Lone Star Value Fights For Shareholder Rights And Shareholder Value At SWS
Believes Merger Agreement with Hilltop is a Product of a Deeply Flawed Process Run by SWS Board and Fails to Maximize Value for All Stockholders
Considering All Options to Enhance Value for SWS Stockholders
OLD GREENWICH, Conn., April 7, 2014 /PRNewswire/ -- Lone Star Value Management, LLC (together with its affiliates, "Lone Star Value"), a significant stockholder of SWS Group, Inc. ("SWS" or the "Company") (NYSE: SWS), owning 800,000 shares of the Company, today announced it delivered an open letter to the Board of Directors of SWS (the "Board"). The letter discussed Lone Star Value's conclusion that the merger agreement entered into between SWS and Hilltop Holdings Inc. ("Hilltop"), whereby Hilltop would acquire SWS for $7.88 per share, fails to maximize value for all SWS stockholders. Lone Star Value questioned the Board's deeply flawed process that, for the second time in three years, has seen the Board reject a higher, all-cash offer in favor of an inferior transaction with Hilltop, whose Chairman, Gerald J. Ford, also sits on the SWS Board. Lone Star Value expressed its belief that Hilltop and Oak Hill Capital Management, LLC ("Oak Hill") have leveraged their position as directors, large stockholders and creditors to exercise outsized influence over this process and produce a pre-ordained result that serves their own interests rather than the best interests of all stockholders. Lone Star Value reserved its right to take any and all actions necessary to protect stockholders' interests, including exercising appraisal rights under Delaware law and conducting a consent solicitation to remove all current directors of SWS.
The full text of the letter follows:
April 7, 2014
Board of Directors
SWS Group, Inc.
1201 Elm Street, Suite 3500
Dallas, Texas 75270
Dear Members of the Board:
Lone Star Value Management, LLC (together with its affiliates, "Lone Star Value") is a significant stockholder of SWS Group, Inc. ("SWS" or the "Company") with current ownership of 800,000 shares of SWS. In our prior letter dated January 13, 2014 to the Board of Directors of SWS (the "Board"), we set forth our analysis demonstrating the inadequacy of the initial offer made by Hilltop Holdings Inc. ("Hilltop" or "HTH") to acquire the Company at a price of $7.00 per share and we called upon the Board to undertake a fair and rigorous process to explore all potential strategic alternatives to sell SWS to the highest bidder. By entering into a merger agreement with Hilltop for $7.88 per share (payable 25% in cash and 75% in Hilltop common stock) after failing to run a proper auction process, it is clear that the Board has not fulfilled its fiduciary duty and has failed, for the second time in three years, to obtain maximum value for the long-suffering shareholders of SWS.
In our prior letter, we stated our belief that a financial company like SWS should at least be worth its book value per share, which, as of December 31, 2013, stood at $8.25 on a fully-diluted basis (assuming the exercise of warrants owned by Hilltop and Oak Hill Capital Management, LLC, another related party ("Oak Hill")). In addition, SWS' fully-diluted book value of $8.25 per share does not reflect the additional value expected to come from the operational synergies from this transaction and repeatedly touted by Gerald J. Ford, Chairman of Hilltop (and a director of SWS) – not to mention the balance sheet benefits to be obtained by the retirement of SWS' $100 million in borrowings from Hilltop and Oak Hill, which carry an effective interest rate of 14.9%. In addition to undervaluing SWS, Hilltop's offer is now 75% in stock (up from 50% stock in its original offer) which creates additional risk for SWS shareholders versus an all-cash offer. As evidence that the stock market believes Hilltop is buying SWS for a cheap price, HTH's stock price rose almost $2 per share on January 10, 2014, the date its original offer was proposed -- $2 per share represents an implied value accretion of $180 million to HTH's shareholders due to Mr. Ford's ability to buy SWS for a low price. This value accretion of $180 million implies the stock market believes SWS is worth approximately $10.60 per share to HTH ($7.00 original bid price plus $3.60 per share, obtained by dividing $180 million by SWS' fully-diluted shares outstanding of 50 million). HTH's stock price went up again on April 1, 2014 when its revised offer for SWS was announced.
The SWS Board appears to be either unwilling or incapable of acting in the best interests of SWS stockholders having failed to run an adequate auction process to obtain the highest and best transaction for SWS shareholders for the second time in three years. A review of the Company's press releases and public filings over the past few years reveals a highly troubling pattern of poor decisions by the Board which has severely destroyed value for the long-suffering shareholders of SWS. We believe the following sequence of events at SWS speaks for itself:
11/18/2010 |
Slashes dividend from $0.09 per quarter to $0.01 per quarter
|
12/06/2010 |
Announces a $95mm convertible note offering; stock price falls 25% over three trading days
|
12/08/2010 |
Terminates $95mm convertible note offering
|
3/17/2011 |
Confirms offer from Sterne Agee of $6.25 per share in cash, a 27% premium to the prior day's closing price; Board says it will review the proposal
|
3/18/2011 |
One day later, Board rejects Sterne Agee's offer of $6.25 per share in cash
|
3/21/2011 |
Announces Hilltop/Oak Hill financing transaction consisting of $100mm in debt with an 8% coupon and warrants at an exercise price of $5.75 per share, granting pro forma ownership of 34% to Hilltop/Oak Hill upon exercise
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4/28/2011 |
Board receives a revised offer from Sterne Agee of $7.50 per share in cash, a 52% premium to the stock price on 3/16/2011
|
5/03/2011 |
After only three business days, Board rejects revised Sterne Agee offer of $7.50 per share in cash
|
8/01/2011 |
Completes Hilltop/Oak Hill financing without running an auction to sell SWS to the highest bidder; Hilltop and Oak Hill each get a Board seat |
With these ill-advised and incoherent actions, the Board deprived SWS stockholders of the ability to realize immediate, certain and substantial value for their shares by selling to Sterne Agee for $7.50 per share in cash, instead choosing to engage in a costly and highly dilutive financing transaction that also carried with it the addition of one Board seat each to Hilltop and Oak Hill, thus paving the way for the current low-priced takeover of SWS. We note that had the SWS Board accepted the $7.50 all-cash offer from Stern Agee and SWS shareholders invested that capital into the S&P 500, they would have $12.38 today. Fast forward to the current transaction, the two Hilltop and Oak Hill directors, together with six carryover directors (collectively constituting 80% of the current Board), have once again perpetuated an injustice on the SWS stockholders. Rather than rectify the errors of the past, the SWS Board has compounded them with the following series of confounding events:
1/10/2014 |
Hilltop announces unsolicited proposal to acquire SWS for $7.00 per share (50% cash/50% stock)
|
1/13/2014 |
Lone Star Value issues public letter to the Board, urging formation of special committee and a full and fair strategic alternatives review process; i.e., an auction to sell SWS to the highest bidder
|
2/3/2014 |
Board finally forms special committee
|
2/3-4/1/2014 |
Based on feedback Lone Star Value received from interested bidders, SWS failed to run a genuine auction process and consistently created roadblocks that discouraged interested parties from bidding
|
2/18/2014 |
Confirms receipt of an unsolicited acquisition proposal from Esposito Global for $8.00 per share (100% cash)
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2/27/2014 |
Board amends bylaws to bolster director and officer indemnification protections
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4/1/2014 |
Announces merger agreement with Hilltop at a price of $7.88 per share (25% cash/75% stock) |
We are left with no choice but to seriously question a deeply flawed process that, for the second time in three years, has seen the Board reject a higher, all-cash offer in favor of a transaction favorable to Gerald J. Ford and has seen the Board fail to run a proper auction process. It is apparent to us that any process the Board claims to have undertaken is nothing more than a sham, manipulated by the overriding influence exercised by Hilltop and Oak Hill in their capacity as directors, significant stockholders and creditors, producing a pre-ordained result that is in the best interests of Hilltop and Oak Hill and not of all stockholders. As a further indication of the Board's imbalance of interests, the merger agreement expressly provides for Oak Hill to receive a significant prepayment premium in connection with the retirement of its loans to the Company, in addition to the merger consideration for its warrant shares.
We were contacted by a number of potential bidders for SWS who complained about the process (or lack thereof) by the special committee of the SWS Board and its advisers. These potential bidders told us they were repeatedly made to jump through an endless series of hurdles before even being able to sign a confidentiality agreement, much less get the data they needed in order to make a proper bid. None of these potential bidders were actually invited into a data room where they could review all the same information given to Hilltop. We contacted both the legal adviser, Bill Taylor at Davis Polk, and the financial adviser, Brian Sterling at Sandler O'Neill, to inquire about the process the SWS special committee was running. Both advisers said they were not authorized to answer any questions regarding the process. Perhaps this is because there wasn't one. We believe the SWS special committee and its advisers are taking an extremely narrow view of fiduciary duty. Any process worth its salt would have yielded a transaction that enhances value for all stockholders, rather than a select, well-connected few. Politicians in Washington these days have extremely low approval ratings at least partially due to the well-founded belief on the part of the American people that the well-connected and wealthy special interests are able to extract special benefits and favors at their expense. How is the SWS Board any different?
If the Board is unwilling to properly fulfill its fiduciary duties by focusing on the best interests of all SWS shareholders, then we are compelled to fill that void. We intend to take our case for value maximization directly to the SWS stockholders to ensure that any transaction that is ultimately consummated by SWS provides the true owners of the Company with full and fair value for their shares. Accordingly, we reserve our right to take any and all actions necessary to protect these interests, including, but not limited to, exercising appraisal rights under Delaware law and conducting a consent solicitation to remove the current directors of SWS. The directors of SWS must be concerned about their personal liability, why else would they ask for enhanced indemnification as described in an 8-K filing on February 27, 2014.
Sincerely,
/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
203-489-9501
[email protected]
SOURCE Lone Star Value Management, LLC
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