Philip Falcone's new investment shell company HC2 Holdings (HCHC) is the process of trying to take over a little known but highly profitable steel fabricator, Schuff International (SHFK). Critics are say that the hedge fund manager is taking advantage of over the counter market which are lossly regulated. Last week HC2 Holdings floated a tender offer to consolitade its ownership of the company.
Falcon bard by SEC
SEC accused Falcone of improperly borrowing money from is fund to pay his personal taxes and also he gave some of his investor preferential treatment in return their capital. The SEC accused him of engaging in a short squeeze of bonds held by a Canadian manufacturer.
“Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws,” Andrew Ceresney, co-director of the SEC’s enforcement division
Andrew Ceresney also said that, “Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge-fund industry.”
He will be bared from the security industry for at least five years, and he wil be able to contine to run his publicly traded company the Harbinger Group Inc (HRG).
HC2 acquires 65% of Schuff in May
His new investment vehcile acquired 65% of Schuff from its the controlling family in May 2014. Since acquiring the 65% stake, HC2 has increased its to 70% and now wan to increase it to a 100%. Currently Schuff share are trading higher then HC2 acquiring price of $31.50 and higher than the price the company wants to be for the rest of the shares.
HC2 has a tender offer for the rest of the share of Schuff International for $31.50 per share that values the come at $135 million. This has led to critizism of the tender offer from HC2 from minority shareholders and others; first the tender offer is where the company has been trading at. A blogger Michael Zapato post on SunZero about the tender offer, and where his argues that Schuff is worth conservatively between $57 to $101 per share far exceeding the tender offer. He has a memo that goes into detail why Schuff is worth more than HC2 is offering to pay. Michael Zapato explains in this firm's report that HC2 is try to pay less then 3x EBIT for the entire company. He explains the company currently has a record backlog and that will lead to a massive expansion in earnings per share in 2014.
Memo on Schuff International https://sumzero.com/sp/SHFK_tender
Potential Class Action Suits
There are at least three class-action law firms are planning suits aganint Philip Falcone and HC2. Randy Katz a lawyer from Baker & Hostetler told the New York Post that,
"“It’s an enterprise ripe for [Falcone] to come in and take over without paying full value.” He also said " OTC investors frequently don’t know they have the right to reject a tender offer.
HC2 said in a statement to the Post,
"We are not forcing anyone to do anything, They can either tender or not."
But In their statement to the Post, they leave out the fact that if they get 90% of the company, they can force the other ten percent of shareholders to sell at a price similar to the tender offfer.
It is clear from all of this that Philip Falcone and HC2 will face lots of hurdles to gain full control of Schuff International from minority shareholder like Michael Zapato and Lawyers like Randy Katz who will fighht against the tender offer.