LESCO: Hawkshaw Capital Disappointed with Deere Takeover Offer

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 |  Includes: DE, LSCO
by: Lon Juricic

In a 13D filing on LESCO Inc. (LSCO), 13.6% holder Hawkshaw Capital disclosed a letter to the company expressing their dissatisfaction with the $14.50 takeover offer from Deere & Co. (NYSE:DE). The firm said the intrinsic value is significantly higher than what Deere & Co. is offering.

Hawkshaw said:

We are confident that shareholder value well in excess of $14.50 will be created if the Board and current management continue to execute on: 1) rebuilding the direct sales force, 2) avoiding the sizable hedging losses and uneconomic pricing commitments experienced in 2006, and 3) growing the number of high return on capital service centers.

Hawkshaw also said, "It appears that the Board did not conduct an open auction process, in which all interested parties might have been given an opportunity to bid for Lesco."

Hawkshaw intends to vote against the proposed transaction.

Hawkshaw changed their filing status from 13G to 13D indicating their more active stance with the investment.

A Copy of the Letter:

Dear Lesco Board Members:

I am writing to you with regard to the proposed sale of Lesco Inc. to Deere &Co. for a consideration of $14.50 per share. Hawkshaw Capital Management, LLC("Hawkshaw"), of which I am a Managing Member, is currently the beneficial owner of 1,246,733 shares of Lesco common stock, which we believe represents over 13%of shares outstanding, thus making us Lesco's second largest shareholder.

Lesco's intrinsic value is significantly higher than what Deere & Co. is offering. The proposed price of $14.50 at best captures the cost synergies available to Deere & Co. as a strategic acquirer, but fails to adequately compensate Lesco shareholders for a return to normal operating earnings and the value creation from continued expansion of the company's high return on capital retail service center business.

We do not understand why the Board decided to sell Lesco at such an inopportune time: that is, immediately following one of the worst operating years in the company's history. The issues that precipitated the stock's decline are, in our view, temporary in nature and largely fixable over the next two years. In 2006,Lesco weathered a "perfect storm" that resulted in a greater than 50% decline int he company's share price. Prior to these challenges, the stock had traded as high as $18 per share. We are confident that shareholder value well in excess of$14.50 will be created if the Board and current management continue to execute on: 1) rebuilding the direct sales force, 2) avoiding the sizable hedging losses and uneconomic pricing commitments experienced in 2006, and 3) growing the number of high return on capital service centers. Indeed, management has already articulated plans to accomplish these objectives and has publicly reported substantial progress on the sales force effort in particular. Therefore, we question the Board's decision to sell the company at this time and at this price.

Furthermore, it appears that the Board did not conduct an open auction process,in which all interested parties might have been given an opportunity to bid for Lesco. If this is in fact the case, we would question whether the Board has sufficiently executed its fiduciary duty to ensure maximum value for shareholders. Therefore, should any alternative potential buyers approach the company, it is incumbent upon the Board to facilitate equal access to all information provided to Deere & Co., despite any conditions that may be imposedby the merger agreement. If no alternative buyer emerges with a sufficiently higher bid, we believe the merger agreement with Deere & Co. should be terminated, and would support Lesco remaining independent under the leadership of current management.

For these reasons, we currently intend to refrain from voting our shares in support of this transaction.

Best Regards,

Frank Byrd, CFA
Managing Member
Hawkshaw Capital Management, LLC

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