Asks Board and Management to Explore Specific Paths to Value Creation
Seeks Increased Management Incentives, Return of Excess Cash to
Shareholders and then Sale of the Company
Full text of the open letter follows:
As principal of
A. Excess Cash
As mentioned in our first letter, we calculate that the Company could return approximately
TESO will hold approximately
$100 millionin cash by the middle of this year.
The Company holds
$80-$100 millionin excess working capital. As mentioned in our previous letter, the equation of payables and receivables on your balance sheet would release $80 millionin cash, and management has on numerous occasions indicated that the Company could release over $20 millionin working capital from excess inventory. This equates to $100 millionin cash to be released through a more sound management of working capital.
The Company is slated to generate well over
$120 millionin EBITDA this year. We believe that a conservative degree of financial leverage-1.5 X net debt to EBITDA- would allow you to take on $180 millionin debt at no more than 5% interest).
As for uses of this cash, we note the Company’s interest in ‘consolidating’ the industry. However, the
We therefore propose that management conduct a share buy-back, and below set forth below a brief analysis on the EPS impact of such a step. Our brief analysis assumes that the Company pays a 10% premium to the current share price (i.e. buys stock at
|Status Quo||Share Buy-back||share Buy-back|
2015 Net Income
We note that of the 12 top investors polled, one voiced a preference for a special dividend. Should the board prefer the latter option, we note that
We believe that despite Tesco’s world-class operations and margins, as well as strong growth prospects, the Company has a limited independent future. The Company lacks access to the capital necessary to become a formidable, diversified operator within its sector. Tesco’s limited resources have already forced management to dispose of the CDS division in 2012, despite that division’s extremely attractive, if not transformational, long term prospects.
As mentioned in our previous letter, we believe that no event can unlock value for investors as decisively as a sale of the Company, especially when preceded by the return of excess cash to shareholders. A strategic acquirer would be able to eliminate over
|Casing Drilling||8 X EV/EBITDA projected|
(Q2/2012) EBIT: <0%
|Union Drilling:||5.5 X EBITDA|
(Q3 2012) EBIT: <0%
|Boots & Coots:||6.5 X EBITDA||(Q3 2010) EBIT: 7%|
|Expro Intl:||11X EBITDA|
(Q2 2008) EBIT: <0%
(Q1 2010) EBIT: 8.3%
|Superior Well||20 X EBITDA||(Q3 2010)|
|Global Ind.||N.M / 2 X Revenues|
(Q32011) EBITDA <0%
(Q1 2012) EBIT: 3%
|Allis Chalmers||9 X EBITDA|
(Q3 2012) EBIT <0%
|Prosafe Prod.||7 X EBITDA||(Q2 2010) EBIT: N.M.|
|Omni Energy||7.5 times EBITDA||(Q4 2010) EBIT: 3%|
We thank you for your assurance that any interest expressed in the Company would be duly considered. However, you are surely aware that buyers will not present unsolicited bids for the Company. We also believe that the board should settle for a reasonable rather than extraordinary premium, and therefore ask that you engage in a formal, and public, process to sell the Company, but only after returning the Company’s excess cash to shareholders. This process should commence within 6 months.
C. Incentive Creation
Finally, we still believe that management must be more strongly incentivized to take decisive steps to create shareholder value. We appreciate your assurance that management’s compensation plan is consistent with best practices. However, as mentioned in our previous letter, we believe that management has and is leading operations exceptionally well (at least since the time of our investment, in the summer of 2012). Specifically, management has built a services division which continues to grow in size and profitability, and to set industry standards. Further, the sale of Casing Drilling was a commendable decision by the management team. We also applaud the more recent decision to curb unnecessary capex, and to focus on cash flow generation. We have in this letter proposed specific steps to create extraordinary value for shareholders on a timely basis, and would like to see management better incentivized to undertake these initiatives. Specifically, we again ask that the board adopt a program to augment the management team’s share options. We would suggest an increase of 25% in the option package should the stock price reach
In conclusion, we believe that your fiduciary responsibility requires that you promptly return excess cash to shareholders, and thereafter take formal and public steps to sell the Company. We believe that management needs and deserves to be very well incentivized to undertake these steps, and that this process will not only unlock exceptional value for shareholders, but will also increase the likelihood that Tesco is part of a larger, more diversified enterprise in the industry, with greater access to resources including capital.
ABOUT WHITE EAGLE
White Eagle is a global, value-oriented investment advisory firm that invests in companies with a leading position in their industry or country of operations, strong margins and growth prospects, and compelling valuation. Where appropriate, White Eagle works with the management team and boards of its invested companies to create value for shareholders.