The Steel Partners (SPLP) buyback… or not?
In March 2014 Steel Partners announced a Dutch tender auction for $49 million worth of units at prices ranging from$16.50 to $17.50. Initially the price of SPLP units rose on the news, gradually settling back into the high $16 range as the April 23rd tender deadline approached. But when the results of the tender were announced the unit price fell back, down to around $16 where it is today. The simple reason is that the offer was oversubscribed at $16.50! This means there were a number of large holders that wanted out. Most likely these were original investors in Lichtenstein’s hedge fund (which was forcibly transmuted into the limited partner structure after the 2008/9 financial meltdown) who were waiting for an opportunity to liquidate their holdings without having a devastating impact on the market price.
Remaining unit holders should be pleased, right? After all, 2.97 common units (about 9.6% of units outstanding) were repurchased at a price significantly below Net Asset Value. That theoretically increases the discount to NAV of the remaining units. So why did the unit price not react positively? Well it may have to do with the fact that the offer was significantly oversubscribed at the low-end of the price range, so owners of another 1.5 million units would have been happy to part with these units at the final $16.50 price. This could translate into continued pressure on the market price as those owners try to sell. But, it could also have to do with the filing of an 8-K on May 2nd in which the general partners announced that 1.5 million units of class c units (eventually exchangeable into common units) were issued to management representing incentive awards for 2012 and 2013. So, in effect, there was really only a net 1.5 million unit reduction counting both the Dutch tender and the issuance of these incentive units. The incentive compensation scheme for WL & Co. has been there all the time for limited partners to see, but perhaps it wasn’t until the effects were actually concrete that we realized how much we are paying to the general partner’ skills. The continuing impact of the incentive unit issuance is in all intents similar to a creeping takeunder, and we, limited partners, will eventually be squeezed out, or at least seriously diluted, through the management incentive structure. Yes, more management ownership will align management’s interest with those of the limited partners, but
the combination of high incentive pay [automatically reinvested via C shares will] and discounts to market price for incentive units issued to management (ostensibly because of lower liquidity with a lockup period) eventually erode limited partnership interests. Certainly large investors forced to remain in the partnership because of liquidity issues (not a lot of units are traded daily with respect to the number outstanding) might object that the liquidity discount afforded management is out-of-place. I know I think so, even if I’m not a large unitholder. (edit: see Auggie’s comments below)
The positive impact of the Dutch tender was practically negated by the issuance of incentive units, kind of like when management grants themselves options then proceeds with a similar sized share buyback program. In essence the tender offer simply diluted the negative impact of the incentive units. So where does that leave us? As to the unit price, just about where we were at the end of the 1st quarter with the market price at about a 35% discount to NAV. From a confidence in management perspective… significantly lower. We saw some nice gains in NAV in 2013, so management does deserve some credit. How much is hard to say as the market was ‘kind’ last year. Now let’s see what management can do in a sideways or down market. Can they still create value?…. to be continued