JANA Partners Challenges Houston Exploration's Board To Stop 'Playing Possum' and Join the Debate On Maximizing Shareholder Val
16 Mayo 2006 - 11:49AM
PR Newswire (US)
NEW YORK, May 16 /PRNewswire/ -- JANA Partners LLC ("JANA") today
challenged the Board of Directors of The Houston Exploration
Company ("Houston Exploration" or the "Company") (NYSE:THX) to
prove to shareholders that they are aggressively pursuing maximum
value by either showing why the approximately $650 million share
repurchase JANA has called for will not deliver the most long-term
value for shareholders, or if they cannot, to institute such a
repurchase immediately. JANA Managing Partner Barry Rosenstein, in
a letter to the Board today, noted that it has been close to two
months since JANA first presented the Company with JANA's analysis
demonstrating that such a repurchase would create far more value
for shareholders than the Board's stated plans to use these
proceeds primarily for new acquisitions and debt repayment, and
almost a month since JANA publicly called upon the Board to pursue
such a repurchase. Furthermore, Rosenstein pointed out, it has been
over two weeks since shareholders responded overwhelmingly to a
brief "withhold" campaign by JANA to send a message to the Board to
maximize value. Although JANA called upon shareholders to withhold
their votes for directors at last month's annual meeting less than
a week before the meeting, Rosenstein noted that a resounding 30%
of the shares were withheld. He noted further that this number
would have likely been over 50% today given that on the record date
for the meeting JANA held most of its 9% of the shares through
options for regulatory reasons and given the substantial turnover
in the shares since that time. "Yet the Board has said nothing in
response to this electoral outcry," Rosenstein said in today's
letter, "nor has it offered any analysis to counter our detailed,
quantitative analysis or to support their stated intentions. In
fact, we are starting to question whether anyone at the Company has
even done the math on what course of action is best for
shareholders. This refusal to join the debate about maximizing
value for shareholders continued on the Company's quarterly
earnings call last week, when Company management declined to
mention any of these matters or take a single question from a
buy-side analyst." Rosenstein maintained that the Board's refusal
to respond substantively to demands to maximize value "represents a
fundamental misunderstanding of the relationship of a board to
their shareholders. Shareholder demands for value maximization are
not a threat to be avoided. Instead they are an opportunity to work
collaboratively to achieve the best possible returns for the
company's true owners, which is a board's highest duty. Therefore,
we urge the Board to stop 'playing possum' and start engaging with
its shareholders in the debate regarding the future of the
Company." Referring to JANA's updated analysis demonstrating that a
$650 million share repurchase should result in per share earnings
accretion of approximately 45%, which was appended to today's
letter, Rosenstein wrote, "We challenge you to either respond with
your own analysis showing that your stated plans will create more
value for shareholders, or commit to this substantial repurchase.
Failing to respond and proceeding blindly ahead as planned without
having demonstrated any semblance of consideration for maximizing
value will demonstrate a clear breach of your fiduciary duties, and
we will not hesitate to hold each Board member individually liable
for doing so if necessary." In addition, given the Company's
historical underperformance, Rosenstein again called upon the Board
to explore possible strategic alternatives for the Company,
including a potential sale. "We believe there are numerous
interested acquirers and it is our understanding that the Company
may have in fact already received an indication of interest in a
sale which was rebuffed before it could be fully explored,"
Rosenstein wrote. "This would indicate in our mind further
indifference to the Board's obligation to maximize value, and we
believe it must begin a prompt evaluation of such a transaction."
Background JANA Partners LLC, a Delaware limited liability company,
is a hedge fund with assets exceeding $5 billion with offices in
New York and San Francisco and is the beneficial owner of
approximately 9% of the outstanding shares of Houston Exploration.
ATTACHMENT: FULL TEXT OF MAY 16, 2006 LETTER FROM JANA PARTNERS LLC
TO THE BOARD OF DIRECTORS OF THE HOUSTON EXPLORATION COMPANY May
16, 2006 The Board of Directors The Houston Exploration Company
1100 Louisiana Street, Suite 2000 Houston, Texas 77002 Attention:
William G. Hargett Chairman, CEO & President VIA FACSIMILE AND
OVERNIGHT DELIVERY Gentlemen, "Playing possum" is the colloquial
term for a defensive technique employed by opossums, more commonly
referred to as possums, whereby the animal falls over and remains
motionless when confronted with danger. As a survival strategy for
these animals when confronted by predators such as owls and foxes,
it is generally effective (though less so when employed against
oncoming traffic). As a survival strategy for a board of directors
when confronted with shareholder demands to maximize value after
years of underperformance however, it is an inexcusable abdication
of fiduciary duties. Moreover, it represents a fundamental
misunderstanding of the relationship of a board to their
shareholders. Shareholder demands for value maximization are not a
threat to be avoided. Instead they are an opportunity to work
collaboratively to achieve the best possible returns for the
company's true owners, which is a board's highest duty. Therefore,
we urge the Board to stop "playing possum" and start engaging with
its shareholders in the debate regarding the future of the Company.
It has been almost one month since JANA Partners LLC ("we" or "us")
first publicly called upon the Board of Directors (the "Board") of
The Houston Exploration Company ("Houston Exploration" or the
"Company") to put the proceeds of the recent Gulf of Mexico asset
sale and the Company's strong balance sheet to work for
shareholders through an approximately $650 million Dutch tender
share repurchase, rather than squandering most of these proceeds on
value-destroying acquisitions and inefficient debt repayments. It
has been even longer, almost two months, since JANA first shared
its analysis with the Company privately. And it has been over two
weeks since, following a very brief "withhold" campaign by us, your
shareholders delivered a clear message at the annual meeting that
the Board must take all necessary steps to deliver the highest
possible return for shareholders. As we have explained, the already
sizable 30% of shareholders who voted to withhold their votes from
the Board would very likely have been over 50% if the vote had
represented the current shareholder base, given that JANA's vote
would be 9% rather than 1% today and given that we believe that
most share purchases since the record date for the annual meeting
have been by investors who support our view.(1) Yet the Board has
said nothing in response to this electoral outcry, nor has it
offered any analysis to counter our detailed, quantitative analysis
or to support their stated intentions. In fact, we are starting to
question whether anyone at the Company has even done the math on
what course of action is best for shareholders. This refusal to
join the debate about maximizing value for shareholders continued
on the Company's quarterly earnings call last week, when Company
management declined to mention any of these matters or take a
single question from a buy-side analyst. We therefore have a direct
and simple challenge for the Board. Attached is an updated analysis
comparing the share repurchase scenario to the acquisition
scenario. We believe this analysis clearly shows that an
approximately $650 million share repurchase will create
significantly more shareholder value than using these proceeds to
pursue long-lived onshore acquisitions in today's highly
competitive M&A environment. As set forth in the attached
analysis, we believe that the Company could repurchase
approximately 37% of the outstanding shares (slightly less than 11
million shares) paying a 15% premium to the recent market price.
This would be achieved by using estimated net cash proceeds of
approximately $520MM from the Louisiana Gulf of Mexico sale in
addition to $130 million of debt (leaving the Company with the same
leverage ratio of approximately 1.0x estimated 2007 EBITDA that it
had prior to paying down debt with the proceeds of the Texas Gulf
of Mexico sale). We believe that a buyback of this size would
achieve EPS accretion of close to 45% based upon our 2007
estimates. The acquisition scenario however yields significantly
less EPS accretion. Furthermore, much of the accretion generated in
the acquisition scenario is actually attributable to the removal of
the large cash position from the balance sheet (which we assume
would earn only a 2% return if it remained on the balance sheet).
We have assumed for purposes of this analysis that the Company
would have to pay close to $2.75/Mcfe (which is in fact below
recent comparable transactions) for long-lived onshore assets. We
have also assumed an R/P ratio of 13 years for the acquired assets
and a cost structure similar to the Company's existing onshore
assets - so the EBITDAX multiple would also be at a substantial
premium to the existing multiple. Based upon these assumptions, the
EPS accretion achieved would be approximately 14%, although the
actual accretion would in fact likely be even lower given that such
a transaction would carry much higher integration and execution
risk, which is not fully discounted in our analysis. We challenge
you to either respond with your own analysis showing that your
stated plans will create more value for shareholders, or commit to
the substantial repurchase we have outlined. Failing to respond and
proceeding blindly ahead as planned without having demonstrated any
semblance of consideration for maximizing value will demonstrate a
clear breach of your fiduciary duties, and we will not hesitate to
hold each Board member individually liable for doing so if
necessary. In addition, in conjunction with the Dutch tender, we
believe the Company should consider implementing a comprehensive
hedging strategy. By doing so, the Company can place a "collar" on
a significant portion of 2007 and 2008 natural gas volumes, which
would be beneficial given that our projections are based upon the
lower-end of what the Company would likely be able to secure as a
floor on such a "collar" transaction. In other words, implementing
a hedging program such as this would preserve significant commodity
price upside while locking-in cash flows that already translate
into a deeply discounted relative and absolute valuation. We
encourage you to look at the example of the oil and gas exploration
company Kerr-McGee, a similar situation we were involved with last
year where we advocated the repurchase of a substantial amount of
stock together with the implementation of a hedging strategy to
lock in cash flows. In marked contrast to your non-responsiveness
to date, the leadership of Kerr-McGee ultimately used our challenge
to maximize shareholder value as an opportunity to engage in a
productive dialogue with shareholders, including by traveling the
country to speak with shareholders about the best way to accomplish
this goal. After implementing our proposals and even expanding upon
them, Kerr- McGee's stock price has doubled, demonstrating the
value of working together with your shareholders rather than trying
to shut them out. Finally, as we have previously stated, we believe
given the Company's historical underperformance that the Board must
explore possible strategic transactions to maximize value,
including a potential sale. We believe there are numerous
interested acquirers and it is our understanding that the Company
may have in fact already received an indication of interest in a
sale which was rebuffed before it could be fully explored. This
would indicate in our mind further indifference to the Board's
obligation to maximize value, and we believe it must begin a prompt
evaluation of such a transaction. We look forward to your prompt
response demonstrating a serious evaluation of these matters. We
can be contacted at (415) 989-7770. Sincerely, Barry Rosenstein
JANA Partners LLC Managing Partner BR/CP THX: Share Repurchase
Scenario THX 2007E EPS Impact assuming share Pro repurchase Current
Buyback Forma Cash (including LA GOM proceeds after tax & hedge
buyback) $520 ($520) $0 Total Debt $424 $130 $554 Net Debt (Cash)
($96) $650 $554 assume 15% premium Share Price $52.75 $61 $52.75
Shares Outstanding 29.3 (11) 18.6 Equity Market Capitalization
$1,546 $981 Total Enterprise Value $1,451 $1,535 2007E EBITDAX $522
$522 EV/2007E EBITDAX 2.8x 2.9x Proved Reserves (Bcfe pro forma for
divestitures & acquisitions) 632 632 Proved Reserve Multiple
($EV/Mcfe) $2.29 $2.43 2007E EPS $6.67 $9.64 P/E Ratio 7.9x 5.5x
EPS Accretion 45% THX: Acquisition Scenario Pro Capitalization
Current Acquisition* Forma Cash held in 1031 Account $590 ($590) $0
Cash (excluding LA GOM proceeds) $20 $0 $20 Total Debt $424 $0 $424
Net Debt (Cash) - calculated using after tax LA GOM proceeds ($96)
$590 $404 Share Price $52.75 $52.75 Shares Outstanding 29.3 29.3
Equity Market Capitalization $1,546 $1,546 Total Enterprise Value
$1,451 $1,951 2007E EBITDAX $522 $92 $614 EV/2007E EBITDAX 2.8x
6.4x 3.2x Proved Reserves (Bcfe pro forma for divestitures &
acquisitions) 632.2 214.5 846.7 Proved Reserve Multiple ($EV/Mcfe)
$2.29 $2.75 $2.30 2007E EPS $6.67 $7.62 P/E Ratio 7.9x 6.9x EPS
Accretion 14% * Acquisition assumes a 13 year R/P ratio and a
similar cost structure to existing THX onshore asset base (1) On
the record date for the annual meeting, JANA beneficially owned 9%
of the Company's stock but for regulatory reasons held most of this
position through options which have since been exercised.
DATASOURCE: JANA Partners LLC CONTACT: JANA Partners LLC,
+1-212-692-7696
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