Requests More Thorough Disclosure And Scrutiny Of Equal's Strategic Alternatives Process
MILL VALLEY, Calif., Dec. 10, 2013 /CNW/ - Lawndale Capital Management, LLC and its affiliate funds ("Lawndale") own more than 1.7 million shares, or more than 4.8%, of the outstanding shares of Equal Energy, Ltd. (N-EQU) ("Equal" or the "Company,"), making Lawndale one of Equal's largest shareholders. Lawndale has reviewed the December 9, 2013 press release issued by Equal, announcing that the Company had entered into a definitive agreement to be acquired by Petroflow at a price of $5.43/share.
Lawndale feels a synergistic buyer should be able to easily grow Equal's cash flow. This higher cash flow should safely support modest increased borrowings that could fund a sizable stock buyback, a higher sustainable dividend on the lower share count and still be able to support substantial production and reserves growth. The resulting distribution combined with the remaining higher yielding Equal shares should combine in value to more than Petroflow's $5.43/share.
Lawndale's analysis notes that the proposed transaction is all-cash, squeezing out public shareholders from all benefits of Equal's future growth and value creation from its vast and valuable reserves and growing production streams. Lawndale also notes that Petroflow is a former operating partner of Equal's Oklahoma assets and the Company's current management. When such dangerous combinations occur Lawndale's policy is to request more thorough disclosure and apply greater scrutiny of the alternatives process for any value being transferred from Equal Energy shareholders to the buying group for which shareholders are not being compensated.
Equal's December 9 press release emphasizes the "fairness" of the transaction price and no longer discusses the company's bright economic prospects in light of substantial increases in industry propane prices and export capacity and Equal's own reserves and production outlook.
Andrew Shapiro, President of Lawndale, stated, "Proponents of transactions often try to argue the strength or 'fairness' of their bid by highlighting a purported 'premium' they are offering to pre-offer 'trading' prices. Price premium to historical trading is the weakest and most flawed measure of 'fairness.' Especially in small companies, pre-bid trading takes place in an inefficient vacuum, without any expectation of a definitive transaction or even a sleepy board and management being woken up. Thus, such 'trading' levels are very poor proxy to base an appropriate premium for transfer of a company's control."
Shapiro added, "We think better measures for fair takeover and change of control value are tested against net present value of discounted cash flows and/or valuation multiples to assets or prospective cash flows. Courts in appraisal actions take a similar view. "
Lawndale's policy is to view any so-called "deal protections," which impede higher and better offers providing greater value to Equal shareholders, with great suspicion. This is especially so when there is legacy management continuation or sizable severance payouts. "No-shop" clauses and "break-up" fees are examples of such deal protections that may not serve selling shareholders well and require great scrutiny.
Shapiro said, "Instead of focusing on price 'premiums,' we believe Equal's disclosure to shareholders, should have, and must, in the near future, detail the scope and extent of the bidding process along with Equal's reserves and production forecast provided to Petroflow. Furthermore, Equal needs to provide to its shareholders, all the strategic alternatives considered and not considered, along with rationale for their rejection. Finally, Equal should broadly disseminate how any interested alternative bidders may 'top' the agreed purchase price, rather than highlighting the impediments for such a superior bid that would provide greater value."
About Lawndale Capital Management, LLC
Lawndale Capital Management, a San Francisco Bay Area-based investment advisor, has managed activist hedge funds focused on creating and unlocking shareholder value in small- and micro-cap companies for over 20 years. Lawndale applies a private equity approach through active and relational ownership of public company securities. In most investments, Lawndale plays a constructive relational role by actively working with boards and management teams to help them achieve their strategic and operating goals. In other instances, Lawndale is a direct value-unlocking catalyst, utilizing a range of tools that include aggressively promoting improvements in a company's governance and operational structures, proxy actions, asserting shareowner's legal rights and taking active roles in restructuring and buyout proposal negotiations.
SOURCE: Lawndale Capital Management, LLC