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The battle over Wilshire Enterprises between Phil Goldstein’s Bulldog Investors and Wilshire’s (WOC) CEO Sherry Wilzig Izak is gradually growing into a full scale war, if not a jihad. Amidst a stream of litigation, the shareholder meeting was postponed from this week to March 24th, giving management crucial time to beef up their defenses that ultimately will be futile.

We have previously chronicled the battle between Wilshire and Bulldog, which ended in a temporary defeat of Bulldog when management declared that “initial bids are in” for a prompt sale of the company. Almost a year after the initial bids, a buyer emerged for $3.88/share, down from $8.50 a few years ago when management rejected a bid by Mercury Real Estate as “undervalued”. Last year’s buyer didn’t have enough funds to acquire Wilshire, and the stock now trades just over $1.

With the date of the shareholder meeting approaching, the fight over Wilshire is heating up. Wilshire’s management is fighting hard to keep Bulldog out:

  • Litigation to block the sale of shares to Bulldog.
  • Acquisition of shares in the open market by CEO Sherry Wilzig with voting rights attached, although the record date has passed.
  • Splitting the annual meeting into two.
  • Expanding the board with an unelected director.

There was a brief period in late 2008 when Wilshire’s poison pill had expired and the board had not yet adopted a new one. It should be noted that the adoption of a new poison pill during a battle for control of a firm is a highly questionable maneuver that has little chance of being upheld in court, but the board adopted the pill anyway.

Just before the new pill was adopted, Bulldog acquired a block of shares that had previously been owned by a former business associate of Sherry’s late father Siggi Wilzig. The seller is said to be Sherry’s godfather. They seem to have fallen out; if the scathing letter posted on the internet shortly after the sale by someone claiming to be related to the seller is authentic. Management has since been busy suing the brokerage firm that arranged the sale and trying to void it. The goal of the lawsuit was to prevent Bulldog to vote its shares. The judge, probably annoyed by this case, ruled that the case would be decided after the shareholder meeting and only if the vote of these shares had made a difference. A partial defeat for management.

In a desperate attempt to gather the votes CEO Sherry Wilzig needs to keep her job at the upcoming shareholder meeting, she has been buying up shares in the open market. The record date for the meeting has long passed, so she had to resort to a trick to get the votes: she acquired the shares with voting rights attached through an irrevocable proxy. We are not making this up. We were approached ourselves by a broker from Gilford Securities, who informed us that

if you check the tape you will see that we found a seller of 279k WOC yesterday. The seller sold us this block @ $1.10 and executed an irrevocable proxy so that the voting rights transferred to my buyer. I have a limited amount of buying power left and others that I am in negotiations with, but I will bid you the same for all of your piece as long as you are willing to execute the irrevocable proxy so that your voting rights come with the piece. That would be enough to clean me up, and for that we are willing to pay the premium.

The Wilzig estate owns some 21% of Wilshire and one would have thought that the purchase by Sherry Wilzig, which brings her holdings to more than 5%, would trigger the poison pill and dilute her stake and that of the estate. However, since Sherry Wilzig bought the shares in her own name, she can probably get away with it as long as she does not form a formal group with the estate.

We are sure that her lawyers have ring-fenced the estate carefully to ensure that the estate will vote for management without forming a group. Whether or not this would hold up to a test of facts and circumstances if it came to litigation is a different question. If management adopts such a high risk strategy where the poison pill could backfire, it shows that they are extremely desperate. And we won’t even discuss whether a CEO should be allowed to drive the share price to penny stock level through negligence and then buy it up on the cheap, while clinging to the poison pill to block Bulldog from its good faith attempt to launch a tender offer.

Management also split the annual meeting into two. Rather than saving costs and holding a single meeting in 2009 to catch up for the 2008 meeting and hold the 2009 meeting both at once, management decided to hold two meetings in one year. It is a waste of shareholder money, but if management loses one election, maybe they can win the other. Due to the confusion over the shareholder meeting, Bulldog had to litigate to get its nominees on the proxy for the first meeting. The company settled the litigation and agreed to hold the second meeting no later than August 18th.

Finally, management has expanded the board from six to seven members with one unelected board member serving an unspecified term. Since Bulldog will win four seats in this year’s proxy contests, two in March and two in August, the expansion of the board will not make much of a difference.

Wilshire owns 950 rental units, some 200,000 sqft of office space, plus some land. Yet it is unable to turn a profit. It also has a cash hoard of some $13 million, yet its market capitalization is only $8 million, reflecting lack of confidence in the CEO and her recently announced long term strategic plan for creating value.

Even though management is unable to turn a profit with the real estate owned, it plans to add to its real estate holdings and become a major industry player. Good luck competing with Sam Zell’s Equity Residential (EQR) or the Pritzkers with your paltry $13 million, much of which sits in unaccessible auction rate securities. We might have had some confidence in that strategy if management had been able to at least make the current rental real estate profitable to market yields. One can argue whether or not it is the right time to sell now, but one can not argue that management should stay in place after so many years of failing to get the rent roll to grow at the same rate as expenses. The same CEO who drove the stock price down while real estate values were soaring now wants to create long-term value.

A friend of ours recently performed a valuation of Wilshire and found that the company should be worth a multiple of its current stock price if you make reasonable assumptions about the value of the apartments. The current management has been unable to run the firm profitably and there is nothing to suggest that they will ever get the firm anywhere near its intrinsic value.

So what is the likelihood that Bulldog will prevail at the two shareholder meetings? The last contested election was decided very narrowly by 2% in favor of management. There has been some change in the shareholder base in the meantime, and anyone who gave CEO Sherry Wilzig the benefit of the doubt (”initial bids are in”) is unlikely to do so again. We predict that the election will be close again, if only because of management’s dirty tricks to accumulate voting shares by skirting the poison pill and and sterilizing those likely to vote against them. The election may well be decided in court.

Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which owns shares of Wilshire Enterprises.

Source: Wilshire Enterprises War Gets Downer and Dirtier