Distressed / Event Driven Funds Take Aim at Smurfit-Stone

A few months ago we highlighted some of the hedge fund ownership of Smurfit-Stone's post re org equity as determined from the HD function on Bloomberg. With that, I am sure all my readers know that Smurfit-Stone has agreed to be acquired by Rock-Tenn. Yesterday, three prominent distressed / event-driven funds sent a letter to SSCC's Board of Directors calling the acquisition price essentially a sham.

In the letter, Third Point, Royal Capital Management, and Monarch Alternative, collectively holding approximately 9% of the company's outstanding shares (60% acquired via the re-org process), express disappointment "at the merger terms [the Board] approved, and to announce [their] intention to vote against the Merger as it stands today."

Their argument is very well laid out and I have included the entire letter below. For full disclosure, I am long SSCC calls as I believe the take out price is far too low. I particularly like the point about the incentives of the acting CEO to sell the business as soon as possible - a point I try to reiterate over and over on this site. Furthermore, the fantastic people over at Footnoted had SSCC as one of their Top 10 acquisition candidates for 2011. They write:

"Just last week, the company filed an 8-K with updated information about the Dec. 31, 2010 resignation of Steven J. Klinger from his roles as President, Chief Operating Officer, and director. The resignation was surprising at first, given the fact that the company had just inked an amended employment agreement with Klinger last summer following its emergence from bankruptcy. But when we dug deeper, we learned that Klinger and the company had previously agreed that within 30 days after Smurfit-Stone got notice that its CEO-at-the-time intended to leave, the company would consider promoting Klinger to the roles of President, CEO, and (potentially) Chairman of the Board. We know that Moore is expected to retire sometime in the next few months, and yet the board did not tap Klinger for the CEO post.

Although Klinger officially resigned, he will be sticking around a bit longer because of an agreement that he and Smurfit-Stone made on New Year's Eve. Per that arrangement, Klinger agreed to work as a consultant from New Year's Day through March 31, 2011 in exchange for the tidy sum of $150,000 per month. He's to perform whatever consulting services the CEO and the Board "reasonably request" him to render; the document doesn't offer any further details. But the agreement appears to be about more than just the money. It also states that when the Consultancy Agreement expires on March 31, 2011, Klinger's unvested options and RSUs will remain outstanding for six more months. If a change in control occurs during that window of time, Klinger's awards will immediately vest.

Given the short-term of the consulting agreement and the specific conditions which benefit Klinger if a change in control occurs by the end of September, we think it's possible that negotiations for a sale are occurring."
If that's not GOLD, I do not know what is...

Enjoy the letter!


Anonymous,  2/04/2011  

very interesting hunter, what calls are you in if i may ask? the august 40s look nice

Anonymous,  2/07/2011  

Hunter, agree with your sentiment, it seems clear from the Rock stock price movement after all sides thought this was a good deal. Smurfit was clearly underearning and the value of their plants was inflecting upwards so it would seem a higher price is in order. - Adrian Meli


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.