Wilshire Enterprises (WOC) finally launched its $2 tender offer for 4 million shares, roughly half of the outstanding shares. It is a bad deal for shareholders and we anticipate that worse is to come because public shareholders will be minority holders in a firm whose management has a record of poor decisions, such as the refusal to sell at $8.50 to Mercury Real Estate Partners a few years ago.
The tender offer is the result of a settlement of a proxy fight with Philip Goldstein’s Bulldog Investors/Full Value Partners. Bulldog agreed not to run its slate of directors, and management agreed to provide Bulldog and all other investors with a liquidity event that allows them to sell roughly three quarters of their shares. Unfortunately, Bulldog’s desire to exit their investment will leave everybody in the position of minority shareholders. Even worse, due to the last minute timing of the settlement prior to the shareholder meeting, Bulldog did not vote the proxies that shareholders had entrusted them with and two shareholder proposals, including ours to eliminate the poison pill, were defeated by management’s votes.
The good news is that management ditched FBR as its financial advisor, after they charged exorbitant fees and yielded little results other than bringing in a buyer who could not get financing. Wilshire’s new financial advisor is TM Capital Corp which works for a bargain basement rate of $500,000. Apparently that is a price level at which TM Capital is not prepared to do too good a job. Data in the Stock Ownership Summary (slide 7) of their board presentation is simply copied and pasted from Bloomberg, along with the errors in the Bloomberg data base. Bloomberg attributes the shares held by our fund [PAEDX] to the Georgetowne Funds. Never mind that the Georgetowne Funds shut down last fall. We spoke to the manager when we first noticed their holdings on Bloomberg and he assured us that he had never even heard of Wilshire Enterprises. So we wonder where else in their opinion TM Capital took sloppy shortcuts without checking their information. If we were Wilshire’s management we would ask for a partial refund of the half a million dollar fee due to poor quality work.
The bad news is that public shareholders will become minority owners of a small illiquid company. Currently officers control 900,925 shares of Wilshire directly, representing 11.2% (TM Capital’s opinion ignores COO Kevin Swill’s 127,200 unvested shares as well as some in-the money stock options and shows a smaller percentage of only 8.5%). In addition, the Wilzig estate owns 1,660,792 shares, which we can count as being under the control of management. Therefore, management has control over 2,561,717 shares, or 31.8%. If 4 million shares from outside shareholders are acquired by the company, then management will have absolute control over the company: 63.25%. We see two problems with that:
- Management has avoided so far the payment of a control premium to shareholders by distinguishing between the shares held by management and those held by the estate. If Sherry Wilzig were to obtain formal control over the shares in her father’s estate, how would the remaining public shareholders obtain a control premium? They would not.
- As we pointed out in our book about merger arbitrage, shareholders are largely powerless against creeping takeovers of companies. Sherry Wilzig’s slow takeover of the company reminds us of what was about to happen at infoUSA, now renamed infoGroup (IUSA) when Vinod Gupta was slowly approaching the 50% threshold.
Shareholders will be in a tough spot once management exercises absolute control. If all shareholders tender, the proration factor will be about 73%. Not all shareholders will tender, so that the tendering shareholders should expect to be left holding about one quarter of their current holdings. We expect that the shares will descend back to penny levels once the tender offer is completed. At some point in the next year or two, management will take the company private through another tender offer, which will cost them less than a dollar per share. Sherry Wilzig was willing earlier in the year to acquire shares for $1.10 from distressed sellers in private transactions, so we would expect that this will be a level at which a going private deal could be consummated. If proration of the current offer is taken into account, the average payout for shareholders in a $1.10 squeeze-out will be $1.76, roughly current cash on hand and no value for the going concern.
Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund [PAEDX], which owns shares of Wilshire Enterprises.