The Kellwood Co.. defended its plans to buy back $60 million in debt and fund growth through a revolving line of credit after being criticized by its largest shareholder and former suitor for not instead using its cash to reward shareholders.
“The Board believes that buying back stock and maintaining an appropriate capital structure delivers significant value to our shareholders,” Kellwood said in a statement filed with the Securities and Exchange Commission. “The Board, the Company and its independent advisors have carefully evaluated the best uses for its cash and Kellwood is confident that its plans will advance shareholder value.”
Kellwoods brands include Royal Robbins, Sierra Designs, Slumberjack, Wenzel and Wenger.
Kellwood filed the statement after Sun Capital Securities Group, LLC sent a letter to Kellwoods board urging them to rescind plans announced yesterday to buy back $60 million in bonds.
The bulk of that letter follows below:
“As the second largest shareholder in Kellwood Company (“Kellwood” or the “Company”) with an approximate 9.9% ownership interest, Sun Capital Securities Group, LLC (“Sun Capital”) strongly urges the Company to immediately terminate its ill-advised and value destructive tender offer (the “Bond Tender”) for the 7.875% Senior Notes due July 2009 (the “Notes”),” reads the letter signed by Jason Bernzweig, VP of Sun Capital. “The Bond Tender, if completed, would be destructive to equity value and would represent a direct transfer of value from your shareholders to bondholders. This is evidenced by an 8% decline in your stock price yesterday following the announcement of the Bond Tender, while the broader markets were up over 1%.
Paying off these Notes that have terms extremely favorable to Kellwood and cannot be replicated in today's financing environment is detrimental to the Company and your shareholders. The compelling attributes of these Notes include, but are not limited to, the absence of maintenance covenants, which provides the Company with significant financial flexibility as management attempts to execute its most recent restructuring plan. Also, there is no restricted payments covenant, which allows the Company to distribute its free cash flow, as well as proceeds from asset sales to shareholders without limitation. In addition, there is no change of control provision, which allows the Company and its shareholders to capture a higher value in a sale because a buyer would be able to assume the Notes on favorable terms relative to alternate financing options. Accordingly, paying a premium to repurchase these Notes at this time, when it would be clearly beneficial to hold the Notes to maturity and repay them at par, is at odds with the fiduciary obligation of the Board and management to maximize shareholder value.
If the Board has genuine confidence in management's business plan, the right strategy for maximizing shareholder value would be to leave the Notes outstanding at this time, distribute the cash proceeds to shareholders, either in a special dividend or via a share repurchase, and then refinance the Notes in 18 months upon maturity at par. We note that the $60 million required for the tender represents 15% of your current market capitalization or approximately $2.30 per share of realizable value to your shareholders. Alternatively, if the Board understandably has concerns about management's business plan, the right approach would be to negotiate with Sun Capital or run a sale process where potential buyers would have the ability to assume the Notes. In either circumstance, the Bond Tender is not in the interest of Kellwood shareholders.
It is clearly irresponsible for Kellwood to repay the Notes at this time, particularly at a premium. As fiduciaries for shareholders you cannot justify this direct transfer of value from shareholders to bondholders. Therefore, the only responsible action by the Board, as fiduciaries for shareholders, is to immediately terminate the Bond Tender.”
