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Letter from Former Bill Ackman Protege to Helen of Troy's Board of Directors
Posted by: Canadian Value (IP Logged)
Date: February 7, 2014 05:14PM
NEW YORK, Feb. 4, 2014 /PRNewswire/ -- Sachem Head Capital Management today sent a letter to the Board of Directors of leading consumer goods company Helen of Troy Limited (HELE). In the letter, Sachem Head outlines its belief that Helen of Troy shares are materially undervalued, highlighting the Board's apparent unwillingness to respond to recent inquiries regarding potential strategic combinations, and recommending actions for the Board of Directors to undertake to maximize value for the shareholders, including a thorough and legitimate review of strategic alternatives.
The full text of the letter from Sachem Head Capital Management follows:
Board of Directors
February 4, 2014
To the Board of Directors of Helen of Troy Limited:
Sachem Head Capital Management is an investment partnership founded in July 2013 that manages approximately $1 Billion. We selectively and constructively engage management to explore ways to create shareholder value. As of February 4, 2014, Sachem Head owns 1,200,000 shares of Helen of Troy stock, which represent approximately 3.7% of shares outstanding.
Despite its high quality consumer brand portfolio, including leading names such as OXO, Pur, Sure and Pert, Helen of Troy's full value is not appreciated by public markets, particularly relative to what we believe are its most comparable peers (see Exhibit A). Given this underperformance, we believe it is critical that the Board undertake a full review of strategic alternatives to explore opportunities to maximize value for all shareholders. This should include a good-faith sale process with a sincere evaluation of any legitimate offers, rather than summary dismissals of inbound approaches, as we understand has occurred over the past two weeks with at least one potential strategic buyer.
We believe Helen of Troy shares are (and have been) materially undervalued for several reasons:
As a result, we believe that projected fiscal year 2015 GAAP net income understates the true earnings power of the business by roughly 40% (see Exhibit B).
To address these points, in November 2013, Sachem Head met with Helen of Troy's then-Chairman and CEO Gerald Rubin, current interim CEO Tom Benson, and then-Lead Director Gary Abromovitz to discuss our views on steps the company could take to maximize shareholder value. Topics discussed included a material capital return to shareholders via a leveraged recapitalization and share repurchase, the possibility of pursuing an inversion transaction with a U.S. company, and CEO succession. We suggested that the company retain financial and legal advisors to investigate these options. The meeting was productive and we were encouraged by the spirit of collaboration present in the room.
Over the course of the next several weeks, we had follow-up conversations with Gerald Rubin, who relayed to us that the company was willing to explore any and all alternatives to maximize shareholder value. Indeed, in early January we were pleased to learn that the Board had retained a leading investment bank as a financial advisor to explore a range of alternatives. Senior representatives of that bank assured us that their review would be broad and include (but not be limited to) our suggestions of a material capital return and a potential strategic transaction.
We were therefore surprised when the company issued a press release on January 16 stating that CEO Gerald Rubin had suddenly resigned and been replaced with an internally promoted new permanent CEO. We were further disappointed to learn, on our follow-up calls with the company and its financial advisor, that the scope of the strategic review would likely be limited to capital return, excluding a broader set of alternatives. Sachem Head believes that limiting the scope of a strategic review and appointing a permanent CEO in the midst of undertaking such a review are steps that are counter to the potential maximization of shareholder value.
While the market reacted positively to Mr. Rubin's departure, we believe that with the benefit of the full context, shareholders should share our entirely different view. Mr. Rubin was engaged and supportive of a broad strategic alternatives process, and we believe the circumstances surrounding his hasty resignation are, ironically, yet another example of inadequate Board stewardship. Furthermore, the hurried internal promotion of a division head to CEO without a comprehensive external search also seems imprudently rushed, myopic and not in shareholders' best interests.
Sachem Head has spoken to multiple potential strategic buyers, and has reason to believe that there are several strategic and financial buyers who may be interested in pursuing an acquisition of Helen of Troy. Sachem Head has specific knowledge of at least one inquiry to the Board in the past two weeks from a well-respected company with financial resources and a proven acquisition track record that was rebuffed. Further, Sachem Head has reason to believe that there may have been similar approaches from others. Despite the recent increase in Helen of Troy's share price, Sachem Head continues to believe that Helen of Troy is materially undervalued and that shares currently trade at a steep discount to the price a strategic buyer would be willing to pay for the company.
In light of the aforementioned facts Sachem Head believes the Board should immediately take the following actions:
We would remind the entire Board of Directors of your fiduciary duties that include maximizing value for shareholders, and expect you to act accordingly.
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