(WGEM) – One of the key shareholders in Gardner Denver, Inc., is urging the company's board of directors to sell the company following the resignation of former President and CEO Barry Pennypacker.
In a Thursday letter to Gardner-Denver board chairman Diane K. Schumacher, ValueAct partner Gregory P. Spivy voiced concerns about the company's direction.
"We believe the sale of the company at this time would be both prudent and the most effective way to deliver maximum value to shareholders on a risk-adjusted basis for both the short and long term," Spivy wrote in the letter that was posted Friday on the Securities and Exchange Commission website.
ValueAct is urging the board, which meets next week, to immediately engage investment bankers to solicit offers.
You can read the full text of the letter below:
July 26, 2012
VIA EMAIL AND OVERNIGHT MAIL
Diane K. Schumacher
Chairperson of the Board of Directors
Gardner Denver Inc.
1500 Liberty Ridge Drive
Wayne, PA 19087
ValueAct Capital owns 2.5 million shares, representing 5.1% of Gardner Denver Inc.s ("GDI" or "the Company") common shares outstanding. As a large shareholder, we are writing to recommend that the board of GDI pursue a sale of the Company in light of the circumstances in which it finds itself after the surprising resignation of its CEO, Barry Pennypacker, on Monday July 16, 2012. We believe a sale of the Company at this time would be both prudent and the most 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 GDI board of directors to engage investment bankers immediately for the purpose of soliciting offers for the Company.
ValueAct Capital manages over $7.5 billion on behalf of some of the world's most respected institutional and individual investors. We have an enviable track record that extends over 12 years and has involved board representation at 28 companies, roughly half of our core investments. Recent successful investments in which ValueAct Capital played an active governance role include the multi-year transformation of Sara Lee Corporation into 2 new more focused and highly-valued companies, the portfolio upgrading,operational turnaround and subsequent premium sale of Misys plc and the highly successful acquisitive growth strategy of Valeant Pharmaceuticals.
Before today, ValueAct Capital has never publicly called for the sale of a company. Thus, some explanation is in order. We are firm believers in the value of shareholder representation in the board room and the importance of having a board of directors with significant capital at risk when facing challenging strategic decisions. Ideally, a large, experienced governance investor like ourselves would have a seat at the table and would work collaboratively inside the board room with fellow directors, management and the Company's advisors in determining appropriate strategic direction during a time like this. In this instance, we had not sought board representation given the relatively short tenure of our investment. As a result, we believe it is most efficient to communicate our recommended plan of action in writing to the entire Board of Directors at this time, as we understand the Board is convening a meeting early next week to consider several key strategic decisions.
We commend Michael Larsen on his handling of the difficult situation thus far. As we would have expected given our prior interactions with him, he has exhibited solid management and communication skills and provided comfort to investors in several of the most critical areas--the integrity of the financial results, the continuity of the operational initiatives and the capital deployment priorities. We also appreciate the recommitment communicated publicly to the principles of the strategic plan that Barry Pennypacker and his team had developed for GDI and we look forward to learning the details of the next major restructuring initiative—addressing the underperforming profitability of GDI's European operations.
However, continuity of the operational culture and commitment to the restructuring plans do not change the unfortunate fact that the execution risk of the Company's strategic plan has now escalated significantly with Barry's resignation. In our view, Barry's experience, skill set and management approach were uniquely well-matched to the strategic opportunities and priorities of GDI. The timing of Barry's departure is especially inopportune in light of the impending launch of the European restructuring, one of the most challenging geographies in which to execute such an initiative, as well as the continuing cyclical weakness of GDI's upstream energy business.
While we appreciate the interim leadership role Michael Larsen can play and are thankful to have an executive of his caliber on the team, Barry's departure, plus the recent turnover and associated turmoil in the executive ranks leave the broader team depleted and dangerously short-handed at a critical juncture. It is worth noting that the team has been significantly rebuilt over the past several years with many executives who had direct experience and apparent affinity working with Barry, and thus, inevitably, may now be at risk for further turnover.
Of course, consideration of a sale of the Company as an alternative to retaining public company status under a new CEO must incorporate the likelihood of success and relative value creation from a sale. On this front we are encouraged by the prospects. To start, as a result of the strength and diversity of the Company's group of businesses, Gardner Denver can be expected to generate an impressive level of cash flow, even under various cyclical revenue decline scenarios that might unfold. Such high, sustainable cash flow is highly valued in the private transaction market where the costs of debt capital are currently relatively low and financing availability is high. This contrasts with a public market mindset more focused on near-term earnings growth, than underlying cash flow production, and limited patience to ride out business and economic cycles.
There are a number of comparably-sized industrial sector companies for sale, or that have been sold recently, for which debt financing commitments have been obtained in the range of 6x EBITDA. With blended all-in debt financing rates, at those leverage levels, likely in the 7.5% to 8.5% range, financing conditions are uniquely conducive to large private equity transactions and supportive of valuation multiples well in excess of public trading multiples for comparable businesses. This is evidenced, most relevantly, in the announcement today of United Technologies' sale of its Hamilton Sundstrand industrial unit to Carlyle Group LP and BC Partners for $3.5 billion. This transaction is reportedly priced at a valuation multiple approaching 9x EBITDA, utilizing debt financing greater than 6x.
We believe private equity buyers will not be deterred by the various concerns that may weigh on a public market valuation of the Company for the foreseeable future. First, private equity buyers often work with operating executives within their organizations or past CEOs with which they have had success and thus will not be daunted by the current leadership transition. In fact, we think the strength of the finance team and divisional heads and the becoming-ingrained lean organizational culture will be a significant selling point. Secondly, the implied valuation for the announced acquisition of Hamilton Sundstrand Industrial, a business subject to many of the same economic cycle risks as GDI, evidences the multi-year investment horizons of private equity firms that allow them to see through to the other side of potential cycles. We believe the well-laid out margin improvement initiatives at GDI, including the planned European restructuring, will be valued by private equity buyers, given the clear visibility these initiatives provide to sustainable free cash flow growth independent of the macroeconomic cycles.
For all of these reasons, we recommend the board of GDI, at its upcoming board meeting, approve the immediate retention of advisors for purposes of running a sale process targeting an all-cash offer for 100% of the common shares of Gardner Denver. Our assessment of the situation, founded in our extensive experience, suggests there is a high likelihood of the board being able to secure for shareholders an attractive premium to GDI's current trading price. We believe such valuation will be considered highly-attractive by your current shareholders compared to the valuation they might hope to receive longer-term for their shares if the board pursued the path of appointing a new CEO, solidifying its organization and implementing the identified initiatives slated to drive value creation, while attempting to navigate an extremely uncertain economic environment.
We are prepared to assist if we can be helpful in any way—including in a board role--with a strategic alternatives review, as well as the ultimate execution of our recommended sale process path. We have extensive experience directing successful sale and divestiture processes from the board, often under similarly unfortunate circumstances. We would be pleased to share our thoughts further on this subject at your convenience.
/s/ Gregory P. Spivy
Gregory P. Spivy
Cc: Michael M. Larsen, Interim Chief Executive Officer, Gardner Denver Inc.