with permissions).

 

Does anyone know what's going on?

[watsa_is_a_randian_hero]

Update on Schuff:

 

-Name change to DMB Global

-Ticker change to DMBG

-Not standard pink sheets any more; only "grey market".  Interactive brokers does not support this.

-Acquired two companies announced on October 11.

 

It looks like underlying performance continues to be good - are there any others who are still invested?  Presumably we could continue to hold and extract dividends?

[watsa_is_a_randian_hero]

Another Dividend.  Does anyone still hold this?

[wachtwoord]

Another Dividend.  Does anyone still hold this?

 

I've never been able to buy it unfortunately. Good luck to those that still hold it. It's a cash cow :)