In a filing with the Securities and Exchange Commission, FrontFour Capital has disclosed a presentation titled “Change is Needed at OM Group – A Path to Value Creation” aimed towards directing the attention of the shareholders of OM Group, Inc. (NYSE:OMG) to the company’s underperformance. In addition, FrontFour reported holding around 1.79 million shares of the company, equal to 5.9% of its common stock, and slightly up from 1.76 million shares reported in an earlier filing.
FrontFour is a value-oriented activist hedge fund that is managed by Stephen Loukas, David A. Lorber, and Zachary George. Similar to the majority of activist investors, FrontFour is focused on identifying companies with good business models but where a company’s management and board of directors are not focused on the best interests of all shareholders. Therefore, FrontFour engages in constructive dialogue regarding that company’s outlook and strategic plans. One of the other companies in which the fund has been involved is North American Energy Partners Inc. (USA) (NYSE:NOA). With a holding of 3.57 million shares, which represent close to 10% of the company’s outstanding stock, FrontFour has previously had discussions with the company’s board and senior management regarding the underperformance of the stock, which it believed was trading below the company’s intrinsic value. Nevertheless, despite FrontFour’s activism, the stock of North American Energy Partners lost over 50% in the last six months.
OM Group, Inc. (NYSE:OMG) is the largest long position in FrontFour’s equity portfolio and has been since the fourth quarter of 2014, when the fund upped its stake by more than 400% and went activist on the company. Earlier in January, the investor issued a letter that was sent to Joseph M. Scaminace, Chairman of the Board and CEO of OM Group. In the letter, FrontFour expressed concerns with the company’s performance and the destruction of shareholder value. Additionally, the fund came up with some strategies that according to its estimates, could take the stock to $60 per share.
FrontFour might have a point. The stock of the producer of high-performance magnetic materials dropped by 6% over the last 52 weeks, amid high volatility. The company has also reported top and bottom line declines in the last several quarters. Additionally, in its presentation, FrontFour stated that OM Group, Inc. (NYSE:OMG) has underperformed its self-defined peer group by an abysmal 458% since the appointment of current CEO Scaminace in June, 2005. FrontFour also considers that OM Group has issues with its working capital management and value destructive M&A strategy, citing that the company has spent $1.5 billion on acquisitions whose enterprise value has dropped to around $750 million at the beginning of January (when FrontFour disclosed going activist). Among other things, the investor has addressed excessive executive management compensation and poor track record and weak corporate governance of the OM Group, Inc. (NYSE:OMG)’s board of directors.
To address these issues, FrontFour came up with several strategies aimed towards maximization of OM Group, Inc. (NYSE:OMG)’s shareholder value. As it has been disclosed in the letter, the investor still suggests that the company can pursue some opportunities in value creation through cost cuttings of at least $50 million, the release of $30 million in working capital, and a buyback plan worth $250 million. Additionally, FrontFour considers that its nominees to the board of directors, which include David A. Lorber, Thomas R. Miklich, and Allen A. Spizzo, possess the required skill-set and experience to address the issues faced by OM Group.
The presentation with detailed explanation of FrontFour’s suggestions can be accessed below:
Change is Needed at OM Group – A Path to Value Creation:
As it has been mentioned above, OM Group, Inc. (NYSE:OMG) represented the largest long position in terms of value in FrontFour’s equity portfolio at the end of 2014. Additionally, the fund also held 1.43 million shares of Diamond Resorts International Inc (NYSE:DRII), the $39.84 million stake being the second-largest in the fund’s equity portfolio. The stock of the resorts operator gained 80% in the last 52 weeks as the company’s revenue surged to $845 million in 2014 from $730 million a year earlier and it turned to a profit of $0.77 per diluted share from a loss of $0.04. Diamond Resorts International Inc (NYSE:DRII), which has a market cap of $2.6 billion, also has billionaires Ken Griffin and Israel Englander among its shareholders. At the end of 2014, Griffin’s Citadel Investment Group held 704,300 shares and Englander’s Millennium Management owned 577,500 shares of Diamond Resorts International Inc (NYSE:DRII), both positions being slightly increased during the last three months of 2014.
In addition, FrontFour disclosed a $36.06 million stake in Innophos Holdings, Inc. (NASDAQ:IPHS), which represented the third-largest holding in the fund’s equity portfolio. The investor trimmed its stake by 3% on the quarter to just under 617,000 shares. FrontFour first disclosed holding 98,100 shares of the specialty grade phosphate products company at the end of March, 2014. Since then, the stock has remained almost flat, but FrontFour has been bullish throughout 2014 as it significantly increased its exposure to the company. Innophos Holdings, Inc. (NASDAQ:IPHS) posted a 1% annual decrease in revenues for 2014 to $839 million, though EPS grew to $2.91 from $2.21, which however, wasn’t very appreciated by analysts as in the following days after the financial report, Monness Crespi & Hardt and Zacks downgraded the stock to ‘Neutral’ from ‘Buy’ and ‘Outperform’ respectively. Moreover, among other funds that we track, Jim Simons‘ Renaissance Technologies surged its stake in Innophos Holdings, Inc. (NASDAQ:IPHS) by 450% to 200,600 shares and Millennium Management raised its holding by 200% to 183,300 shares, although both positions represent around 0.02% of the equity portfolios of each fund.
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