FrontFour Capital Group, a Greenwich, Connecticut-based fund led by Stephen Loukas, David A. Lorber, and Zachary George, has boosted its position in OM Group, Inc. (NYSE:OMG) and went activist on the company. As a new filing with the Securities and Exchange Commission showed, FrontFour owns over 1.79 million shares of OM Group, up from 268,200 shares held earlier. The stake is equal to 5.8% of the company’s common stock. Moreover, the investor issued a letter sent to Joseph M. Scaminace, Chairman of the Board and CEO of OM Group, in which it expressed concerns with the company’s performance and destruction of shareholder value.
In their letter, FrontFour mentioned that one of its concerns is the fact that the company has missed its financial targets and cut down its revision of EBITDA guidance twice over the course of last year along with the reduction in long term revenue growth estimates. Moreover, the investor stated that OM Group, Inc. (NYSE:OMG) has provided weak returns on capital and keeps pursuing a distructive M&A strategy.
“Additionally, the Company has a bloated cost structure, and is significantly overcapitalized given the Company’s net cash position and the excess cash trapped within working capital. We believe these cumulative factors have caused the Company’s shares to significantly underperform both the broader equity market and its peer group over a sustained period of time,” the letter added.
In addition, the fund stated that the stock of OM Group, Inc. (NYSE:OMG) is significantly undervalued, but there are ways that can fix this situation, such as undertaing some cost-cutting initiatves worth at least $50 million, the release of $30 million in working capital, and a buyback of $250 million. The implementation of this measures could bring the stock to trading at around $60 per share, which is more than double comparing to the current price of the stock.
Regarding OM Group’s M&A strategy, FrontFour stated that it destructed the value of the company, since the company acuired around $1.5 billion in net assets, which is significantly above the current market capitalization of the company, which amounts to around $840 million. The investors considers that the shares are undervalued because shareholders are afraid that OM Group, Inc. (NYSE:OMG)’s cash balances and debt capacity will be used for further destructive acquisitions. Therefore, the company should cease any acquisitions until it can get some new perspectives.
In conclusion, in order to address these and other issues, the investor proposed several measures to be implemented. OM Group should conduct a buyback program and repurchase around $250 million worth of stock at $33 per share in 2015. Regarding cost cutting initiatives, the company should have at least $50 million of run-rate cost savings by 2016, with $15 million recognized over the course of the current year. OM Group should also incur $30 million of cash costs to implement restructuring and reduce its working capital by the same amoung by 2016. In addition, OM Group should have a valuation multiple of 8.5x EBITDA, which represents the midpoint of estimated target range and a corporate tax rate of 25%.
Overall, FrontFour considers that the main problem of OM Group, Inc. (NYSE:OMG) is that it has been undermanaged and there is a potential for unlocking value that would benefit all shareholders. The company needs an improvement in board oversight that will make it well-positioned to execture on its expanding market opportunities. The fund will continue to engage in discussions with the company, but it also mentioned that it might consider nominating its own slate of candidates to the company’s board.
OM Group, Inc. (NYSE:OMG) is a specialy chemical, industrial growth company that operates in four segments: magnetic technologies, advanced materials, specialty chemicals and battery technologies. The stock reacted positively on FrontFour’s latest move as it climbed around 8%. However, over the last 52 weeks, the share price of OM Group dropped by 18%, while the specialty chemicals industry added around 12% over the same period.
Following raising its stake, FrontFour has become one of the largest shareholders of OM Group, Inc. (NYSE:OMG), but other investors also seem to see value in the stock. One of the investors with a great track record, Steven Cohen is also bullish on the company, as his fund Point72 Asset Management raised its stake by 65% during the third quarter of 2014 to 1.08 million shares. On the other hand, Chuck Royce’s Royce & Associates cut its position by 26% to 1.12 million shares.
The full letter is available below:
Disclosure: none
