SpringOwl Asset Management Opposes Apollo Led Takeover of OM Group; Urges Shareholders to Vote Against Deal

Jul 07, 2015, 13:35 ET from SpringOwl Asset Management LLC

NEW YORK, July 7, 2015 /PRNewswire/ --

VIA EMAIL AND FEDEX

Mr. Joseph M. Scaminace, Chairman and Chief Executive Officer
Mr. Hans-Georg Betz, Director
Mr. Carl R. Christenson, Director
Mr. Joseph M. Gingo, Director
Mr. John A. McFarland, Director
Mr. Patrick S. Mullin, Director
Ms. Katherine L. Plourde, Director
Allen A. Spizzo, Director

OM Group, Inc.
950 Main Avenue, Suite 1300
Cleveland, Ohio  44113

July 6, 2015

Gentlemen and Lady:

Investment funds managed by SpringOwl Asset Management LLC and its affiliates (collectively, "SpringOwl") are shareholders of OM Group, Inc. ("OMG" or the "Company").  We are writing to express our disappointment not only at the terms of the Apollo Led Buyout that you approved, but also at the wholly-insufficient process which you undertook in reaching these terms.  We intend to vote against your proposed sale.  SpringOwl holds 100,000 shares of the Company's outstanding common stock (the "Common Stock") at prices ranging from $26.37 to $34.09 per share.  As of May 31, 2015, we believe our holdings in the Company's Common Stock were greater than the personal holdings of all the independent directors combined.  We purchased approximately 72% of these shares from November 5, 2014 to May 19, 2015, before the Company announced its agreement to be acquired by the Apollo Led Buyout (as defined below)

On June 1, 2015, OMG announced that it had entered into a definitive agreement to be acquired by funds managed by affiliates of Apollo Global Management, LLC ("Apollo", and such funds, collectively, the "Apollo Funds"), for $34.00 per share in cash.  Platform Specialty Products ("Platform") would acquire OMG's Electronic Chemicals and Photomasks businesses (together "Chemicals/Photomasks") from the Apollo Funds in two separate transactions for total cash consideration of $365 million.  Following the transactions, the Apollo Funds will own OMG's Magnetic Technologies, Battery Technologies and Advanced Organics businesses ("RemainCo").  We refer to these transactions collectively as the "Apollo Led Buyout".

As you know, on June 3, 2015, SpringOwl issued a statement calling for disclosure and scrutiny of the Apollo Led Buyout sale process and expressing skepticism regarding that process.  Since that time, a number of OMG shareholders have contacted SpringOwl expressing similar thoughts.

We are writing to express our disappointment not only at the terms of the Apollo Led Buyout that you approved, but also at the wholly-insufficient process which you undertook in reaching these terms.  We were encouraged to read today, July 6, 2015, an OMG press release stating:

"Prior to the expiration of the "go-shop" period, the Company's Board of Directors received a written "company takeover proposal."   After consulting with its financial advisors and legal counsel, the Company's Board of Directors determined that the party submitting the proposal is an "excluded party" under the Merger Agreement with which the Company may continue to negotiate following the end of the "go-shop" period. There can be no assurance that the proposal or any other alternative proposal will ultimately lead to a superior proposal, as negotiations with the excluded party could terminate at any time."

However, we were greatly disappointed that without disclosing any details of an alternative offer:

"The Company's Board of Directors continues to recommend that the Company's shareholders adopt the Merger Agreement."

We do not believe that a fair sales process can be conducted if the Board is simultaneously considering a new written proposal while recommending against it and without providing details of the other offer. 

It is our intention to vote "AGAINST" Proposal #1 to adopt the Merger Agreement, "AGAINST" Proposal #2 to approve the compensation to be paid to OMG's named executive officers in connection with the Merger Agreement, and "AGAINST" Proposal #3 to approve adjournments of the Special Meeting to solicit additional proxies.  We believe that as the Company's shareholders learn about the Apollo Led Buyout and the compensation to be paid to OMG's named executive officers, more of the shareholders are likely to reach the same conclusions that we have and potentially speak out about their views – as we are doing.

SpringOwl has numerous reasons why the Apollo Led Buyout is wholly-insufficient, ill-timed, and an affront to all shareholders.  Prior to noting our specific objections to the Apollo Led Buyout, it is important to note that there is a prior written agreement executed by OMG with FrontFour Capital Group LLC ("FrontFour") to strengthen its Board with the addition of two independent directors who were to contribute to OMG's ongoing efforts to improve the Company and create sustainable, long-term value for all shareholders. 

SpringOwl believes the remaining FrontFour directors, in conjunction with the existing OMG Board, could derive a superior price to the Apollo Led Buyout price.  By rejecting the Apollo Led Buyout, SpringOwl believes that OMG can work to realize this higher price.

Positive OMG Action with FrontFour

On January 9, 2015, FrontFour, after meeting with the management of OMG, issued a public letter to the OMG Board.  Their letter (copied in the link below) methodically articulated what FrontFour saw as a history at OMG of value destruction, poor return metrics, operating margins that were significantly below its peer group, bloated SG&A structure, significant cash trapped in working capital, and an overcapitalized balance sheet.  FrontFour's letter outlined strategic initiatives that they believed could deliver 120% value upside if properly executed by the OMG Board and officers (link to letter: http://origin-qps.onstreammedia.com/origin/multivu_archive/ENR/1229635-1-Letter-to-OMG.PDF).  To support their recommendations, FrontFour subsequently nominated a slate of three highly-qualified, independent candidates to revitalize and improve OMG's Board. 

"David A. Lorber, managing member and principal owner of FrontFour, stated "We have clearly and publicly stated our serious concerns with OM Group's performance and have outlined a clear path to value creation through a combination of a cost-cutting opportunity of at least $50 million, the release of $30 million in working capital and a $250 million stock buyback.  By our estimate, the successful implementation of these initiatives should result in OM Group's shares trading at approximately $60 per share, which represents upside of nearly 120%.  However, the Board must be reconstituted in order to execute on these initiatives and drive accountability," continued Mr. Lorber.

In our view, OM Group has strong underlying businesses and there is a great opportunity to unlock value for the benefit of all shareholders. We are therefore taking action to ensure that shareholders' interests are directly represented.  With improved Board oversight, OM Group will be well-positioned to execute on its expanding market opportunities, product offerings and to deliver improved margins and cash flows to its shareholders," concluded Mr. Lorber."

SpringOwl agreed with FrontFour's description of OMG and welcomed both their strategic initiatives and the addition of three new and highly qualified, independent Board candidates to help implement the right program to turn around what we felt was an undermanaged and undervalued company. 

We were delighted to see on March 23, 2015 that OMG and FrontFour reached an agreement to nominate two new independent directors to the 2015 slate of nominees, David A. Lorber, Co-Founder of FrontFour and Joseph M. Gingo, Chairman of A. Schulman Inc.  In addition, OMG agreed to expand the Board by one seat promptly following the 2015 Annual Meeting, to nine members, and name Allen A. Spizzo, a business and management consultant focused on the chemicals, materials, biotechnology and pharmaceutical industries, a director of the Company.  As part of the agreement with OMG, FrontFour agreed to vote all of its shares in favor of each of the Company's nominees at the 2015 Annual Meeting and to customary standstill provisions. 

The FrontFour agreement marked to us the beginning of a process that we saw as an opportunity for shareholders to finally realize the true value of OMG.  FrontFour outlined in detail why OMG was worth approximately $59 per share, which was 111.7% higher than the closing price of the OMG stock the day prior (January 7, 2015 price $27.14) to their January 8, 2015 letter. 

SpringOwl found the FrontFour / OMG agreement on March 23, 2015 encouraging based on the public comment by Joe Scaminace, Chairman and Chief Executive Officer of OMG, who stated that day that:

"We have had constructive conversations with FrontFour over the past several months about our strategy and Board composition, and are pleased to have reached an agreement resulting in strong candidates as director nominees.  These individuals will further strengthen our Board with their experience and perspective and will contribute to our ongoing efforts to strengthen OM Group and create sustainable, long-term value for all shareholders." 

We had every reason to believe that OMG would be working with FrontFour to help achieve the $59 implied share price calculated by FrontFour.  Based on this belief, SpringOwl purchased additional OMG stock.

SpringOwl felt that FrontFour's price target was highly feasible based on their Key Modeling Assumptions:

  • $250 million share repurchase program @ $33.00 to be completed in 2015
  • $50 million of run-rate cost savings realized by 2016; $15 million recognized in 2015 with remainder in 2016
  • $30 million of cash costs incurred to implement restructuring
  • Working capital reduction of $30 million realized through 2016
  • Valuation multiple of 8.5x EBITDA which represents midpoint of estimated target range
  • Corporate tax rate of 25%
  • Capital expenditures at 4% of sales

We would note that the $30 million to $40 million cost saving plan adopted by OMG subsequent to the FrontFour letter was similar to the program outlined by FrontFour (quote from Joseph Scaminace from the OMG April 30, 2015 earnings conference call -- "we remain on track to deliver our goal of annualized savings of $30 million to $40 million by the end of 2017.")

Circumvention of the FrontFour Agreement

We were shocked and extremely disappointed to read at 8:00AM on June 1, 2015 the announcement of the Apollo Led Buyout.  The release came literally hours before the beginning of OMG's Annual Meeting and the shareholder vote to admit the three new independent directors, which had been agreed upon in writing by OMG on March 23, 2015. 

The timing of the OMG/Apollo agreement deprived the three to-be-elected new independent directors of the right to review and vote on the merger agreement.  On May 31, 2015, only one day prior to the election of the FrontFour Board candidates, the old OMG Board discussed the terms of the proposed Merger Agreement and engaged in a discussion regarding the risks and challenges to OMG in executing its strategic plan if it remained independent, including the likelihood of success and timing of realizing positive returns from certain repositioning activities, and the risks and challenges of other potential strategic initiatives.  Based on the March 23, 2015 agreement between OMG and FrontFour, a discussion of this materiality should have been undertaken only by the newly elected OMG Board including the FrontFour directors who could, according to Joe Scaminace on March 23, 2015, "contribute to our ongoing efforts to strengthen OM Group and create sustainable, long-term value for all shareholders".  SpringOwl believes that all shareholders were deprived of a fair review of the Apollo Led Buyout by this preemptive action.

Unknown to FrontFour and all OMG shareholders, by March 23, 2015, OMG was already eight months into a sale process of the Company.  It is customary when admitting new Board members that such new Directors execute a confidentiality agreement prior to being seated so they can be up-to-date on corporate activities and the upcoming Board agenda when attending their first meeting.  For reasons that are now obvious, OMG probably delayed the FrontFour representatives from executing a confidentiality agreement prior to June 1, 2015.  Additionally, on February 18, 2015, one month prior to its agreement with FrontFour, OMG had provided a draft Merger Agreement for the Apollo Led Buyout.  One has to seriously question the integrity of OMG management and Board based on the conflict between their public comments and private actions. 

SpringOwl Viewpoint

After OMG's April 30, 2015 earnings conference call, we were encouraged by the prospects of a company focusing on growth and improving operations that would achieve a much higher value in coming years.    For example, during the April call management said:

"Beginning next quarter and beyond, we expect increasing profitability driven by the benefits of our cost optimization actions, typical seasonality and positive contributions from our growth and operations initiatives. Accordingly, we're reaffirming our full year forecast of $105 million to $115 million of adjusted EBITDA for 2015. 

In February, we announced and began a program of decisive enterprise-wide opportunities to improve our competitiveness and performance. These actions are underway and are expected to improve our ability to serve customers, better compete in global markets, and deliver stronger financial performance. We made progress on a number of these initiatives during the quarter, which I will discuss in more detail on the next slide."

Instead, this upside is being purchased at a discount by the Apollo Led Buyout and management.  Joe Scaminace, the CEO, has had a ten-year tenure which has resulted in nearly zero shareholder value creation. After the brief FrontFour activist campaign that barely lifted the stock from deserved lows, he and the Board decided to sell the Company to Apollo the day before the new Board was to be elected.  SpringOwl believes there is there is an inherent conflict of interest when a management team leads a sale to a private equity firm.

We are using this schematic for valuation (Note: We are ignoring corporate costs because we feel they would likely almost all go away—see comments on the Platform deal "synergies" below—if the Company were sold to one or more strategic buyers.):

       Apollo Math ($millions)            

2014 EBITDA


Price


Multiple

Electronic Chemical/Photomasks  

$28.0


$365.0


   13.04x

Advanced Organics                         

$19.4


$204.0


  10.52x

      Total                                                 

$47.4


$569.0


  12.01x







Battery Technologies                   

$36.2


$355.1


9.81x

Total ex-VAC                                     

$83.6


$924.2


11.05x







Total Price                                           



$1,030.2



Implied VAC Value               

$62.4


$106.0


1.70x

In other words, Apollo pays shareholders $34 per share, and then sells off the Chemicals/Photomasks and Organics businesses at what looks like a very healthy multiple to Platform—who then says there is $20mm in savings on top of the $28mm of trailing EBITDA that OMG was earning in that segment.

We then value the Company by using a 10.5x multiple for the Chemical Business that is staying with OMG and a 9.8x multiple of current year EBITDA for a high quality Battery Technologies business.  SpringOwl believes a 9.8x multiple is a conservative valuation based on that business's growth prospects as reinforced by management's comments on their April conference call, noting that:

"Also during the [first] quarter, we broke ground on our Lithium-Ion Center of Excellence in our Battery Technologies business. As lithium-ion continues to be a growth platform across the defense, aerospace and medical battery markets, our investment will keep us at the forefront of this technology."

That leaves Apollo essentially paying 1.7x current year EBITDA for the core VAC Magnetics business on an EBITDA forecast which is 40% below what OMG thought they would generate when they bought VAC in 2011.  SpringOwl's analysis determined that the VAC Business has a value much greater than 1.7x since we believed management was making great progress in improving its competitiveness and performance, based on comments by management on  their April conference call:

"In Magnetic Technologies, we initiated our discussions with the works council. This involved numerous meetings with VAC employees, where we presented our proposals for change. This is the typical process in Germany and while time-consuming, will enable us to achieve our ultimate goals to improve competitiveness and performance."

Our obvious conclusion is that this is a poor deal for shareholders since by management's own statements, there is great potential leading up to "the end of 2017".  The present value of a new CEO running this Company properly and getting the benefit of a better European economy sometime in the next three years exceeds a $34 per share number by at least 30% in our estimation. 

SpringOwl continued to believe in a long term higher value for OMG based on further comments by management on the April conference call:

"Turning now to slide four, we're making good progress on our competitive repositioning and cost optimization program. This is a primary focus for us in 2015. Actions taken in the quarter are expected to deliver annualized savings of approximately $3 million, primarily in our Specialty Chemicals segment and we remain on track to deliver our goal of annualized savings of $30 million to $40 million by the end of 2017."

Apollo Led Buyout Leverage

In connection with the Apollo Led Buyout, Apollo has funding commitments of $650 million from third party lenders and an additional $125 million from Platform (total Apollo financing $775 million).  Platform has funding commitments to borrow $375 million.  Total planned borrowings for the OMG acquisition are $1.025 billion (we are netting out the $125 million loan from Platform to Apollo), representing the entire purchase price of the Apollo Led Buyout.  All of the assets of OMG are pledged as collateral. 

We are shocked that this acceptance of approximately 100% leverage post-deal follows OMG's rejection of the recommendation by FrontFour and other shareholders to prudently use leverage to enhance ROE and capital allocation. 

Discounted Cash Flow Analysis

Deutsche Bank performed a discounted cash flow analysis to determine a range of implied present values per share of OMG common stock. Deutsche Bank applied discount rates ranging from 11.0% to 13.0% to estimates of the future unlevered free cash flows of OMG through 2019, calculated based upon information provided by OMG management and to a range of estimated terminal values of OMG at the end of such period.  For our valuation analysis, we used "The Revised Five Year Projections" which management "provided to the Board during its consideration of the merger".   For purposes of its financial analyses, Deutsche Bank calculated unlevered free cash flow (based on a table on page 55 of the Company's recently filed Preliminary Proxy Statement (the "Proxy") – below. 




















Revised Five Year Projections


2015


2016


2017


2018


2019

Net Sales

$

922


$

971


$

1,030


$

1,087


$

1,146

Adjusted EBITDA

$

106


$

131


$

155


$

177


$

198

Capital Expenditures

$

48


$

43


$

39


$

42


$

44

Unlevered Free Cash Flow(1)

$

31


$

44


$

73


$

95


$

112

Deutsche Bank calculated the terminal value by applying multiples ranging from 8.0x to 10.0x to OMG management estimates of 2019 pension-adjusted EBITDA.  Deutsche Bank then subtracted OMG's estimated net debt and unfunded pension and post-employment benefit obligations as of March 31, 2015 and divided the result by the number of fully diluted shares of OMG common stock outstanding using the treasury method. This analysis resulted in a range of implied present values of OMG common stock as of March 31, 2015 of approximately $31.25 to $41.75 per share.

The 11% discount rate is the most appropriate since it the same as OMG's weighted average cost of capital (WACC) of 11.1% (Bloomberg calculation).   Under this Deutsche Bank scenario, SpringOwl believes a fair value for OMG is $41.75, or 23% higher than the $34 per share offer

The value of OMG to Apollo is actually closer to $65 per share due to the favorable financing secured for the transaction.  The Apollo Led Buyout will be financing 100% of the purchase of OMG, based on the description of the Apollo Loan Facilities (pages 71 and 72 of the Proxy).  The secured and guaranteed debt we estimate would have an 8% coupon.   A DCF of "The Revised Five Year Projections" using an 8% discount rate yields a value of $65.84 per share

Comparable Trading Multiples

The Proxy contains an OMG valuation based on "Comparable Trading Multiples", as follows:

"BNP Paribas performed a comparable company analysis, which attempts to provide a range of implied equity values per share for OM Group common stock by comparing the Company to similar companies that are publicly traded. Using publicly available information, BNP Paribas compared selected financial data of the Company with similar data for selected publicly traded companies engaged in businesses which BNP Paribas judged to be comparable to the Company's businesses or aspects thereof in the U.S. and EU engineered materials sector, specialty chemicals sector and battery sector." 

"Based upon these judgments, BNP Paribas selected a reference range of multiples of 7.0x - 9.0x and applied such range to the Company's EBITDA for CY15E to calculate the Company's equity value per share.  This analysis indicated the following ranges of implied equity values per share for the Company:







Implied Equity
Value Per Share

EBITDA for CY15E based on management forecast


$

24.37-$31.15

EBITDA for CY15E based on street forecast


$

22.79-$29.17

BNP Paribas' work is in sharp contrast to the valuation of comparable companies by ISS and of OMG's own comparable companies that they submitted to ISS. 

ISS-based comparable companies (including shared comps) have an EV/EBITDA of 13.9x, while the EV/EBITDA of the comparable companies (again including shared comps) provided to ISS by OMG is 11.1x.  Staying with BNP Paribas' valuation methodology but using an average of the ISS and OMG comparable company valuations (12.5x) derives a value for OMG of $43.73.  Using that multiple on OMG's 2016 estimated EBITDA derives a value of $54 per share. 

Fantasy of Shopping the Transaction

SpringOwl believes that this transaction was not adequately shopped to provide an optimal return to shareholders.  Our above valuation for OMG of over 30% more than the Apollo Led Buyout is based on both a Sum-of-the-Parts and Comparable Company valuation which derives the highest and best value of the Company. 

Our view is not unique, since it is also shared by BNP Paribas, OMG's financial advisor.  On November 11, 2014, BNP Paribas advised the OMG Board that the best value for OMG would be obtained by selling to multiple buyers.  BNP Paribas noted their

"belief after discussions with Management that no single strategic party acting alone would be likely to have an interest in an acquisition of the entire Company due to the complexity of the Company's businesses." (page 24 Proxy) 

While OMG's own financial advisor felt no single buyer would be interested in buying all of the Company, the Board continued on its value-destructive course by specifically limiting bids to single buyers.  While the Proxy describes in detail a narrow shopping process, it never notes why the Board did not take the advice of its own financial advisor in order to maximize shareholder value.  The Proxy notes that:

"the Board authorized Management to request BNP Paribas to contact additional financial parties to gauge market interest in a potential transaction involving the sale of the entire Company. In order to maintain confidentiality, the Board indicated that the outreach efforts were to be limited to financial third parties reasonably likely to be interested in a potential transaction involving the sale of the entire Company". 

It is important to note that the Company specifically excluded potential strategic buyers, which tend to pay more than financial buyers.  It is beyond reason that OMG felt that their sale process was so unique that strategic buyers could not be trusted with confidential information, which is routine in multiple other M&A situations. 

OMG reports in the Proxy that its sale process began:

"on August 12, 2014, when the Company received a call from a financial advisor representing Platform, indicating Platform's interest in discussing a transaction involving the Company's electronic chemicals business.  During this discussion, the Company indicated that it was not interested in pursuing a sale of only the electronic chemicals business. The financial advisor representing Platform indicated that if the Company was unwilling to sell only the electronic chemicals business in a separate transaction, then an unidentified financial sponsor would likely be submitting a written indication of interest to purchase all of the outstanding OM Group common stock." (page 23 Proxy)

It is important to note that the Company does not indicate that management met with its Board or hired financial advisors at the time of the Platform offer on August 12, 2014 to evaluate the offer or to determine the best route to maximize shareholder value.  Instead, the Company rejected any consideration of the overture, apparently without any professional consultation.  We do not know why the Board pursued a process which excluded a possible path to maximize shareholder value.  Nowhere does the Proxy note the Board's view of how to maximize shareholder value. 

Since their initial approach to OMG, Platform is paying Apollo as part of its Apollo Led Buyout a very full 13x 2014 EBITDA price of $365 million for the Company's electronic chemicals business.  This full price for one single business provides a strong indication that a patient sale of OMG's businesses would derive a greater value than the $34 per share offered by the Apollo Led Buyout.  Again, both SpringOwl and BNP Paribas believe that the maximum value for OMG would be derived from a sale of the individual business units.

Today, July 6, 2015, the OMG press release reported that:

"During the "go shop" period, the Company engaged in an active and extensive solicitation of 49 potentially interested parties (including 21 potential strategic buyers and 28 potential financial buyers), which resulted in five parties engaging in informal discussions with the Company or its advisors, and three parties negotiating and entering into confidentiality agreements with the Company and being provided information."

The go-shop process was not open enough for us to determine whether OMG allowed its financial advisors to consider offers other than for the complete company.  It is encouraging to read in the OMG press release that "the Company may continue to negotiate following the end of the "go-shop" period."

OMG has not formed a special committee on its Board to review these proposals nor have they revealed the terms and conditions of any counter offers to the Apollo Led Buyout; however "The Company's Board of Directors continues to recommend that the Company's shareholders adopt the Merger Agreement."

Insufficient & Restrictive Go-Shop Period

The go-shop period was both too short and too restrictive.  The go-shop period was a brief 35 calendar days which ended on July 5, 2015, a period including the Independence Day holiday weekend.  While BNP Paribas and Deutsche Bank contacted a total of 48 parties (including 20 potential strategic buyers and 28 potential financial buyers), considering the short time period, the most logical buyers are Parties A through F due to their familiarity with OMG. 

However, the breakup fee for concluding a deal with a party contacted prior to the go-shop period is $36.575 million or $1.22 per share.  This fee drops to $18.3 million for other parties.  In other words, buyers who have real knowledge of OMG and would be the most prepared to make a realistic offer during the short go-shop period are required to pay a termination fee DOUBLE that of a novice buyer.  From the short go-shop window to penalizing the most capable buyers, it does not appear that OMG is truly seeking a higher and better offer. 

Despite these constraints, on July 6, 2015, an OMG press release noted that "Prior to the expiration of the "go-shop" period, the Company's Board of Directors received a written "company takeover proposal"."  SpringOwl strongly recommends that the OMG Board form a special committee to fully review this "company takeover proposal" and retract its comment that "The Company's Board of Directors continues to recommend that the Company's shareholders adopt the Merger Agreement" until the process can be fully evaluated. 

Executive Compensation

The top five executives of OMG are being paid exceptionally well at the closing of the merger, in SpringOwl's opinion.  Joseph Scaminace will receive under the Golden Parachute Compensation arrangement total consideration of $15 million.  Additionally, he will receive 30,400 Share Units that will vest at the merger, 82 Dividend Equivalent Rights and 163,234 options that will vest at merger at a weighted average exercise price of $29.64 (valued at $712,285).   

On April 30, 2015, representatives of BNP Paribas and Deutsche Bank engaged in further discussions with representatives of Apollo and Platform. During these discussions and at the direction of the Board, representatives of BNP Paribas and Deutsche Bank informed Apollo and Platform that the Board was willing to pursue a transaction at $35.00 per share. Representatives of Apollo and Platform indicated that they were not willing to pay $35.00.   One possible reason for this refusal was that the Apollo Led Buyout was already paying Joseph Scaminace $0.50 per share in Golden Parachute Compensation, and the top five executive officers a total of $27.6 million.  Together the top five executives are being paid $0.92 per share or about 3% of the entire transaction.  This does not include the automatic vesting of over 358,000 options with a cash consideration value of almost $2 million to these top five executive officers. 

Deutsche Bank Conflict

On December 31, 2014, OM Group engaged Deutsche Bank to provide advisory and investment banking services to the non-executive members of the Board in connection with their exploration of strategic alternatives. In considering this engagement, OM Group was informed that Deutsche Bank and its affiliates had an ongoing relationship with Apollo and its affiliated funds and had received significant fees from Apollo and its affiliates for a variety of investment and commercial banking services over the prior three years. The Company nevertheless engaged Deutsche Bank to act as a financial advisor to the non-executive members of the Board.  

Summary

We believe that the proposed acquisition by OMG for aggregate consideration of $34 per share substantially undervalues the Company and represents a woefully inadequate price.  We are acutely disappointed that the Board of Directors is willing to throw in the towel on the significant upside inherent in the Company's assets.

As committed investors, we have been highly confident in our respective investments in anticipation of market share gains as often articulated by management.  Furthermore, we believe the price offered by the Apollo Led Buyout could be justified for only part of OMG, leaving the long awaited fruition of shareholder's time and capital investment in its improving markets to the purchasers "for free".  In short, the timing could not be more unjust. 

To add insult to injury, it appears to us that the Board did not run anything resembling a robust sale process, seemingly in violation, or at least in disregard, of its Revlon duties to shareholders under Delaware law to seek the best price available.

In reading the Company's recently filed Preliminary Proxy Statement (filed after the market close on Friday, June 26, 2015), we have the following observations:

  • Outside of an abbreviated and narrow process, the Company did not undertake any effort to market itself nor did the financial advisors of OMG seek out potential buyers.
  • OMG only met with financial buyers of the whole Company, eliminating the prospect of higher and better offers from a sale of business segments or a sale to a strategic buyer.
  • No Special Committee was formed to shop the Company or evaluate offers.
  • The financial advisor had a conflict of interest.
  • Platform notes that it "sees synergy opportunities greater than $20 million over the next two years" for a business that generates $28 million in EBITDA. The upside value anticipated by Platform should be accruing to OMG shareholders.
  • The go-shop topping fee penalizes potential buyers with prior working knowledge of OMG.
  • During the go-shop period one written "company takeover proposal" was received. The terms of this proposal have not been revealed to the shareholders, but the Company's Board continues to recommend that shareholders adopt the Apollo Led Buyout.

Appallingly, OMG's Board, at the behest of management, seems to have sought to justify what appears to be its indefensible approval of the Apollo Led Buyout by simultaneously reducing earnings guidance for the period 2015 through 2019 (the "Revised Five Year Projections").  In light of commentary by management as recently as their April 30, 2015 earnings call or in connection with the March 23, 2015 agreement with FrontFour and in other public forums, we are left wondering where the truth lies. 

Given the interest of a "smart money", sophisticated and highly-regarded distressed asset investor like Apollo in backing the Apollo Led Buyout, notwithstanding the Revised Five Year Projections and a non-transparent rejection of a new offer received during the go-shop period, we are left to wonder whether the Board is living up to the Duty of Candor which it owes to the public shareholders of OMG.

In short, we cannot help concluding that the Board has forsaken its duties to maximize value for and to be candid with OMG shareholders.  We believe that, ultimately, the value of the highly strategic assets of the Company is far in excess of the proposed deal price.  We believe that shareholders should be seeking to be paid appropriate value for the OMG shares OR should demand that the Company continue in its current "public" state so that shareholders – many of whom have endured significant volatility in the value of their holdings through a period of regulatory uncertainty – are able to benefit from the patience they have shown as the Company seeks to "turn the corner" on this regulatory uncertainty.

We believe that if the management simply continued on the Company's current course, OMG shareholders would be better off on a stand-alone basis than we would be if we were to accept the terms of the Apollo Led Buyout.  The OMG "Revised Five Year Projections" assumes EBITDA in 2016 of $131 million.  Utilizing BNP Paribas' comparable trading valuation methodology and the average of comparable multiples from ISS and OMG's comparable companies submitted to ISS we derive a value for OMG in 2016 of $54 per share.  SpringOwl believes that greater shareholder value would be derived from OMG remaining an operating company.

That said, we remain open to a sale of the Company at a price which reflects its true long term value.

The [Lack of] Process Leading the Agreement for the Apollo Led Buyout

A below-fair-value deal price is tough to swallow in any context, but it is a particularly bitter pill when it has resulted from a sale process that appears not only to have not been exhaustive, but in actuality was limited to only financial buyers who are willing to buy the entire company.  This seeming abdication of the Board's duty to maximize value for OMG's shareholders through a competitive sale process raises significant questions about the motivations of the Board and management.  Specifically, given management's proposed ongoing role in the Company post-transaction, was the process designed for the benefit of OMG's shareholders or for the benefit of OMG's management? 

In our experience, providing a would-be acquirer an almost-exclusive opportunity to bid on your company, failing to conduct a meaningful sale process and ultimately signing a merger agreement with meager provisions to maximize value for shareholders (including the lack of a meaningful "Go Shop" provision (and recommending against a written offer received during the go-shop period) are likely indications that incentives of the Board are misaligned with those of the shareholders.  One need look no further than the extraordinarily large payout to the five top executives of OMG (noted above). 

Even more egregious, even though Mr. Scaminace is slated to continue to run the Company following the Apollo Led Buyout, he appears to be double-dipping with the transaction.  In addition to ongoing compensation following the proposed transaction, he will become eligible for a "single trigger change of control" bonus upon consummation of the Apollo Led Buyout.  Mr. Scaminace stands to realize, by our account, a windfall payment of up to approximately $16 million (upon the closing of the Apollo Led Buyout).[1]  Collectively, the Company's officers are slated to receive up to approximately $27 million in change of control payments[2] – we wonder if the Board views this as unseemly as we do, given the ten years of decidedly subpar stock price performance that OMG shareholders have endured. 

It is not hard to imagine the incentives that pushed Mr. Scaminace, with the Board's apparently unwavering support, towards accepting this transaction with a "smart money" buyer without bothering to conduct a market check.  Shareholders, however, do not receive the same special benefits, and we cannot help wondering whether Mr. Scaminace's (and the rest of management's) interests were put ahead of those of the Company's shareholders.

OMG Could Stay Public and Shareholders Would be Better Off

We, and many other shareholders, have viewed OMG as an underperforming company with substantial upside opportunity and highly valuable assets.  Apollo clearly agrees with at least part of this assessment.  Given that OMG is a public company with access (at some price) to the capital markets, these opportunities do not require a financial partner with Apollo's presumably high-cost capital to execute.  More important than any outside partnership, we believe that OMG would greatly benefit from increased independent voices in its Boardroom, so that the Board could refocus on seeking to maximize shareholder value for the long term.

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Shareholders Should Demand that Apollo Pay a Fair Price or Should Vote "AGAINST" All Proposals and Allow a Maximization of Long-Term Value of Our Shares

We believe the Apollo Led Buyout woefully shortchanges OMG shareholders.  Although we believe that OMG has the potential to thrive as a continuing public company, we would support a sale of the Company at a fair price, but believe that any transaction with Apollo must provide adequate consideration for the holders of OMG common stock.  We note that there appears to have been a significant turnover in the shareholder base since the announcement of the Apollo Led Buyout, with an average of 700,000 more shares trading per day (average daily volume 1,706,207 since June 1, 2015) versus an average daily volume of 1,052,335 shares from January 2, 2015 to May 29, 2015.  We further note that the stock has, for the most part, traded above or approximately at the proposed transaction price.  Fortunately, given the apparently wide dispersal of the Company's common stock, the ultimate approval by shareholders is by no means assured.  

We greatly regret that you, fiduciaries on our behalf, appear to have entered into a transaction without doing the work which we believe would be required to seek to maximize value for all OMG shareholders.  We also greatly regret that the Board continues to recommend that shareholders adopt the Apollo Led Buyout while the Company may continue to negotiate with a potential buyer.  As things stand now, we cannot support the Apollo Led Buyout and intend to vote "AGAINST".

Sincerely,

SpringOwl Asset Management LLC

/S/ Andrew Wallach, Co-CEO

SOURCE SpringOwl Asset Management LLC