In an amended 13D filing on Griffon Corp. (NYSE:GFF) Thursday morning, 8.5% holder Clinton Group delivered a letter to the company proposing a $25.00 per share public recapitalization where up to 50% of the outstanding shares would be purchased through a tender offer.
Clinton Group said they have not received a meaningful response from the company with respect to the proposal.
The firm said:
Based on our analysis of comparable companies, it seems that the cost structure of Griffon can be reduced dramatically. If significant annual cost savings are outlined and a plan is undertaken by the restructuring firm to realize such savings in the near-term, then we believe the stock of Griffon should trade well north of the $25 tender price and offer significant long-term upside. For example, using a conservative 15x P/E multiple on a tax effected $20 million of savings divided by a share count reduced by 43% (through the recapitalization and Clinton Group's incremental equity investment) YIELDS IN EXCESS OF $9.00 PER SHARE OF INCREMENTAL VALUE.
A Copy of the Letter:
To Griffon Board Members:
We have recently attempted to discuss with management and its advisors anoutline of a PROPOSED $25.00 PER SHARE PUBLIC RECAPITALIZATION of GriffonCorporation ("Griffon" or the "Company"). Unfortunately, to date, we have notreceived a meaningful response with respect to the proposal. Therefore, we wouldlike to outline our transaction to the Board of Directors with the hope that wewill ultimately receive a favorable response to our proposal. We wouldappreciate a response within two weeks so that we can expeditiously finalize ourdue diligence with respect to arranging financing as well as appropriatelyaddressing structural issues with the Company.
We propose a $25.00 per share public recapitalization, led by Clinton GroupInc., where up to 50% of shares outstanding are purchased through a tenderoffer. Each existing shareholder would be entitled to have a minimum of 50% oftheir current holdings purchased if proration is required.
The sources of financing for the recapitalization are expected to be as follows:
- $395 million 1st lien bank financing
- $130 million 2nd lien bank financing
- Approximately $65 million incremental capital from Clinton Group, or its affiliates and co-investors.
At less than 5.0x total debt to EBITDA, we believe this is a reasonable andflexible debt financing proposal for the Company. We have been in discussionswith several major financial institutions regarding the debt financing, andbelieve this financing to be easily obtainable. Compared to relevant corporaterefinancing and leveraged buyout transactions in the current marketplace, thiscapital structure is actually conservative.
The proposal is contingent on:
- Clinton Group initially appointing a majority of the directors to the board, who will be subject to annual elections thereafter;
- Adoption of the governance modifications articulated in our previous letter, including board declassification, to be implemented for the benefit of all shareholders;
- Mr. Blau to be designated Non-Executive Chairman with any associated change of control payments deferred until he no longer remains a member of the Board of Directors;
- Engagement of a restructuring firm to manage the Company on an interim basis focusing on cost reductions related to corporate overhead, segment SG&A, manufacturing, distribution, product sourcing, product rationalization and other areas designed to greatly improve the profitability of Griffon's businesses. We have been in contact with a firm who is willing to commence this engagement on an expedited basis;
- Completion of due diligence, and funding, by major financial institutions with whom we have had discussions regarding financing terms and structure; and
- Equity incentive plans created for the management teams of the individual subsidiaries.
We believe that undergoing a levered recapitalization by utilizing the strengthof the Company's balance sheet, coupled with executing a turnaround in Griffon'sstruggling business segments and rationalization of corporate overhead, willultimately create tremendous value on a per share basis over the long-term.
Offering both attractive rates and favorable terms, the current debt financingmarkets further suggest that now is the opportune time to employ leverage toreduce the Company's cost of capital while executing on a strategy that willprovide existing shareholders with partial monetization of their shares at apremium to today's market price and the upside in Griffon's "turnaround."
Based on our analysis of comparable companies, it seems that the cost structureof Griffon can be reduced dramatically. If significant annual cost savings areoutlined and a plan is undertaken by the restructuring firm to realize suchsavings in the near-term, then we believe the stock of Griffon should trade wellnorth of the $25 tender price and offer significant long-term upside. Forexample, using a conservative 15x P/E multiple on a tax effected $20 million ofsavings divided by a share count reduced by 43% (through the recapitalizationand Clinton Group's incremental equity investment) YIELDS IN EXCESS OF $9.00 PERSHARE OF INCREMENTAL VALUE.
We look forward to hearing your response to our proposal and meeting withmembers of the board and its advisors to discuss our proposal in detail.
Clinton Group Inc.