OLD GREENWICH, Conn., Jan. 13, 2014 /PRNewswire/ -- Lone Star Value Management, LLC (together with its affiliates, "Lone Star Value"), a significant shareholder of SWS Group, Inc. ("SWS" or the "Company") (NYSE: SWS), owning 750,000 shares of the Company, today announced it delivered a letter to the Board of Directors of SWS (the "Board"). The letter detailed Lone Star Value's conclusion that the unsolicited proposal submitted by Hilltop Holdings Inc. ("Hilltop") to acquire all of the outstanding shares of SWS for $7.00 per share in 50% cash and 50% Hilltop common stock is deeply inadequate and significantly undervalues the Company. Lone Star Value expressed its belief that, consistent with its duties to SWS shareholders, the Board must commence a full and fair review of all opportunities to maximize shareholder value through the sale of the Company to the highest bidder. In addition, the Board should create an independent special committee to coordinate the review process that does not include members of management, Hilltop or Oak Hill Capital Partners ("Oak Hill"). Lone Star Value voiced its concern that Hilltop's large equity stake, lending relationship and current representation on the Board provide it with leverage to seek preferential treatment over other bidders. Lone Star Value called on Hilltop to publicly commit to cooperate with any efforts of the Board to identify other potential acquirers and pursue a transaction that maximizes shareholder value.
The full text of the letter follows:
January 13, 2014
Board of Directors SWS Group, Inc. 1201 Elm Street, Suite 3500 Dallas, Texas 75270
Dear Members of the Board:
As you know, Lone Star Value Management, LLC (together with its affiliates, "Lone Star Value") is a significant shareholder of SWS Group, Inc. ("SWS" or the "Company") with current ownership of 750,000 shares of SWS. We invest in undervalued securities and seek to engage with our portfolio companies in a constructive way to help maximize value for all shareholders. I grew up in the Dallas area and have followed SWS for a long time. Over the years, I have also had many friends who have worked at SWS. We invested in the Company in early 2012 and we have conducted a deep analysis of its business and prospects. We have shared our analysis and recommendations with the Board of Directors of SWS (the "Board") and principals of Hilltop Holdings Inc. ("Hilltop") and Oak Hill Capital Management ("Oak Hill") both in meetings with them and in a private letter we sent to members of the Board in November 2013. Our goal, which I am sure that you share, is for SWS to realize its full potential as a company and for shareholder value to be maximized.
Our views and message to the Board have been clear. As our November 2013 letter unequivocally stated, we have long believed that value at SWS can be maximized through the sale of the Company to the highest bidder following a full and fair review of all available opportunities. However, after careful review and consideration of the unsolicited written proposal submitted to the Board by Hilltop on January 10, 2014 in which Hilltop offers to acquire all of the outstanding shares of SWS that it does not already own for $7.00 per share in 50% cash and 50% Hilltop common stock (the "Hilltop Proposal"), we have concluded that the Hilltop Proposal is deeply inadequate and significantly undervalues the Company.
In our view, a financial company like SWS should be worth at least its book value per share in any sale of the company. SWS's current book value is $9.64 per share. The Company's CEO and CFO assured us in a private meeting at the Company's headquarters in June 2013 that SWS's book value was correctly calculated and stated in its financial statements. By our estimate, on a fully diluted basis to account for warrants held by Hilltop and Oak Hill, SWS's book value is approximately $8.30 per share. We believe that financial companies, like most cyclical stocks, should be valued on normalized earnings. We estimate a reasonable ROE for SWS over time should be 10%, which implies normalized earnings of $0.83 per share on SWS's fully diluted book value of approximately $8.30. We believe a typical P/E ratio for a financial stock like SWS is 12x, implying a normalized value of approximately $10 per share. In addition, the Hilltop Proposal offers only a 15% premium to where SWS stock was trading prior to Hilltop's bid. The typical premium in comparable acquisition deals is over 30% which argues for a bid of $8.00 per share.
Further, Hilltop has heralded the significant operating synergies that can be realized in a transaction between SWS and Hilltop. In a statement accompanying the Hilltop Proposal, Gerald J. Ford, Chairman of the Board of Hilltop and a director of SWS, noted "...that Hilltop's and SWS's businesses are highly complementary" and "[the proposed transaction] will create benefits from being part of a larger organization that is strongly capitalized and positioned to compete on an expanded scale." Given the synergies Mr. Ford so strongly believes in, we expect the proposed consideration in any transaction for the sale of the Company to reflect these synergies. Hilltop's low bid of $7 per share is below SWS's book value and certainly does not, in our opinion, reflect the value of any synergies.
The Hilltop Proposal also contemplates that half of the consideration to be paid to SWS's current shareholders will be in the form of stock in Hilltop. This structure imposes upon SWS shareholders the risks inherent in an investment in a company that is still completing the assimilation of a number of recent large acquisitions. Hilltop completed the acquisition of PlainsCapital Corporation in November 2012 and the FDIC-assisted acquisition of First National Bank of Edinburg as recently as September 2013. In our view, the consideration offered in the Hilltop Proposal does not adequately reflect these added risks.
Overall, our view is that the Hilltop Proposal does not provide fair and adequate consideration to SWS shareholders and we feel confident that a robust and thorough market search will result in superior proposals with the potential to deliver far greater value to shareholders. However, it is essential that any such process for the exploration of strategic alternatives is conducted fairly, treats all potential suitors equally and places maximizing shareholder value as the paramount objective.
One overriding concern of ours is that Hilltop's large 24% equity stake in SWS (on a fully diluted basis) and current representation on the Board provide Hilltop with significant leverage to force through a deal that is not in the best interests of all SWS shareholders. This is not the first time that Hilltop has been able to extract preferential terms from the Board at the expense of shareholders. SWS entered into a transaction with Hilltop and Oak Hill in July 2011 in connection with a loan Hilltop made to SWS at a very high 8% interest rate. In addition, in return for their investment, Hilltop and Oak Hill each became entitled to representation on the Board and each received an exceptionally large amount of warrants at an exercise price of $5.75 that if exercised would give each a 17% equity stake in the Company. Perhaps it is this favoritism to the detriment of shareholders that explains the significant withhold vote with respect the reelection of the Hilltop and Oak Hill representatives on the Board since they joined it. Amazingly, in the days just prior to the investment by Hilltop and Oak Hill in 2011, SWS summarily rejected a $7.50 per share all-cash offer from a serious and substantial financial institution. This questionable decision suggests the Board's main priority at the time was not maximizing shareholder value but keeping SWS independent even if it meant raising capital in a very dilutive manner. Why else choose to issue debt with an 8% coupon rate and warrants at exercise price of $5.75 for 34% ownership in the Company instead of selling the whole Company for $7.50 per share?
SWS shareholders cannot afford another deal with Hilltop that sees their best interests subordinated to Hilltop's. Given the importance of a fair process, we call on Hilltop to publicly commit not to stand in the way of a full and impartial sales process and not to use any leverage from its large equity stake, lending relationship or presence on the Board to skew the odds in its favor in the context of any competing bid.
It is incumbent upon the Board that it conducts a thorough and fair process to explore all value-maximizing opportunities and give all interested third parties equal chance to structure a bid that delivers full value to SWS shareholders. To ensure a fair process, the Board must immediately form a special committee of the Board charged with coordinating a full exploration of opportunities for the sale of the Company to the highest bidder. Such independent special committee should exclude members of management, Hilltop or Oak Hill. We firmly believe that an exhaustive review process will yield superior proposals for the acquisition of the Company that could deliver far greater value for SWS shareholders than the Hilltop Proposal.
In conclusion, the SWS Board should run a thorough and fair process to sell the Company to the highest bidder. We strongly believe the Hilltop Proposal deeply undervalues SWS and falls short of delivering to SWS shareholders fair and full value. The Board's fiduciary duties to the shareholders mandate that at this time it must conduct a robust and fair exploration of all alternatives with the help of a special committee of the Board, reputable financial advisors and without favoritism to any bidders. We expect the Board to fulfill its duties by immediately commencing such a full and impartial review process.
/s/ Jeffrey E. Eberwein
Jeffrey E. Eberwein Founder and Chief Executive Officer of Lone Star Value Management, LLC
About Lone Star Value Management:
Lone Star Value Management, LLC ("Lone Star Value") is an investment firm that invests in undervalued securities and engages with its portfolio companies in a constructive way to help maximize value for all shareholders. Lone Star Value was founded by Jeff Eberwein who was formerly a Portfolio Manager at Soros Fund Management and Viking Global Investors. Lone Star Value is based in Old Greenwich, CT.
Investor Contact: Jeffrey E. Eberwein 203-542-7020 email@example.com
SOURCE Lone Star Value Management, LLC