Cental Steel & Wire rejected a cash offer of $1,000 per share from Samuel, Son & Co., a metal processing and metal products manufacturing company headquartered in Ontario. Central Steel stock, thinly traded on over-the-counter markets, closed at $700/share last week, meaning Samuel, Son & Co.'s offer represented a 43% premium over Central Steel's current market capitalization. Conserve School holds 161,207 shares of Central Steel stock, which would have been valued at $161 million.
It would seem that a cash offer at a substantial premium over current market capitalization would be in the best interests of Conserve School, especially when you consider that the Trust is substantially undiversified, with over three-quarters of its assets held in Central Steel stock. This is an opportunity to, in one fell swoop, not only increase the assets of the trust, but also to boost its liquidity and to diversify and reduce its risk. (And if the first offer was $1,000 per share in cash, you can certainly extract more at the negotiating table.) Conserve School has been heavily reliant on dividends from Central Steel stock to fund operations, and those dividends have taken a wild and unpredictable ride, ranging from $2.50/share in 2002 to a high of $20 in 2007 and back to $11.50 in 2010, according to a Milwaukee Journal Sentinel article. There is little doubt that unpredictable and/or depressed dividends, given their central role in funding Conserve's operations, were a driving force in the decision to convert to a semester school.
Central Steel's decision not to pursue the proposal infuriated minority shareholders, led by Milwaukee-based investment banking firm Edelman & Co. Ltd., which represented 12% of Central Steel's shareholders. President Robert Edelman accused Central Steel executives of "failing to create value", according to the Milwaukee Journal Sentinel. "Central Steel leadership seems to believe that the company is a value unto itself, which needs to be perpetuated as an independent organization in any event, absolutely, and without qualification, forever," he said.
Edelman's statements echo concerns raised previously about the dual role of Conserve School Trustees and Central Steel executives. Preserving tight control over Central Steel has appeared to be the priority, with fiduciary duties and basic portfolio managment principles relegated to the backseat. Conserve School has long been paralyzed by the fact that almost 80% of the trust assets consist of Central Steel stock. As mentioned previously, the trust holds 161,207 shares, which is in the neighborhood of 60% of the company. So while the trust might contain hundreds of millions of dollars, not much of that can be touched without losing control of the company.
Despite the transition to a semester school model, Conserve faces many of the same risks that it did before. The semester school likely costs less to operate, which means it is more likely to be able to survive on stock dividends alone, whereas the full model probably wouldn't. (That's not to say they couldn't pursue tuition revenue or donations like any other school though... but alas...) At the core, Conserve still has almost all of its eggs in one basket. The trust consists mostly of Central Steel stock, and they are still almost exclusively reliant on dividend income to fund the school's operation.
This had the potential to be a boon for Conserve. Substantial appreciation of the trust, combined with greater liquidity and broader diversification... well let's just say if your financial planner asks you if you want these things, say "yes, please". And it highlights once again the conflict of interest in having the same people act as Conserve School Trustees and Central Steel executives.
The Milwaukee Journal Sentinel article can be found here: http://www.jsonline.com/business/sides-tussle-over-central-steel-stock-132383373.html
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