White Eagle Partners Issues Open Letter to Chairman of Tesco Corporation
Asks Board and Management to Explore Specific Paths to Value Creation
Seeks Increased Management Incentives, Return of Excess Cash to Shareholders and then Sale of the Company
NEW YORK--(BUSINESS WIRE)--White Eagle Partners, LLC ("White Eagle"), a shareholder of Tesco Corporation (NASDAQ:TESO) (the "Company"), released an open letter it sent to Norman Robertson, Chairman of the Company, asking the Company's board of directors and management to take specific steps to unlock shareholder value. In the letter, White Eagle expressed its belief that the Company can create value by (i) returning up to $380 million in excess cash to the shareholders, (ii) engaging in a formal, reasonable and public process to sell the Company, and (iii) increasing the management teams' share options to encourage greater alignment of interests.
Full text of the open letter follows:
February 18, 2014
Dear Mr. Robertson
As principal of White Eagle Partners, which currently holds / advises on approximately 2% of Tesco Corporation stock, I wrote to you on October 28, 2013 to express our views about the steps we believe the Company should take to unlock shareholder value: namely, to return excess cash to shareholders, to explore sale of the Company (for a reasonable, rather than unusual, premium), and to increase management incentives to create extraordinary value. I thank you for your reply letter dated November 13, 2013. Before responding in turn, we polled a significant portion of our fellow shareholders for their views on our proposals. Every investor that we spoke with seems to agree on the need for the company to return excess cash to shareholders and/or to take steps to put the Company up for sale. We are therefore formally and publicly asking the board and management to take specific steps, in a timely manner, to explore these paths to value creation.
A. Excess Cash
As mentioned in our first letter, we calculate that the Company could return approximately $380 million (or $9.72 per share) in excess cash to shareholders. We derive our estimate as follows:
- TESO will hold approximately $100 million in cash by the middle of this year.
- The Company holds $80-$100 million in excess working capital. As mentioned in our previous letter, the equation of payables and receivables on your balance sheet would release $80 million in cash, and management has on numerous occasions indicated that the Company could release over $20 million in working capital from excess inventory. This equates to $100 million in cash to be released through a more sound management of working capital.
- The Company is slated to generate well over $120 million in EBITDA this year. We believe that a conservative degree of financial leverage-1.5 X net debt to EBITDA- would allow you to take on $180 million in debt at no more than 5% interest).
As for uses of this cash, we note the Company’s interest in ‘consolidating’ the industry. However, the $10 to $20 million acquisitions being undertaken do not adequately address this excess cash issue, and we would not at all endorse larger acquisitions by the Company.
We therefore propose that management conduct a share buy-back, and below set forth below a brief analysis on the EPS impact of such a step. Our brief analysis assumes that the Company pays a 10% premium to the current share price (i.e. buys stock at $22.7 per share) to purchase $380 million of stock through a reverse Dutch tender auction. Should management prove unable to release the excess cash on the balance sheet on a timely basis, or should operating cash flow trail our estimates, we suggest that you at least return $330 million in a share buy-back, the effect of which is also shown. Note that we are using consensus earnings estimates in our calculation, and assume no expansion in multiples.
|$380 million||$330 million|
|Status Quo||Share Buy-back||share Buy-back|
2015 Net Income
Share Price Target
We note that of the 12 top investors polled, one voiced a preference for a special dividend. Should the board prefer the latter option, we note that $380 million would amount to a dividend of $9.72 per share, and $330 million to $8.44 per share. We believe that either path is more consistent with your fiduciary responsibility than the current decision by the board to sit on excess cash reserves, which earn an offensively paltry return.
B. Sale of the Company
We believe that despite Tesco’s world-class operations and margins, as well as strong growth prospects, the Company has a limited independent future. The Company lacks access to the capital necessary to become a formidable, diversified operator within its sector. Tesco’s limited resources have already forced management to dispose of the CDS division in 2012, despite that division’s extremely attractive, if not transformational, long term prospects.
As mentioned in our previous letter, we believe that no event can unlock value for investors as decisively as a sale of the Company, especially when preceded by the return of excess cash to shareholders. A strategic acquirer would be able to eliminate over $40 million in overhead costs. Valued at 10 times, these savings would equate to $400 million in value, or $10 per share. We note that no company with TESO’s margins has in recent history been sold for less than 10 times EBITDA in your industry. Assuming that the Company is sold for only 8 times EBITDA, we expect to see well over 50% upside from the current share price (that is without a return of the excess capital to shareholders). We set forth below some of the multiples at which companies in your sector have recently been sold, and note that none of them was, at time of sale, as profitable as Tesco.
|Casing Drilling||8 X EV/EBITDA projected||
(Q2/2012) EBIT: <0%
|Union Drilling:||5.5 X EBITDA||
(Q3 2012) EBIT: <0%
|Boots & Coots:||6.5 X EBITDA||(Q3 2010) EBIT: 7%|
|Expro Intl:||11X EBITDA||
(Q2 2008) EBIT: <0%
(Q1 2010) EBIT: 8.3%
|Superior Well||20 X EBITDA||(Q3 2010)|
|Global Ind.||N.M / 2 X Revenues||
(Q32011) EBITDA <0%
(Q1 2012) EBIT: 3%
|Allis Chalmers||9 X EBITDA||
(Q3 2012) EBIT <0%
|Prosafe Prod.||7 X EBITDA||(Q2 2010) EBIT: N.M.|
|Omni Energy||7.5 times EBITDA||(Q4 2010) EBIT: 3%|
We thank you for your assurance that any interest expressed in the Company would be duly considered. However, you are surely aware that buyers will not present unsolicited bids for the Company. We also believe that the board should settle for a reasonable rather than extraordinary premium, and therefore ask that you engage in a formal, and public, process to sell the Company, but only after returning the Company’s excess cash to shareholders. This process should commence within 6 months.
C. Incentive Creation
Finally, we still believe that management must be more strongly incentivized to take decisive steps to create shareholder value. We appreciate your assurance that management’s compensation plan is consistent with best practices. However, as mentioned in our previous letter, we believe that management has and is leading operations exceptionally well (at least since the time of our investment, in the summer of 2012). Specifically, management has built a services division which continues to grow in size and profitability, and to set industry standards. Further, the sale of Casing Drilling was a commendable decision by the management team. We also applaud the more recent decision to curb unnecessary capex, and to focus on cash flow generation. We have in this letter proposed specific steps to create extraordinary value for shareholders on a timely basis, and would like to see management better incentivized to undertake these initiatives. Specifically, we again ask that the board adopt a program to augment the management team’s share options. We would suggest an increase of 25% in the option package should the stock price reach $30 within 12 months due to specific value creation steps, 50% at $35, and 100% at $40.
In conclusion, we believe that your fiduciary responsibility requires that you promptly return excess cash to shareholders, and thereafter take formal and public steps to sell the Company. We believe that management needs and deserves to be very well incentivized to undertake these steps, and that this process will not only unlock exceptional value for shareholders, but will also increase the likelihood that Tesco is part of a larger, more diversified enterprise in the industry, with greater access to resources including capital.
White Eagle Partners
ABOUT WHITE EAGLE
White Eagle is a global, value-oriented investment advisory firm that invests in companies with a leading position in their industry or country of operations, strong margins and growth prospects, and compelling valuation. Where appropriate, White Eagle works with the management team and boards of its invested companies to create value for shareholders.