Friday, December 26, 2014

Private equity squeeze play: Gardner Denver told to sell

Damien J. Park was right

Private equity squeeze play: Gardner Denver told to sell

Damien Park saw this coming:

On July 16, I noted the sudden resignation of Barry Pennypacker as boss at Chesterbrook-based industrial-equipment maker Gardner Denver Inc., which moved here from the Midwest two years ago because Pennypacker, a Montgomery County native, said he wanted to be closer to investors and customers. 

Gardenr Denver's new boss, Michael Larsen, wasn't talking. But Philadelphia-based activist-investor consultant Damien J. Park pointed out Pennypacker's disappearance coincided with a big share purchase by activist investor ValueAct Capital. 

What happened next is the rather classic private-equity shareholder advisory excerpted below, in which ValueAct expresses surprise at Pennypacker's departure -- and strongly urges the remaining directors to find a buyer for the company, quick. 

TO: Diane K. Schumacher, Chairperson of the Board of Directors, Gardner Denver Inc.

Dear Diane, ValueAct Capital owns 2.5 million shares, representing 5.1% of Gardner Denver Inc.s ("GDI") common shares outstanding. As a large shareholder, we are writing to recommend that the board of GDI pursue a sale of the Company in light of the circumstances in which it finds itself after the surprising resignation of its CEO, Barry Pennypacker, on Monday July 16...

We believe a sale of the Company at this time would be both prudent and the most effective way to deliver maximum value to shareholders on a risk-adjusted basis for both the short and long-term. Accordingly, we strongly urge the GDI board of directors to engage investment bankers immediately for the purpose of soliciting offers for the Company...

Recent successful investments in which ValueAct Capital played an active governance role include the multi-year transformation of Sara Lee Corporation into 2 new more focused and highly-valued companies... Before today, ValueAct Capital has never publicly called for the sale of a company...

We understand the Board is convening a meeting early next week to consider several key strategic decisions. We commend Michael Larsen on his handling of the difficult situation thus far. As we would have expected given our prior interactions with him, he has exhibited solid management and communication skills... We also appreciate the recommitment communicated publicly to the principles of the strategic plan that Barry Pennypacker and his team had developed for GDI and we look forward to learning the details of the next major restructuring initiative--addressing the underperforming profitability of GDI's European operations.

However, continuity of the operational culture and commitment to the restructuring plans do not change the unfortunate fact that the execution risk of the Company's strategic plan has now escalated significantly with Barry's resignation. In our view, Barry's experience, skill set and management approach were uniquely well-matched to the strategic opportunities  and priorities of GDI. The timing of Barry's departure is especially inopportune in light of the impending launch of the European restructuring... as well as the continuing cyclical weakness of GDI's upstream energy business.

While we appreciate the interim leadership role Michael Larsen can play and are thankful to have an executive of his caliber on the team, Barry's departure, plus the recent turnover and associated turmoil in the executive ranks leave the broader team depleted and dangerously short-handed...and... may now be at risk for further turnover.

Of course, consideration of a sale of the Company as an alternative to retaining public company status under a new CEO must incorporate the likelihood of success and relative value creation from a sale. On this front we are encouraged by the prospects...  There are a number of comparably-sized industrial sector companies for sale, or that have been sold recently, for which debt financing commitments have been obtained in the range of 6x EBITDA... 

Financing conditions are uniquely conducive to large private equity transactions... evidenced, most relevantly, in the announcement today of United Technologies' sale of its Hamilton Sundstrand industrial unit to Carlyle Group LP and BC Partners for $3.5 billion... at a valuation multiple approaching 9x EBITDA....

We recommend the board of GDI, at its upcoming board meeting, approve the immediate retention of advisors for purposes of running a sale process targeting an all-cash offer for 100% of the common shares of Gardner Denver...

We are prepared to assist if we can be helpful in any way...We would be pleased o share our thoughts further on this subject at your convenience.

Respectfully,Gregory P. Spivy, Partner 

To which Gardner Denver posted this quick reply: "The Gardner Denver Board of Directors and management team are committed to acting in the best interests of the Company and all its shareholders, and we regularly engage with our shareholders. The Board, in consultation with the Company's financial and legal advisors, will carefully review and consider ValueAct's letter." Fight, or surrender? We'll see next week. 

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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