Bandera Partners Issues Public Letter to Board of Loews Corporation Regarding Boardwalk Pipeline Partners
Concerned by Potential Abuse of Boardwalk's Minority Unitholders if Loews Purchases all Boardwalk Units
May 21, 2018, 10:00 ET
NEW YORK, May 21, 2018 /PRNewswire/ -- Bandera Partners LLC, a significant unitholder of Boardwalk Pipeline Partners, LP (NYSE: BWP), announced today that it has issued a public letter to the Board of Directors of Loews Corporation (NYSE: L) regarding Loews' potential purchase of Boardwalk's outstanding units. The full text of the letter follows.
May 21, 2018
667 Madison Avenue
New York, New York 10065
Attention: Board of Directors
Dear Members of the Board:
Bandera Partners owns 1.6 million common units of Boardwalk Pipeline Partners, a substantial stake for a small firm like ours. Like Loews Corporation, we employ a simple value investing strategy to pursue long-term returns on investment for our partners. In Boardwalk, we believe we have found a collection of pipeline assets trading at a very sharp discount to their intrinsic value.
We appreciate that Loews has a contractual right to purchase the common units of Boardwalk in certain circumstances under Section 15.1(b) of the partnership agreement. Whether the Tax Cuts and Jobs Act of 2017 or the FERC's March 15, 2018 policy statement triggers this right is debatable. What is not debatable, however, is that Loews has an obligation to act in good faith in exercising that right.
Last week, we read the public letter from TAM Capital Management accusing Loews of a "brazen attempt to effect a buyout of [Boardwalk] for a fraction of its fair value," as well as reported comments from a Barclays analyst questioning the "poor corporate governance" of Boardwalk. While we respect the need for Loews to carefully weigh its options, we agree completely with TAM Capital that Loews is not permitted to game the timing of the process in order to purchase units at a more favorable price for itself, and we sincerely hope that is not what Loews is doing.
Loews' right is triggered by the receipt of a legal opinion that Boardwalk's tax status has or will reasonably likely have a material adverse effect upon the applicable rate Boardwalk or its subsidiaries can charge its customers. The FERC's policy change is over two months old at this point, and a determination of whether it has triggered Loews' purchase right should easily have been made by now. We believe that if Loews delays the receipt of this legal opinion to minimize the purchase price, this would not only violate the partnership agreement under any reasonable reading, it would violate Loews' obligation of good faith and fair dealing to the minority unitholders.
Furthermore, Loews' April 30, 2018 announcement that it was "seriously considering" exercising its purchase right, whether intentionally or not, triggered a catastrophic collapse in the market price of Boardwalk's units. In a recent report, JP Morgan's research analyst stated that "Loews' actions clearly impacted the BWP unit price." The units' 180 consecutive trading day average, which sets the purchase price, is considerably lower than it would have been without this announcement. Further delays will leave investors with uncertainty as to whether they will be forced to sell and at what price, possibly depressing the market price even more. Loews must not be permitted to profit at the expense of Boardwalk's minority unitholders from its carelessness, at best, or manipulation, at worst, in making this announcement.
Considering the foregoing, assuming Loews even has the ability to exercise its purchase right, we believe that it should not be permitted to purchase Boardwalk's units at a price less than $13.14, the average closing price on the 180 consecutive trading days immediately before its April 30, 2018 announcement. While $13.14 is substantially higher than the units' current trading price, we believe this values Boardwalk at far less than it is actually worth.
Despite Boardwalk's claim that everything about Loews' purchase right was disclosed in the Risk Factors section of its securities filings, the actual disclosure was grossly inadequate. Boardwalk's Form 10-Ks informed unitholders only that an option existed, not that the option would permit Loews to buy the units at a price far below their intrinsic value and far below recent trading prices. The Risk Factors in the original Form S-1 (issued many years ago), and the most recent Form 10-Q (filed April 30, too late to help unitholders), provided more detail than every intervening securities filing, but were scarcely better. They explained the circumstances that would trigger the option in great detail, while discussing price in only the most general terms, stating that Loews might purchase units "at an undesirable time and price"—a boilerplate statement that could be true of any corporate transaction, even one negotiated at arms' length with an independent third party. Boardwalk was required to disclose clearly and prominently in the Risk Factors that investors' units might be seized from them without fair compensation. Boardwalk's retail investors, many of whom are retirees buying units for yield, were not sufficiently warned of these risks related to Loews' purchase right.
We remain hopeful that investors' concerns are misplaced and that Loews will treat unitholders fairly. We believe that you, as stewards of Boardwalk's capital, made a tough but wise decision to slash the partnership's cash distribution, and invest substantial funds into the existing base of assets. While these strategic actions depressed unit prices, they were implemented to drive meaningful long-term returns for investors.
We estimate that Boardwalk has raised over $3 billion from its limited partners to execute this long-term strategy. The benefits of these investments should accrue to all of the partnership's investors, not just Loews. This is why we believe the best outcome for unitholders would be for Loews to pass on its purchase right altogether. If Loews does exercise its option, we think that, at a minimum, it must do so only at a fair price and in accordance with straightforward procedures that accord with unitholders' reasonable expectations of fairness. Any effort to evade these requirements would not only fail, it would forever damage the sterling reputation that Loews has built over many decades.
Bandera Partners LLC
About Bandera Partners
Bandera Partners is a value-oriented hedge fund based in New York.
Jeff Gramm, (212) 232-4583
SOURCE Bandera Partners LLC
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