Sun Capital today sent a letter to the board of Kellwood Co. urging it to immediately terminate the company’s recently announced debt tender offer.
Kellwood on Wednesday issued a tender offer for up to $60 million of 7.875 percent senior notes due 2009 for $1,005 for every $1,000 in principal for bonds until Feb. 6.
The letter, written by Jason G. Bernzweig, vice president Sun Capital Securities Group LLC, said: “As the second largest shareholder in Kellwood Company…with an approximate 9.9 percent ownership interest, Sun Capital Securities Group, LLC… strongly urges the company to immediately terminate its ill-advised and value destructive tender offer (the ‘bond tender’)….The bond tender, if completed, would be destructive to equity value and would represent a direct transfer of value from your shareholders to bondholders. This is evidenced by an 8 percent decline in your stock price yesterday following the announcement of the bond tender, while the broader markets were up over 1 percent.”
The letter noted that “paying off these notes that have terms extremely favorable to Kellwood and cannot be replicated in today’s financing environment is detrimental to the company and your shareholders.”
Sun Capital, in the letter, noted, “The compelling attributes of these notes include, but are not limited to, the absence of maintenance covenants, which provides the company with significant financial flexibility as management attempts to execute its most recent restructuring plan. Also, there is no restricted payments covenant, which allows the company to distribute its free cash flow, as well as proceeds from asset sales to shareholders, without limitation. In addition, there is no change of control provision, which allows the company and its shareholders to capture a higher value in a sale because a buyer would be able to assume the notes on favorable terms relative to alternate financing options. Accordingly, paying a premium to repurchase these notes at this time, when it would be clearly beneficial to hold the notes to maturity and repay them at par, is at odds with the fiduciary obligation of the board and management to maximize shareholder value.”
Sun reasoned that if the board has genuine confidence in management’s business plan, then the “right strategy for maximizing shareholder value would be to leave the notes outstanding at this time, distribute the cash proceeds to shareholders, either in a special dividend or via a share repurchase, and then refinance the notes in 18 months upon maturity at par.”
The private equity firm added, “We note that the $60 million required for the tender represents 15 percent of your current market capitalization or approximately $2.30 per share of realizable value to your shareholders. Alternatively, if the board understandably has concerns about management’s business plan, the right approach would be to negotiate with Sun Capital or run a sale process where potential buyers would have the ability to assume the notes. In either circumstance, the bond tender is not in the interest of Kellwood shareholders.”
Sun told the board that, “It is clearly irresponsible for Kellwood to repay the notes at this time, particularly at a premium. As fiduciaries for shareholders you cannot justify this direct transfer of value from shareholders to bondholders. Therefore, the only responsible action by the board, as fiduciaries for shareholders, is to immediately terminate the bond tender.”
As reported, Sun has tried twice to acquire Kellwood, but has been rebuffed both times.
For more, see Friday’s issue of WWD.