$45.8 million bid to take Mace private

Mace Security International Inc., which owns a chain of car washes and makes the namesake pepper spray, has received an unsolicited $45.8 million bid from a California investor to take the company private.

The offer of $3 a share was sent to the Mount Laurel company Jan. 9, said Joe Altman, senior vice president for Kelly Capital Management L.L.C., a California private-equity firm.

Mace's general counsel, Robert Kramer, said the company's board of directors was reviewing the offer, which was disclosed yesterday in an 8-K filing with the Securities and Exchange Commission. Shares of the company soared after the disclosure.

Mace's two largest shareholders, Lawndale Capital Management and Ancora Capital Inc., said the offer seemed too low. Both have complained about the company's management, including chief executive officer Louis D. Paolino Jr.'s compensation.

In a statement issued in response to queries, Mace accused Kelly Capital of trying to buy the company for less than its book value.

Kelly Capital, which is run by San Diego investors and brothers Michael and Richard Kelly, has been looking at Mace for three years and has approached the company five times about possible sales, Altman said.

"We were only able to get a meeting with Louis Paolino in November of last year," Altman said. "The way things were left was that Louis would get back to us. Since that meeting, we never got any of our phone calls returned." Kramer declined to comment on Altman's statement.

Kelly Capital Management's offer increases the pressure on Paolino to boost the company's stock price and find buyers for Mace's national car-wash chain. Both the business and sales agreements for some of the car washes have failed to meet management's expectations. Kelly and other large shareholders also have complained about Paolino's compensation, calling it excessive and unusual, in that it provides bonuses for buying and selling businesses.

"Under the current board's stewardship, we think that shareholder value will erode over time," Altman said. "The longer we wait, the higher risk there is that the company takes the cash it generates from its car-wash sales and uses that cash for . . . acquisitions that erode shareholder value."

Kelly Capital's interest in the company came up during last month's annual meeting, although an offer to buy its outstanding shares was presented only recently, according to a Mace statement.

Altman said Kelly's bid would have been higher were it not for a clause in Paolino's compensation package that provides him with a payout of 2.99 times his average compensation over a five-year period, plus his options grants for those years, if the company were sold. Such arrangements typically include only the base salary and bonus, according to Institutional Shareholder Services, a firm that provides guidance on corporate-governance issues.

"I would have a lot more comfort if the compensation of Louis Paolino was directly tied to the bottom-line financial performance of the Mace operating business, and currently that's not the case," Altman said.

In its statement confirming Kelly Capital's interest, Mace also denied that Paolino's pay was excessive or unusual.

"The company declines to comment regarding if it has received any other buyout overtures during the past year," Mace said.

Mace Security has been telling shareholders to give it a chance to boost the shares' value. In a presentation at last month's annual meeting, the company estimated its net book value - assets minus depreciation and amortization - at $57.8 million, or $3.78 a share. The company also said that it would not have any debt once it completed the sale of its car washes and that it expected to have about $30 million to $40 million in cash on its books.

Paolino, who declined requests for an interview made through Mace executives, appears to be betting that Mace's future will be in the $5.5 billion closed-circuit-security-television business. That industry is dominated by gigantic companies, including General Electric Co., Tyco International Ltd., and Honeywell International Inc.

Mace began expanding into that security market in 2002 through the acquisition of smaller companies, using its stock as currency. At the end of that year, security products accounted for $2.5 million of Mace's $46.7 million in sales, according to the company's annual report. A year later, that more than doubled to $5.6 million, and, by 2005 it reached $24.5 million.

But as Mace's stock - which split in 2002 - began falling, so did its ability to make acquisitions. In January 2005, the shares were trading for $4.90. They closed yesterday at $2.72. Mace said it "hasn't ruled out" share buybacks.

Profit in the security business also is proving to be elusive. In the nine months ended Sept. 30, the business lost $967,000, compared with a loss of $2 million in the year-earlier period.

"The company is working to eliminate low-margin sales in favor of higher-margin products," Mace said. "During the last two years, the company has developed, designed and refined the majority of the products it sells today, and has established new sales channels. The company believes that it has established a security business that can continue its revenue growth and will become profitable once higher sales levels are achieved."

Mace Security has not reported a yearly increase in net income since 2001. Profit has fallen in five of the last seven quarters. Sales growth, which was fueled by acquisitions, has begun to peter out. Revenue has fallen for three straight quarters, which has made investors question the expansion in the security business.

"There is a lot of investment going into the security-products businesses, with very little organic growth in revenues or gross profits in total so far, and certainly not enough yet to offset expenditures," Andrew Shapiro, president of Lawndale Capital Management, of Mill Valley, Calif., Mace's top shareholder, wrote in an e-mail. "It's not clear what the efficiency or payback is or will be on all those marketing dollars."

At December's shareholder meeting, Lawndale and the No. 2 shareholder, Ancora Capital, of Cleveland, withheld their votes for the incumbent directors: Constantine Papadakis, Drexel University president; Paolino's brother, Matthew; Mark S. Alsentzer, CEO of Pure Earth Inc.; and Burton Segal, an accountant. All of the directors were approved by more than 71 percent of the shareholders. Directors generally receive approvals from more than 90 percent of the vote.

Proxy advisers Glass Lewis & Co. L.L.C. and Institutional Shareholder Services singled out the compensation committee for criticism for its role in negotiating a three-year employment contract with Paolino in August. Papadakis, the chairman of the committee, did not respond to an interview request left with a Drexel spokesman.

"Viewed as a whole, the new compensation package" is "generous and unique . . . for a CEO of a company with an enterprise value of just $45 million," Glass Lewis wrote.

Paolino's compensation for 2007 will be $1.1 million, including the immediately vesting stock options. Options usually are structured to become valid over several years.

In addition, Paolino can receive a bonus of 1 percent of the sale price of the car washes and 3 percent of the price of any business sold or purchased by Mace. Ancora Capital's Richard Barone called the bonuses "absolutely bizarre."

Mace denied that Paolino has reason to do deals just to collect a bonus, and it said that a study by its compensation committee found that 39 percent of companies give their CEOs similar incentives.

"The bonus does not provide an incentive for bad transactions," the company said.