Consider Steel Partners Holdings’ Preferred Shares

1

Company placed reasonable clause surrounding dividend payouts

Stock: Steel Partners Holdings LP(NYSE:SPLP) 

Steel Partners Holdings LP, a $480 million New York-based private investment firm, currently traded at 20% discount its book value (about same as its 3-year average). The firm does not pay a dividend on its common shares but has an attractive fixed 6% dividend yield on its preferred units (ticker SPLP-A).

In its recent six months operations, Steel Partners’ revenue increased 28.7% (vs. 3-year ave. 13.1%) year over year to $681.7 million and a contrasting 36.4% decline (vs. 3-year ave. -30.2%)  in profits to $7.2 million.

The investment firm recorded 31% higher costs and expenses resulting in lower profitability in the period.

Warren Lichtenstein, Executive Chairman of Steel Partners

“Operating results for the second quarter reflected solid performances by our Diversified Industrial and Energy segments, including contributions from acquired operations, along with reduced corporate expense, partially offset by lower contributions from our Financial Services segment.

“While expectations for the quarter and first half of 2017 were achieved, the high end of the Adjusted EBITDA guidance range for the remainder of the year has been adjusted downward to reflect the outlook in our Diversified Industrial segment, including weaker than anticipated demand, a shift in product mix, and expected higher material costs, partially offset by an improved outlook in our Financial Services and Energy segments.”

Steel Partners is managed by an entity called SP General Services LLC (SPGSL) in which five of SPGSL board members are appointed by no other than Warren G. Lichtenstein, Steel Partners’ executive chairman and owns 14.4% stake in the company itself. SPGSL, on the other hand, owns 28.4% of Steel Partners whereby the 51-year-old Lichtenstein also serves as the chief executive.

In addition to annual expenses of SPGSL answered for by Steel Partners, the company pays an annual rate of 1.5% of its capital to SPGSL and was at $8.6 million in the recent fiscal year.

Founded in 1990, Steel Partners owns and operates businesses and has significant interests in companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics, banking and youth sports.

The company operates through the following segments: Diversified Industrial (86% of 1H unadjusted revenue), Energy (9%), Financial Services (5%), and Corporate and Other.

Steel Partners have several direct/indirect ownerships of companies including Handy & Harman (which will be totally acquired through a merger agreement as of June 26), API Group plc, Steel Excel, and Utah-based WebBank.

For some reason, Steel Partners’ energy business has failed to generate any profits in recent years, including the first half of its operations. The company’s stake in WebBank has help it generated good business in recent years as the bank itself had a healthy Tier 1 Capital ratio of 29.7% as of June compared to 33.3% in December 2016.

As of June, Steel Partners had $338 million in cash and cash equivalents, and $390 million in debt (+$14 million from a year earlier) with debt-equity ratio 0.65 times (vs. 0.65 times a year earlier). Overall capital also increased by $16.5 million to $595.7 million.

In the past three years, the company allocated $86 million in capital expenditures, raised $353 million in debt and other financing activities (net repayments), handed out $202 million in share repurchases despite a free cash flow generation of $171 million in the period.

With a good amount ownership interest and focus on building its diversified industrial business (86% of unadjusted revenue), Steel Partners’ preferred shares seem to be a good pick. The company, nonetheless, should probably eliminate its declining energy business as it only encroaches on its capacity to deliver profitability.

Using recent historical revenue growth and multiples and a 15% margin indicated a per share figure of $21.51 vs. $18.45 at the time of writing.

Dividend investors, meanwhile, might want to take some risk on Steel Partners’ preferreds that currently traded at $21.05 compared to a potential redemption of $25, plus yearly dividends. A caveat, reviewing its clauses triggered some interesting findings that actual liquidation value could be less than $25 depending on the company’s capability on allocating cash to such.

SEC Filings Snippets (link to file)

Distributions

Distributions on the SPLP preferred units will be payable when, as and if declared by the SPLP GP Board out of funds legally available, at a rate per annum equal to 6.0% of the $25.00 liquidation preference per unit. Distributions are payable in cash or in kind or a combination thereof at the sole discretion of the SPLP GP Board. The liquidation preference per unit for purposes of calculating distributions will not be adjusted for any changes to the capital account balance per unit as described below under “— Amount Payable in Liquidation.”

Amount Payable in Liquidation

Upon any voluntary or involuntary liquidation, dissolution or winding up of our partnership (“liquidation”), each holder of the SPLP preferred units will be entitled to a payment out of our assets available for distribution to the holders of the SPLP preferred units following the satisfaction of all claims ranking senior to the SPLP preferred units. Such payment will equal the sum of the $25.00 liquidation preference per SPLP preferred unit and accumulated and unpaid distributions, if any, to, but excluding, the date of liquidation (the “preferred unit liquidation value”), to the extent that we have sufficient gross income (excluding any gross income attributable to the sale or exchange of capital assets) in the year of liquidation and in the prior years in which the SPLP preferred units have been outstanding to ensure that each holder of SPLP preferred units will have a capital account balance equal to the preferred unit liquidation value.

The capital account balance for each SPLP preferred unit will equal $25.00 initially and will be increased each year by an allocation of gross ordinary income recognized by us (including any gross ordinary income recognized in the year of liquidation) that is allocated to the SPLP preferred units, as described above in “Material U.S Federal Income Tax Consequences.” We refer to our gross income (excluding any gross income attributable to the sale or exchange of capital assets) as our “gross ordinary income.” The allocations of gross ordinary income to the capital account balances for the SPLP preferred units in any year will not exceed the sum of the amount of distributions paid on the SPLP preferred units during such year and, to the extent the amount of our distributions in prior years exceeded the cumulative gross ordinary income allocated to the capital account balances for the SPLP preferred units in those years, the amount of such excess for all prior years. If the SPLP GP Board declares a distribution on the SPLP preferred units, the amount of the distribution paid on each such SPLP preferred unit will be deducted from the capital account balance for such SPLP preferred unit, whether or not such capital account balance received an allocation of gross ordinary income in respect of such distribution. The allocation of gross ordinary income to the capital account balances for the SPLP preferred units is intended to entitle the holders of the SPLP preferred units to a preference over the holders of outstanding common units upon our liquidation, to the extent required to permit each holder of a SPLP preferred unit to receive the preferred unit liquidation value in respect of such unit. If, however, we were to have insufficient gross ordinary income to achieve this result, holders of SPLP preferred units would be entitled, upon liquidation, to less than the preferred unit liquidation value and may receive less than $25.00 per SPLP preferred unit. See “Risk Factors — If the amount of distributions on the SPLP preferred units is greater than our gross ordinary income, then the amount that a holder of SPLP preferred units would receive upon liquidation may be less than the preferred unit liquidation value.”

DisclosureI do not have shares in any of the companies mentioned.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s