OLD GREENWICH, Conn.,
Jan. 13, 2014 /PRNewswire/
-- Lone Star Value Management, LLC (together with its
affiliates, "Lone Star Value"), a significant shareholder of SWS
Group, Inc. ("SWS" or the "Company") (NYSE: SWS), owning 750,000
shares of the Company, today announced it delivered a letter to the
Board of Directors of SWS (the "Board"). The letter detailed
Lone Star Value's conclusion that the unsolicited proposal
submitted by Hilltop Holdings Inc. ("Hilltop") to acquire all of
the outstanding shares of SWS for $7.00 per share in 50% cash and 50% Hilltop
common stock is deeply inadequate and significantly undervalues the
Company. Lone Star Value expressed its belief that, consistent with
its duties to SWS shareholders, the Board must commence a full and
fair review of all opportunities to maximize shareholder value
through the sale of the Company to the highest bidder. In
addition, the Board should create an independent special committee
to coordinate the review process that does not include members of
management, Hilltop or Oak Hill Capital Partners ("Oak Hill"). Lone Star Value voiced its
concern that Hilltop's large equity stake, lending relationship and
current representation on the Board provide it with leverage to
seek preferential treatment over other bidders. Lone Star
Value called on Hilltop to publicly commit to cooperate with any
efforts of the Board to identify other potential acquirers and
pursue a transaction that maximizes shareholder value.
The full text of the letter follows:
January 13, 2014
Board of Directors
SWS Group, Inc.
1201 Elm Street, Suite 3500
Dallas, Texas 75270
Dear Members of the Board:
As you know, Lone Star Value Management, LLC (together with its
affiliates, "Lone Star Value") is a significant shareholder of SWS
Group, Inc. ("SWS" or the "Company") with current ownership of
750,000 shares of SWS. We invest in undervalued securities
and seek to engage with our portfolio companies in a constructive
way to help maximize value for all shareholders. I grew up in
the Dallas area and have followed
SWS for a long time. Over the years, I have also had many
friends who have worked at SWS. We invested in the Company in
early 2012 and we have conducted a deep analysis of its business
and prospects. We have shared our analysis and recommendations with
the Board of Directors of SWS (the "Board") and principals of
Hilltop Holdings Inc. ("Hilltop") and Oak Hill Capital Management
("Oak Hill") both in meetings with
them and in a private letter we sent to members of the Board in
November 2013. Our goal, which I am
sure that you share, is for SWS to realize its full potential as a
company and for shareholder value to be maximized.
Our views and message to the Board have been clear. As our
November 2013 letter unequivocally
stated, we have long believed that value at SWS can be maximized
through the sale of the Company to the highest bidder following a
full and fair review of all available opportunities. However,
after careful review and consideration of the unsolicited written
proposal submitted to the Board by Hilltop on January 10, 2014 in which Hilltop offers to
acquire all of the outstanding shares of SWS that it does not
already own for $7.00 per share in
50% cash and 50% Hilltop common stock (the "Hilltop Proposal"),
we have concluded that the Hilltop Proposal is deeply inadequate
and significantly undervalues the Company.
In our view, a financial company like SWS should be worth at
least its book value per share in any sale of the company. SWS's
current book value is $9.64 per
share. The Company's CEO and CFO assured us in a private
meeting at the Company's headquarters in June 2013 that SWS's book value was correctly
calculated and stated in its financial statements. By our
estimate, on a fully diluted basis to account for warrants held by
Hilltop and Oak Hill, SWS's book
value is approximately $8.30 per
share. We believe that financial companies, like most cyclical
stocks, should be valued on normalized earnings. We estimate a
reasonable ROE for SWS over time should be 10%, which implies
normalized earnings of $0.83 per
share on SWS's fully diluted book value of approximately
$8.30. We believe a typical P/E
ratio for a financial stock like SWS is 12x, implying a normalized
value of approximately $10 per share.
In addition, the Hilltop Proposal offers only a 15% premium to
where SWS stock was trading prior to Hilltop's bid. The
typical premium in comparable acquisition deals is over 30% which
argues for a bid of $8.00 per
share.
Further, Hilltop has heralded the significant operating
synergies that can be realized in a transaction between SWS and
Hilltop. In a statement accompanying the Hilltop Proposal,
Gerald J. Ford, Chairman of the
Board of Hilltop and a director of SWS, noted "...that Hilltop's
and SWS's businesses are highly complementary" and "[the proposed
transaction] will create benefits from being part of a larger
organization that is strongly capitalized and positioned to compete
on an expanded scale." Given the synergies Mr. Ford so
strongly believes in, we expect the proposed consideration in any
transaction for the sale of the Company to reflect these
synergies. Hilltop's low bid of $7 per share is below SWS's book value and
certainly does not, in our opinion, reflect the value of any
synergies.
The Hilltop Proposal also contemplates that half of the
consideration to be paid to SWS's current shareholders will be in
the form of stock in Hilltop. This structure imposes upon SWS
shareholders the risks inherent in an investment in a company that
is still completing the assimilation of a number of recent large
acquisitions. Hilltop completed the acquisition of PlainsCapital
Corporation in November 2012 and the
FDIC-assisted acquisition of First National Bank of Edinburg as recently as September 2013.
In our view, the consideration offered in the Hilltop Proposal does
not adequately reflect these added risks.
Overall, our view is that the Hilltop Proposal does not provide
fair and adequate consideration to SWS shareholders and we feel
confident that a robust and thorough market search will result in
superior proposals with the potential to deliver far greater value
to shareholders. However, it is essential that any such
process for the exploration of strategic alternatives is conducted
fairly, treats all potential suitors equally and places maximizing
shareholder value as the paramount objective.
One overriding concern of ours is that Hilltop's large 24%
equity stake in SWS (on a fully diluted basis) and current
representation on the Board provide Hilltop with significant
leverage to force through a deal that is not in the best interests
of all SWS shareholders. This is not the first time that
Hilltop has been able to extract preferential terms from the Board
at the expense of shareholders. SWS entered into a
transaction with Hilltop and Oak
Hill in July 2011 in
connection with a loan Hilltop made to SWS at a very high 8%
interest rate. In addition, in return for their investment, Hilltop
and Oak Hill each became entitled
to representation on the Board and each received an exceptionally
large amount of warrants at an exercise price of $5.75 that if exercised would give each a 17%
equity stake in the Company. Perhaps it is this favoritism to
the detriment of shareholders that explains the significant
withhold vote with respect the reelection of the Hilltop and
Oak Hill representatives on the
Board since they joined it. Amazingly, in the days just prior to
the investment by Hilltop and Oak
Hill in 2011, SWS summarily rejected a $7.50 per share all-cash offer from a serious and
substantial financial institution. This questionable decision
suggests the Board's main priority at the time was not maximizing
shareholder value but keeping SWS independent even if it meant
raising capital in a very dilutive manner. Why else choose to
issue debt with an 8% coupon rate and warrants at exercise price of
$5.75 for 34% ownership in the
Company instead of selling the whole Company for $7.50 per share?
SWS shareholders cannot afford another deal with Hilltop that
sees their best interests subordinated to Hilltop's. Given the
importance of a fair process, we call on Hilltop to publicly commit
not to stand in the way of a full and impartial sales process and
not to use any leverage from its large equity stake, lending
relationship or presence on the Board to skew the odds in its favor
in the context of any competing bid.
It is incumbent upon the Board that it conducts a thorough and
fair process to explore all value-maximizing opportunities and give
all interested third parties equal chance to structure a bid that
delivers full value to SWS shareholders. To ensure a fair
process, the Board must immediately form a special committee of the
Board charged with coordinating a full exploration of opportunities
for the sale of the Company to the highest bidder. Such
independent special committee should exclude members of management,
Hilltop or Oak Hill. We firmly believe that an exhaustive
review process will yield superior proposals for the acquisition of
the Company that could deliver far greater value for SWS
shareholders than the Hilltop Proposal.
In conclusion, the SWS Board should run a thorough and fair
process to sell the Company to the highest bidder. We
strongly believe the Hilltop Proposal deeply undervalues SWS and
falls short of delivering to SWS shareholders fair and full
value. The Board's fiduciary duties to the shareholders
mandate that at this time it must conduct a robust and fair
exploration of all alternatives with the help of a special
committee of the Board, reputable financial advisors and without
favoritism to any bidders. We expect the Board to fulfill its
duties by immediately commencing such a full and impartial review
process.
Sincerely,
/s/ Jeffrey E. Eberwein
Jeffrey E. Eberwein
Founder and Chief Executive Officer of
Lone Star Value Management, LLC
About Lone Star Value Management:
Lone Star Value Management, LLC ("Lone Star Value") is an
investment firm that invests in undervalued securities and engages
with its portfolio companies in a constructive way to help maximize
value for all shareholders. Lone Star Value was founded by
Jeff Eberwein who was formerly a
Portfolio Manager at Soros Fund Management and Viking Global
Investors. Lone Star Value is based in Old Greenwich, CT.
Investor Contact:
Jeffrey E. Eberwein
203-542-7020
je@lonestarvm.com
SOURCE Lone Star Value Management, LLC