NEW YORK, Sept. 24, 2012 /PRNewswire/ -- The following is a letter from Denali Investors to the independent members of The Shaw Group (SHAW) Board of Directors demanding the formation of an independent special committee, an inquiry into potential conflicts of interest of the Chairman, and a full and proper sale process.
September 18, 2012
Thos E. Capps
Daniel A. Hoffler
David W. Hoyle
Michael J. Mancuso
Albert D. McAlister
Stephen R. Tritch
The Shaw Group Inc.
4171 Essen Lane
Baton Rouge, LA 70809
Dear Independent Directors of The Shaw Group,
The board has thoroughly failed to communicate with shareholders, further cementing our view that the sale process was undermanaged and the current offer remains grossly undervalued. Our investigations revealed a number of very material potential conflicts that you must reconcile. As such:
We demand the formation of a special committee of certain independent directors with separate legal and financial advisors.
This special committee must:
- Investigate potential conflicts of interest of the Chairman, given the premature timing, low valuation, and limited sale process of the deal with CBI, regarding a possible Louisiana senatorial (2014) or gubernatorial (2015) campaign.
- Conduct a full and proper auction that achieves an appropriate premium through a competitive process.
Initially, we were trying to answer a troublesome question: Why are the management and board prematurely selling SHAW for only 3x EBITDA including synergies, just before the optical reasons for the low stock price are set to disappear? In isolation, such behavior would be incongruent with the fiduciary duties of shareholder representatives (the board of directors), given 2013 would be first year in which SHAW would be unencumbered by numerous optical misperceptions that had burdened the company for years. Coincidentally, in the S-4 filed by CBI yesterday, it states that those very misperceptions, namely the E&C segment and the phantom Westinghouse "debt," as primary reasons for not having pursued a transaction earlier. Yet with these issues now behind SHAW, CBI is not even paying a premium to the historic SHAW trading range inclusive of such issues. The immediate formation of a special committee is critical to the independent directors' understanding of the underlying motivations for the current deal.
To our surprise, we came to learn from sources familiar with the Louisiana political structure, that your Chairman may be a likely candidate for Senator or Governor of Louisiana, which is corroborated by his long involvement in state politics, including a previous role as Chairman of the Louisiana Democratic Party. We believe this helps explain why the current deal discussions began in May 2012 and was timed to close in the first half of 2013, given any senate candidate cannot afford to wait beyond 2013. Why? As it turns out, the Louisiana Senate election occurs in 2014, providing only a narrow window of opportunity. We believe this is the highly probable yet unspoken conflicting incentive that engendered the premature timing and low valuation of the current deal. Materially, we believe this constitutes an "intervening event" as set forth in the 'Definitions of Takeover Proposal and Superior Proposal' section of the proxy, thus enabling you to conduct a sale process in good faith notwithstanding the insupportable 'No Solicitation by Shaw of Alternative Proposals' language therein.
In addition, should a senate campaign prove unsuccessful, Louisiana is a rare state that has an off-year gubernatorial election in 2015. The statutes preclude a two-time incumbent governor from a consecutive third time, hence creating an opening for that seat. While we are supportive of the Chairman's demonstrated political ambition and potential campaign, this must not occur at the expense of shareholders, who are being unfairly shortchanged in a deal of convenience. We demand the independent directors investigate this potential conflict. This provides yet another reason why a special committee must be formed by the independent directors.
We remain deeply concerned about the intentional lack of communication with shareholders. There has been no material update or disclosure from SHAW regarding the sale process. There is no evidence of a thorough process conducted by the company or its advisors, which you now know may be rife with potential conflicts. It is possible that other strategics and financial parties were shut out of the process. The current offer is not a market-clearing price based on competitive bidding. Rather, it appears to be a very limited process to allow a conflicted board member to exit at a premature time convenient only to him.
Almost two months since the deal was announced, SHAW management has still not held a customary conference call to discuss the deal or the sale process with investors. Unfortunately, we are learning more from CBI's S-4 filing, which reveals a woefully limited sale process, than from SHAW itself. As more shareholders learn about these conflicts and the undermanaged process, the 75% Supermajority Threshold needed to complete the current deal may become rather difficult to attain. Importantly, continued inaction or lack of communication will only magnify shareholder dissatisfaction toward the board.
At the current $46 offer, you are effectively rubber-stamping a massive and unwarranted transfer of value of approximately $1 Billion in value to CBI that belongs to SHAW shareholders. This must not stand. We call on the independent directors to decisively exercise your fiduciary duties that mandate you work to preserve the value that belongs to shareholders by obtaining an appropriate premium for the acquisition of SHAW. In doing so, you take the opportunity to repair your tarnished reputations and underscore your roles as true shareholder representatives.
We will continue to pursue all options to help realize full value for shareholders.
H. Kevin Byun
SOURCE Denali Investors, LLC