Stuart Olson Value Committee Delivers Letter to Stuart Olson Board of Directors
The Stuart Olson Value Committee, comprised of Crescendo Partners L.P. and Jamarant Capital L.P., announced that it delivered a letter to the Board of Directors of Stuart Olson Inc. (TSX: SOX, SOX.DB.A) today.
The full text of the letter can be viewed below:
January 11, 2019
Members of the Board of Directors
c/o Albrecht Bellstedt, B.A., J.D., Q.C. Chairman
Stuart Olson Inc.
600, 4820 Richard Road SW
Calgary, Alberta T3E 6L1
Dear Board Members,
Crescendo Partners L.P. ("Crescendo") and Jamarant Capital L.P. ("Jamarant"), collectively the "Stuart Olson Value Committee", ("We") or the ("Committee") have been shareholders of Stuart Olson Inc. ("Company") since 2010. We initially sent a letter to the Company on October 12, 2018 and requested a private meeting with Albrecht Bellstedt, the Chairman of the Board, and other independent board members. We requested this meeting because we believed, and continue to believe, that Stuart Olson is trading at a significant discount to its intrinsic value and we wanted to share our thoughts on ways in which this value gap may be closed.
During the past couple of months we have had several conversations with representatives of the Board during which time we have expressed our strong belief that the safest, quickest and best path forward was the public announcement that Stuart Olson was commencing a strategic review of alternatives available to the Company. We believe the optimal conclusion would ultimately be a sale of the Company to either a strategic or a financial buyer. We also conveyed our view that an acceptable alternative to the public announcement of a strategic review process included expanding the Board to include a representative of the Stuart Olson Value Committee. Unfortunately, after several meetings, we were not able to reach an acceptable resolution with the Company and we believe that it is best to publicly disclose our historical conversations with the Company as well as to inform the public of our future plans. We currently intend to nominate one or more directors at the 2019 Annual General Meeting (AGM) pursuant to the Advance Notice By-Law of the Corporation (By-Law No. 2).
The Committee members have significant knowledge and experience working and investing in the engineering and construction industry. Crescendo Partners, a New York based investment management company, has a well-established history of investment success in Canada and the United States, gaining representation on over 25 boards since 1998. Jamarant Capital, also based in New York, was founded three years ago by two Crescendo principals that have been on more than 15 public company boards. In the engineering and construction industry, Crescendo and/or Jamarant have held board representation at Primoris Services Corp, Aecon Group Inc. and Hill International. In addition, we were active in encouraging a sale of Michael Baker International, which was ultimately sold at a premium of over 100%.
We have been investors in Stuart Olson because of its unique focus on the Canadian market, its strong potential free cash flow generation and because of the undervaluation of the stock compared to our estimate of its intrinsic value. Stuart Olson trades not only at a discount to our calculated intrinsic value but also at a discount to its peers. Although we believe that Stuart Olson's discounted public market valuation does not accurately reflect the Company's true value, we have grown disillusioned with management and the Board's ability to close the valuation gap as a publicly traded company based on continued operating performance missteps coupled with continued stock underperformance. For example, the stock performance for the past 1-year, 3-year and 5-year periods (for the period ending 1/10/19) has been terrible at -36.2%, -6.1% and -44.6%. This is compared to the broader TSX Index which has returned -8.5%, +21.0% and +8.9%, respectively.
Currently, comparable public companies trade at 7.1x LTM EBITDA, while Stuart Olson currently trades at only 5.5x LTM EBITDA. Based on our knowledge of the current M&A environment in the E&C industry, we believe Stuart Olson is worth approximately $9.70 per share to a third-party acquirer, implying a ~92% premium to the current share price.
To maximize shareholder value and close the valuation gap, we strongly encourage the Board, in accordance with its fiduciary responsibility, to look at strategic alternatives, specifically a sale of the Company via a competitive auction process. We believe that since Stuart Olson trades at a considerable discount to prices that potential buyers would likely be willing to acquire the company for, both strategic and financial buyers will be interested in acquiring the Company at a significant premium to the current stock price. We believe that now is the best time to explore strategic alternatives for several reasons:
-- Low Interest Rate Environment: Although interest rates in the U.S. and Canada have increased from their historical lows in the past 18 months, they continue to be at extremely low absolute levels enabling potential buyers to effectively finance acquisitions on an accretive basis. The ability of a buyer to pay up for Stuart Olson's assets is directly related to its ability to finance the purchase and the board should not let this window of opportunity continue to slip by.
-- Time Value of Money: Our estimate of intrinsic value specifies an acquisition price of $9.70, which is a 92% premium to January 10, 2019's closing price of $5.04. Factoring in the time value of money and execution risk, the Board would need to be highly confident the stock will reach north of $13.60 per share within three years (at a 12% discount rate) to justify not pursuing a sale of the company. At a 20.0x P/E multiple, this would imply EPS of above $0.68, an EPS number that has not been attained in the past five years. Although we understand that a sale process represents an emotional decision, the Board needs to remember that a sale is simply a rational and analytical decision to maximize value and minimize risk for the true owners of the Company, the shareholders.
-- Optimal Time to Sell is when the Prospects of Increased Pipeline and Infrastructure Work is Greatest: Canada continues to move forward with large infrastructure spending plans including $180 billion proposed over 10 years by the existing Liberal government. In addition, Alberta announced that it will spend north of $25 billion in infrastructure over the next five years. While the prospects for the Canadian and Provincial infrastructure markets continue to be very positive, we are not confident that the Company will be able to capitalize on these tailwinds. Therefore, we believe that it is best to "sell the sizzle" that these potential projects provide to Stuart Olson. As investors with significant experience in the engineering and construction industry, we believe the list of well-qualified and well-funded buyers interested in acquiring Stuart Olson, so they can participate in this infrastructure growth, would be long.
In conclusion, we believe that Stuart Olson has a unique opportunity to sell itself at a very attractive valuation. To accomplish this, the Board needs to act decisively and with a sense of urgency given the factors discussed herein. As such, we urge the Board to do the right thing and implement the necessary steps to maximize value for all shareholders. We believe that both strategic and financial buyers would be interested in the Stuart Olson platform. Stuart Olson is one of the few assets that would be extremely interesting to someone that would like to enter the Canadian market as it is one of the larger construction management companies in Canada and it is exclusively comprised of Canadian business. It has strong exposure to Canadian Infrastructure spending as well as exposure to capital expenditures in the oil sands. We strongly recommend that the Board of Stuart Olson publicly announce the commencement of a thorough review of strategic alternatives immediately.
Managing Member, Jamarant Capital
David D. Sgro
Managing Member, Jamarant Capital
For Investor Questions:
Eric Rosenfeld, (212) 319-7676
About Crescendo Partners L.P.
Crescendo Partners is a value-oriented, activist firm focused on small cap companies in North America, with an emphasis on Canada. The firm was founded in 1998 by Eric Rosenfeld. Prior to founding the firm, Eric ran the risk arbitrage department at Oppenheimer & Co. for fourteen years. The firm seeks to buy companies at a deep discount to their estimated intrinsic value, and work with management and boards of directors on strategic, operational, financial, and governance initiatives to unlock shareholder value. Crescendo believes the Canadian market offers a unique opportunity for its style of investing. The combination of a smaller, underfollowed market, with a shareholder friendly legal environment, provides for abundant investment opportunities.
About Jamarant Capital L.P.
Jamarant Capital is an activist and event driven, long-biased investment partnership. The firm manages a concentrated portfolio of U.S. and Canadian listed small-cap stocks, and takes a long-term approach to investing, which provides the benefit of time arbitrage as well as tax efficiency. Jamarant primarily invests in companies in the consumer staples, consumer discretionary, technology and industrial sectors.
LTM Adjusted EBITDA of $40.4 calculated from Stuart Olson press releases and treating convertible debt as debt