Provided to subscribers on September 2nd.
\Here is the latest from Canadian Value Investors!
Long weekend reading – Pitches from around the web
What does President Lula tweet about anyway?
Startek (NYSE:SRT) back in play, Charlie Brown?
Quick pitches from around the web
Disclosure: At publication we do not have a position in any of these, but are evaluating.
The rise of Crocs (NASDAQ:CROCX) – Crocs shoes have taken the fashion world and value investing community by storm. We have never owned a pair and do not intend to, but always appreciate a remarkable growth story combined with thoughtful share repurchases. Is this a fad or a durable brand? https://unconventionalvalue.substack.com/p/whats-behind-the-rise-of-crocs
Thread here - https://x.com/andrewrangeley/status/1693695373410238968?s=12&t=S1ewsT6UpWXPOoivWFxT6w
Worthington Industries (WOR) – “Forthcoming “early 2024” spin-off of steel processing business could unleash more buyback, dividend, and/or M&A activity at the RemainCo”. Great piece on a neat situation. https://www.flyoverstocks.com/p/flyover-stock-worthington-industries
Mueller Industries (NYSE: MLI) – “Mueller Industries is a 100-year-old sleeper industrial machinery small-cap in the HVAC, refrigeration, and plumbing space. Although boosted by previously rising copper prices, Mueller’s revenue growth, profit margins, and returns on equity and capital are compelling. Underfollowed and underbought, the market assigns a deep discount to the stock price.” https://davidjwaldron.substack.com/p/mueller-industries-nyse-mli
Gypsum Management & Supply ($GMS) – “Another wonderful distribution business”. This one peaked our interest given our continued position in Taiga Building Products (TSX:TBL, please just buy us out at a nice premium Avarga) https://justvalue.substack.com/p/gypsum-management-and-supply-gms?utm_medium=reader2
And remember you can always copy Michael Burry of Big Short fame - https://x.com/burrytracker/status/1692287456543162718?s=12&t=S1ewsT6UpWXPOoivWFxT6w
Quick note Petrobras (PBR) - What does President Lula tweet about anyway?
As part of our approach to keep on top of Petrobras, we follow a number of accounts including El Presidente Lula. Tweets are high volume and interesting. https://twitter.com/LulaOficial/status/1696495122182029425
Petrobras’ new CEO Jean Paul Pratesalso posts, and sometimes important tidbits come up like information on refining pricing (one of our key concerns). E.g. the official narrative is that they are blaming gas station owners for high prices. https://twitter.com/jeanpaulprates/status/1658498615441014789
Startek (NYSE:SRT) back in play, Charlie Brown?
Disclosure: At publication we own a small position in this.
Majority owner CSP is back at it again, trying to take Startek private. The new offer has no financing conditions and is 22% above the current share price. But, will it go through this time or are we poor Charlie Brown?
The new offer press release:
DENVER--(BUSINESS WIRE)-- The board of directors of Startek, Inc. (SRT) has formed a special committee of independent directors that is authorized to evaluate the non-binding proposal, dated July 18, 2023, by CSP Management Limited to acquire all the shares of Startek that it does not already own for $3.80 in cash per share. CSP is currently the beneficial owner of approximately 56% of the outstanding shares of Startek. CSP states in its non-binding proposal that it is not contemplating selling its interests in Startek or approving any combination of Startek with, or a sale of all or substantially all of the assets of Startek to, any other potentially interested party.
The special committee has engaged Gibson, Dunn & Crutcher LLP as its counsel and Houlihan Lokey, Inc. as its financial advisor to assist in its consideration of the proposal.
Startek cautions its stockholders and others considering trading in its securities that the proposal by CSP was received only recently and that no decisions have been made by the special committee about how to respond. A copy of the proposal letter from CSP is available as an exhibit to CSP’s statement of beneficial ownership on Schedule 13D/A as publicly filed with the Securities and Exchange Commission.
The Proposed Transaction
The offer per CSP’s filing:
On July 18, 2023, CSP EAF II GP Limited, as general partner of CSP Fund II LP (“CSP EAF”), an entity affiliated with the Reporting Persons, submitted an offer letter (the “Proposal”) to the Issuer’s board of directors (the “Board of Directors”) to acquire all of the outstanding shares of Common Stock of the Issuer not already beneficially owned by the Reporting Persons at a price per share of $3.80 in cash (the “Proposed Transaction”).
CSP EAF intends to finance the Proposed Transaction with fully committed equity capital, which will be provided by one or more investment funds affiliated with CSP EAF (such affiliated investment funds, together with CSP EAF, “CSP II”). The Proposed Transaction would result in a de-listing and de-registration of the Common Stock.
What’s different?
This time around, it is a largely different set of independent directors and a different advisor, but a new meaningful shareholder - MCI - is making some noise. In the macro, peers have also declined. Will this new lower offer clear?
MCI
One wildcard is MCI. Since the last go-around, MCI acquired ~7% of outstanding shares at a cost base of ~$4.20. They are not happy and have sent the Board a letter telling them so. MCI also owns call centers. It is possible that their position could help with a higher final bid. We are a bit confused by their purchase; they already knew the Startek CSP ownership control and should have been able to guess CSP would attempt to take the company private again.
Most importantly – “Further, unlike the recent Movate f/k/a CSS transaction, which CSP also controlled both sides of, a fairness opinion should be required this time by the Board of Directors (and/or Committee) to effect this deal. We hope that the Board, and particularly the Directors not affiliated with the controlling stockholder, will carefully consider these concerns, and take appropriate steps to protect the interests of the minority stockholders, including, but not limited to, requiring that a “majority of the minority” approve the take-private transaction. We believe such (a) requirement(s) is (are) generally recognized as (a) market protection(s) afforded to holders against self-interested transactions by a controlling stockholder and is a basis for a more favorable standard for review under Delaware Law. We call on other Company stockholders who may share our concerns to review and make their views known.”
Edgar here - https://www.sec.gov/edgar/browse/?CIK=0001031029
Board Changes
Since 2022, the independent Board Member composition has changed significantly. As a quick recap, the 2022 offer was rejected by a committee of independent directors, of which there were three (the rest are tied to CSP). Per the Q2 2023 report:
On July 18, 2023, CSP EAF II GP Limited general partner of CSP Fund II LP (“CSP”) has submited an open offer ("the Proposal") to acquire all of the outstanding shares of common stock (“Common Shares”) of Startek, Inc. (“Startek”) that are not already beneficially owned by CSP Management Limited at a price per share of $ 3.80 in cash. Subsequently, the Board of Startek has appointed a Special Committee comprising of three independent directors to evaluate the Proposal. The Committee has appointed independent advisors to assist them in their evaluation.
Their full rejection:
Special Committee of Startek Updates Stockholders on Status of Preliminary Non-Binding Proposal by CSP
September 9, 2022
DENVER--(BUSINESS WIRE)--Sep. 9, 2022-- The Special Committee of the Board of Directors of Startek, Inc. (NYSE: SRT) announced today that it has rejected the preliminary, non-binding proposal, dated August 8, 2022, by CSP Management Limited and certain of its affiliates (collectively, CSP) to acquire all the shares of Startek that CSP does not already own for $4.65 per share in cash. CSP is currently the beneficial owner of approximately 56% of the outstanding shares of Startek.
In July 2022, at the request of the Committee, management of the Company prepared an updated financial forecast (Forecast) for the 2022 calendar year and the four following calendar years 2023 to 2026. The Forecast projects annual revenue growth, beginning in calendar year 2023 and for the duration of the Forecast period, to exceed 5%. The Forecast projects that the margin for variable profit and for adjusted earnings before interest, taxes, depreciation and amortization, will steadily increase over the Forecast period, with the latter approaching 11% by calendar year 2026. The Forecast was reviewed by the full Board of Directors of the Company to ensure the Board's comments were reflected. On August 1, the Company provided the Forecast to the Committee. The Committee and its financial and legal advisors separately engaged in several additional discussions with management of the Company to assist the Committee in determining whether to adopt the Forecast for purposes of evaluating the CSP proposal.
Based upon this work, the Committee to return the Company to improved financial performance over the Forecast period. The Committee adopted the Forecast for purposes of evaluating the CSP proposal. The factors that the Committee has considered include the trading history of Startek stock, financial analyses of Startek using the Forecast, the macroeconomic environment, the Company’s limited float and liquidity, the ability to pay of a financial sponsor such as CSP, communications that the Committee has received from shareholders, and CSP’s statement that it is currently not a seller of its majority stake in the Company. The Committee has determined, at this time, that the proposal at $4.65 is inadequate and not in the best interests of the shareholders of Startek.
Foros, the Committee's financial advisor, notified CSP on August 21, 2022 that the Committee had determined that the proposed price of $4.65 was inadequate and explained the basis for this determination as described in the preceding paragraphs of this press release. Since that time, rather than submitting a revised proposal, CSP has repeatedly requested more “specific directional guidance on how [the Committee] is thinking about value and price.” The Committee considered this request by taking into account that CSP already possesses the full Forecast and has understood since August 21 that the Committee is using this Forecast for its financial analysis of proposals by CSP. After considering this factor, as well as the Committee’s objective of maximizing value for shareholders, the Committee determined and informed CSP that it would be inappropriate and redundant to provide additional directional guidance to CSP beyond the explanations already provided to CSP. The Committee has reiterated to CSP that the Committee remains available to evaluate and respond to a revised proposal by CSP.
There can be no assurance that any revised proposal or definitive offer will be made or accepted, that any agreement will be executed, or that any transaction will be consummated.
Foros is serving as financial advisor to the Special Committee and Freshfields is serving as legal counsel.
So, the original committee was the three independent directors. What’s changed? One left (Julie) and two more came in. They never disclosed if it was a unanimous vote, but the member who left seems like one that would vote against, and new members were recruited and elected post-offer failure.
Side note: One quick way to check historical Board Member composition is using the wayback machine (web archive), but of course pulling the actual filings is better and should be double checked. - https://web.archive.org/web/20220930095633/https://investor.startek.com/corporate-governance/board-of-directors/
Advisors – 2022 vs 2023
The financial advisor the Board has selected this time around is a top tier advisor for a company of their size. A fairness opinion from them could give Board Members comfort indeed.
2022 bid – “Foros is serving as financial advisor to the Special Committee and Freshfields is serving as legal counsel.”
2023 – Houlihan Lokey advisor and legal with Gibson, Dunn & Crutcher. Houlihan has been around for 50 years and was #1 in 2022 for M&A deals under $1B. https://middlemarketgrowth.org/awards-2023-investment-bank-of-the-year-houlihan-lokey/
The Over-Under
Is there a bet here? Or maybe we should take George Bush’s ethos to heart – “Fool me once… shame on – shame on you. Fool me… you can’t get fooled again”? https://youtu.be/KjmjqlOPd6A For now, it is interesting enough to us for a small position.
