Crescendo Partners Sends Letter To Board Of Directors Of Michael Baker Corporation; Urges Board to Pursue a Sale of the Company
Crescendo Partners, a shareholder of Michael Baker Corporation (the "Company") (NYSE: BKR), today announced that it has delivered a letter to the Board of Directors of the Company.
In the letter, Crescendo Partners urges the Board of Directors of the Company to pursue a sale of the Company in light of the recent departure of the Company's CEO and the offer from DC Capital Partners to acquire the Company. Crescendo believes a sale of the Company at this time would be the most prudent and effective way to deliver maximum value to shareholders on a risk-adjusted basis for both the short- and long-term.
The full text of the letter follows:
Crescendo Partners 777 Third Avenue, Floor 37 New York, NY 10022 (212) 319 7676
December 26, 2012
Members of the Board of Directors c/o Richard L. Shaw, Chairman Michael Baker Corporation Airside Business Park 100 Airside Drive Moon Township, PA 15108
Dear Board Members:
Crescendo Partners is a shareholder of Michael Baker Corporation ("BKR" or the "Company"). We invested in BKR because of the strength of its engineering franchise, its strong free cash flow generation, and its very low valuation. We are writing to recommend that the Board of Directors of the Company (the "Board") pursue a sale of the Company in light of the recent departure of the Company's CEO and the offer from DC Capital Partners, LLC ("DC Capital") to acquire the Company for $24.25 per share. We believe a sale of the Company at this time would be the most prudent and effective way to deliver maximum value to shareholders on a risk-adjusted basis for both the short- and long-term. Accordingly, we strongly urge the Board to initiate a process to sell the Company. We believe that numerous parties would be interested in the Company and we are confident that a strategic buyer interested in purchasing the Company at a significant premium could be found.
Given the small size of the Company, the fiscal uncertainty affecting many of BKR's clients (which could persist for years), and the limited organic growth opportunities available to the Company at this time, we believe that BKR will remain significantly undervalued as long as it remains a stand-alone public company. We think that many of BKR's other shareholders, who are also frustrated by the Company's poor performance, agree with us and think that a sale of the Company at this time would be the most effective way to maximize value for shareholders. In fact, an analyst on the recent Q3 earnings call went so far as to ask the CEO whether the Company should be sold ("Does it make sense for small companies such as yourself to be independent?" from Tahira Afzal at KeyBanc Capital Markets). The recent departure of the CEO further complicates any turnaround efforts of the Company and increases execution risks. Also, in our experience a turnaround of BKR is likely to be more successful in a private setting without the short-term pressure and the quarterly disclosures required in the public arena.
We also believe a sale of the Company would be in the best interests of all of the Company's stakeholders. Those include the employees who could become part of a larger, faster growing, and more vibrant company with significantly more opportunities and the customers who could be served by a larger company with more offerings.
Based on our knowledge of the industry, we are confident that the Company could be sold for 6 to 7 times normalized EBITDA. Using consensus analyst expectations for the next fiscal year ($34.2 million) and the Company's current cash balance, these multiples would imply a sale price between $28 and $32 per share. Further, in light of the Company's announced cost-cutting plan, this EBITDA number could prove conservative. Additionally, a strategic buyer should be able to extract additional costs. Given the likely large number of interested parties, we believe the Company could hold a robust auction process, increasing the likelihood that the Company would receive credit for future cost-cutting opportunities without having to incur any of the execution risk. In conclusion, in our opinion there is a strong possibility the Company could be sold at more than $30 per share.
We are concerned that the Company may argue that now is not the right time to sell because it is in the middle of a turnaround and more value could be created over the long term by keeping the Company public. We strongly disagree. Now is the time to sell the Company because:
The Company does not have a CEO, which significantly increases the execution risk of a turnaround. The lack of a CEO would not be a concern for strategic or private equity buyers (who often work with operating executives within their organizations). The offer from DC Capital effectively puts the Company in play, making the hiring of a top CEO more complicated and less likely. Interest rates are at historical lows, creating an excellent environment to sell cash flow generative businesses either to private equity or strategic buyers. The Company can easily model the already announced cost-cutting opportunities (such as overhead reduction or reductions in force) as well as the cost synergies from a strategic buyer. Given that these cuts are straightforward and a sales process would likely be competitive, BKR's shareholders would stand to get most of the benefits of these cost-cutting actions without incurring any execution risk. Because of the time value of money, in order to justify not selling now, by our calculation the Board would have to be confident that the Company's stock would reach around $42 per share within 3 years (at a 12% discount rate and assuming a $30 per share transaction). We doubt that the Board has this level of confidence in the Company's future prospects when no Board member has bought a single share of stock in the public market during the past four years despite the stock trading at much lower levels. Finally, with the stock down more than forty per cent during the last five years, this Board has already had ample time to create shareholder value and has thus far failed to do so. Shareholders have suffered long enough. The right thing to do is to sell the Company now instead of asking for more time. While we believe that the $24.25 per share offer from DC Capital is low and that the Board has a fiduciary duty to engage with DC Capital to ascertain the maximum price it would be willing to pay for the Company, this offer should serve as an impetus for the Board to engage in a sale and price discovery process and to begin contacting other interested parties. The offer from DC Capital should give confidence to the Board that there are likely other interested parties in acquiring the Company and provide a floor to a sales process.
We also request that the Board establish a special committee consisting only of independent members of the Board to explore the sale of the Company. We and all of your shareholders expect proper corporate governance to be followed.
We hope that the Company will do the right thing and take the needed steps to maximize value for shareholders. We intend to nominate a slate of directors for election at the Company's upcoming annual meeting if the Company has not taken the necessary steps in furtherance of consummating a value maximizing transaction.
Very truly yours,
Arnaud Ajdler Senior Managing Director Crescendo Partners
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