MG Capital Nominates Full Slate of Candidates for Election to HC2’s
Board of Directors
Issues
Letter to Fellow Stockholders Detailing the Case For Urgent Change at
HC2, Including the Removal of Chairman and CEO Philip Falcone
Believes
Dismal Governance, Rampant Conflicts, Unjustifiable Waste, and
Perpetual Strategic Missteps Have Cost Stockholders Hundreds of
Millions of Dollars Over Mr. Falcone’s Tenure
Highlights
That in Addition to Maintaining Negative TSR Over Several Time
Horizons, HC2’s Shares Have Consistently Traded at a Massive Discount
to Net Asset Value
To Address
HC2’s Weaknesses and Bring Credibility to the Boardroom, MG Capital
Has Recruited a World-Class Slate With Superior Backgrounds and
Pedigrees
Nominates Six
Highly-Qualified, Independent Candidates That Possess the Expertise
and Vision Needed to Refresh the Board of Directors and Implement a
Value-Enhancing Turnaround Plan
February 18, 2020 08:30 AM Eastern Standard Time
NEW
YORK--(BUSINESS
WIRE)--MG Capital Management, Ltd. (together with Percy
Rockdale LLC, the nominating stockholder, and its affiliates, “MG
Capital” or “we”) is a significant stockholder of HC2 Holdings, Inc.
(NYSE: HCHC) (“HC2” or the “Company”), which collectively with the
other participants in its solicitation beneficially owns more than 5%
of the Company’s outstanding shares. MG Capital today issued a public
letter to stockholders regarding its decision to nominate six
highly-qualified and independent candidates for election to the
Company’s Board of Directors at the upcoming 2020 annual meeting of
stockholders.
Below is the full text of the letter.
***
February 18, 2020
Fellow Stockholders:
MG
Capital Management, Ltd. (together with Percy Rockdale LLC, the
nominating stockholder, and its affiliates, “MG Capital” or “we”) is a
significant stockholder of HC2 Holdings, Inc. (“HC2” or the
“Company”), which together with the other participants in its
solicitation beneficially owns more than 5% of the Company’s
outstanding shares. We believe that HC2’s indefensible record of
long-term underperformance and value destruction stems from
exceptionally poor corporate governance, rampant conflicts of
interest, ineffective balance sheet management, and the absence of a
credible business strategy. In our view, the manifestation of these
issues over the course of Philip Falcone’s tenure as Chairman and
Chief Executive Officer has completely eroded the market’s confidence
in HC2, resulting in the Company’s shares trading at a perpetual
discount to net asset value of more than 80%.1
Although we prefer to engage with corporate leadership teams in a
private manner when issues arise, it is clear to us that HC2’s Board
of Directors (the “Board”) is not positioned to address our concerns
or oversee the implementation of a viable turnaround plan that puts
independent stockholders first. As long as Mr. Falcone controls the
Company, we feel stockholder value remains at risk. We contend that
little has transpired over the past six years to suggest that he and
his hand-picked directors are truly focused on stockholders’ best
interests above all else. This is why are nominating a full slate of
highly-qualified, independent director candidates to replace the
incumbent Board at the 2020 annual meeting of stockholders (the
“Annual Meeting”).
It
is important to stress that we did not come to this decision hastily.
We devoted a significant amount of time and effort to thoroughly
analyzing HC2’s publicly-available business plans, financial results,
balance sheet, governance, executive compensation, and treatment of
stockholders. This has led us to uncover a number of issues that
appear irreconcilable under the incumbent Board, including:
• Dismal
Long-Term Performance: Since
Mr. Falcone took control of HC2 six years ago, there has been a steady
erosion of stockholder value. Our view is that HC2 has delivered
exceptionally poor total stockholder returns (“TSR”) over one-year
(-33.43%), three-year (-65.56%), five-year (-71.97%) and six-year
(-35.14%) horizons.2 We
find that the picture only gets bleaker when evaluating performance on
a relative basis:
o
1-year TSR: -33.43%
vs. S&P 500 return of 29.68%, Russell 300 return of 28.72%, and 2019
proxy peer group3 average
return of 12.57%.
o
3-year TSR: -65.56%
vs. S&P 500 return of 53.16%, Russell 3000 return of 50.34%, and
2019 proxy peer group average return of 13.77% .
o
5-year TSR: -71.97%
vs. S&P 500 return of 80.79%, Russell 3000 return of 77.09%, and
2019 proxy peer group average return of 31.29%.
o
6-year TSR: -35.14%
vs. S&P 500 return of 101.82%, Russell 3000 return of 95.92%, and
2019 proxy peer group average return of 32.51%.
• A
Haphazard Corporate Strategy: Despite
marketing itself as a diversified holding company that invests
strategically and opportunistically across industries, we feel that
HC2 and Mr. Falcone have consistently failed to demonstrate to
stockholders that they possess the abilities, competence, and
expertise to acquire and manage controlling stakes in companies
operating across seven distinct sectors. Perhaps this explains why Mr.
Falcone recently defended HC2’s insurance holdings and questioned MG
Capital’s scrutiny of the business in an email to us—only to turn
around days later and disclose the intended sale of Continental
Insurance.4 It
is also noteworthy that although HC2 has invested a significant amount
of capital in the insurance space, Mr. Falcone is actually banned from
the sector in several states, including New York.5
• An
Ineffective, Unqualified Board: A
review of HC2’s 2019 Proxy Statement and other publicly-available
information reveals that the incumbent directors are either closely
connected to Mr. Falcone, underqualified, or in possession of a track
record that includes legal and regulatory issues. We believe the
problems in the boardroom obviously begin—but do not end—with Mr.
Falcone, who has been able to reap outsized compensation and push
through concerning related party transactions while holding the
Chairman role.6 Lead
Independent Director Wayne Barr, Jr. has not only failed to check Mr.
Falcone’s actions, but he lost the support of Glass Lewis & Co in 2019
and lacks any stated expertise in construction, insurance, energy,
marine services, and other business segments of relevance to HC2. It
is also notable that Board member Lee S. Hillman was Chairman and
Chief Executive Officer at Bally Total Fitness prior to its bankruptcy
and during the period in which the Securities and Exchange Commission
(“SEC”) ultimately focused on during its investigation of the entity’s
accounting practices.7 Although
we intend to share additional analyses related to the Board, our hope
is that stockholders begin to recognize that HC2’s Board needs a
top-to-bottom overhaul.
• Excessive
Debt: Under
the watch of Mr. Falcone and the incumbent Board, we feel HC2 has
taken on excessive levels of debt at the holding company level. It
currently has approximately $470 million of senior, secured notes
outstanding with an interest rate of 11.5%.8 A
significant debt load and high double-digit interest rate is
inappropriate given HC2’s already large holding company expense
structure and the illiquid nature of many of its holdings. Even if the
Company was somehow able to reduce HC2’s debt to more reasonable
levels in the near-term, we believe the Board has already shown itself
to be lacking when it comes to balance sheet management and financial
judgement.
• Unjustifiably
High Corporate Expenses: HC2’s
“Non-Operating Corporate” segment lost $25.9 million in “Adjusted
EBITDA” in 2018.9 In
addition, management was paid more than $4 million in equity
compensation that year.10 That
brings total corporate expenses over the full-year period to more than
$30 million. Given that HC2 had a market capitalization of
approximately $100 million at the end of 2018, we find this level of
spending to be damning evidence of excessive waste and validation of
our view that Mr. Falcone and the Board are not prioritizing
independent stockholders’ interests. It is also worth highlighting
that expenses continued to spiral out of control in 2019, with
“Adjusted EBITDA” of negative $15.2 million through the end of
September 2019.11
• Numerous
Related Party Transactions: We
have discovered a string of disturbing related party transactions that
appear to have benefited Mr. Falcone at the expense of stockholders.
HC2’s most recent 10-Q discloses that in January 2015, the Company
entered into a "Services Agreement" with Harbinger Capital Partners
(Mr. Falcone’s investment management firm).12 The
firm is currently extracting approximately $4 million per year through
this opaque "Services Agreement." We were also shocked to learn that
in 2018, HC2 entered into a costly 75-month lease for office space
previously occupied by Harbinger Capital Partners. Is it appropriate
for a small public company to have a lavish office on Park Avenue
intended for a once large hedge fund?
• Concerns
Over Mr. Falcone’s Regulatory Issues: We
are concerned about the appropriateness and legitimacy of the services
that HC2 may be receiving from Mr. Falcone and his affiliates,
especially given past infractions. Mr. Falcone entered into a
settlement agreement with the SEC in 2013 after admitting wrongdoing
and agreeing to a ban from the investment advisor industry, including
a prohibition on adding new clients. Yet he and Harbinger Capital
Partners still established a "Services Agreement" in 2015 with HC2,
which controls more than $4 billion of securities via its insurance
subsidiary.13 In
addition, numerous public reports have noted that Mr. Falcone was
previously fined $18 million by the SEC and was thereafter required to
pay more than $30 million to New York State to settle a tax evasion
case.
More recently, since our January 15 13D filing, we believe that Mr.
Falcone and the incumbent Board have taken another series of brazen
steps to entrench themselves at the expense of independent
stockholders and corporate democracy. The Company’s February 10
announcement regarding efforts to sell Continental Insurance and
explore alternatives for DMB Global reads to us like a kneejerk
reaction to MG Capital’s recent engagement. We believe it would be in
the best interests of all stockholders if HC2 avoided any major
corporate actions until after the Annual Meeting, at which point
stockholders may elect a completely new Board. Our view is that a
refreshed Board that is no longer weighed down by biases and conflicts
will be much better situated to conduct a holistic strategic review of
the business.
In
light of all these historical and recent issues, we feel that HC2
stands at a crossroads this spring. Even if Mr. Falcone enacts some
incremental enhancements designed to improve HC2’s short-term
prospects, we believe any road forward proposed by him will lead off a
cliff. MG Capital is offering an alternative road that we contend will
lead to enhanced value creation, superior governance, and the
eradication of conflicts and self-dealing.
After conducting a thorough analysis of HC2’s boardroom deficiencies
and needs, we worked to assemble a world-class slate of directors that
have experience investing in companies and operating businesses across
the Company’s priority sectors. Our nominees also possess diverse
expertise in insurance, energy, telecommunications, investment
management, operational turnarounds, debt restructurings, and
regulatory affairs—all areas that will support our proposed 100-day
plan and long-term vision for enhancing stockholder value. We intend
to provide more detail and information about our proposed path forward
for a better HC2 in the weeks and months to come, but in the meantime,
here are our nominees’ summarized biographies:
• George
R. Brokaw,
52, has served as a private investor through several private and
public investment vehicles. Previously, Mr. Brokaw served as Managing
Director of the Highbridge Growth Equity Fund at Highbridge Principal
Strategies, LLC (“Highbridge”). Prior to joining Highbridge, Mr.
Brokaw was a Managing Director and Head of Private Equity at Perry
Capital, LLC (“Perry”). Prior to joining Perry, Mr. Brokaw was
Managing Director (Mergers & Acquisitions) of Lazard Frères & Co. LLC
(“Lazard”). Mr. Brokaw currently serves on the board of directors of
DISH Network Corporation (NASDAQ: DISH), Alico, Inc. and Consolidated
Tomoka Inc. Mr. Brokaw previously served on several public company
boards of directors including Modern Media Acquisition Corp, North
American Energy Partners, Inc. and Terrapin 3 Acquisition Corporation.
Mr. Brokaw received a BA from Yale University and a JD and MBA from
the University of Virginia, and is a member of the New York Bar.
We believe that Mr. Brokaw’s
extensive investing, legal and governance experience would make him a
beneficial addition to the Board.
• Kenneth
S. Courtis,
64, is a financial executive with over 30 years of investment banking
and board experience. Since January 2009, Mr. Courtis has served as
the Chairman of Starfort Investment Holdings. Previously, he served as
Vice Chairman and Managing Director of Goldman Sachs, and Chief
Economist and Investment Strategist of Deutsche Bank Asia. He received
an undergraduate degree from Glendon College in Toronto and an MA in
international relations from Sussex University in the United Kingdom.
He earned an MBA at the European Institute of Business Administration
and received a Doctorate with honors and high distinction from
l’Institut d’etudes politiques, Paris.
We believe that Mr. Courtis’ extensive investing expertise,
governance experience, and banking relationships and perspectives
would make him a beneficial addition to the Board.
• Michael
Gorzynski,
41, is the Managing Member of MG Capital Management, Ltd., an
investment firm focused on complex value-oriented investments. From
2006-2011, he invested in special situations globally at Third Point,
LLC, a large asset management firm, where he focused on macro,
event-driven, distressed, and private investments across the capital
structure (equity, hybrids, bonds, & loans). He is an expert in
restructurings and in the insurance and banking industries, having
participated in dozens of large-scale bank and insurance company
restructurings. He earned a BA from the University of California,
Berkeley, and received an MBA from Harvard Business School.
We believe that Mr. Gorzynski’s extensive financial and
restructuring experience, and familiarity with the insurance and
banking industries, would make him a strong addition to the Board.
• Robin
Greenwood,
43, has been the George Gund Professor of Finance and Banking at
Harvard Business School since 2013 and began serving as Head of the
Finance Unit in 2018. At HBS he is the Faculty Director of the
Behavioral Finance and Financial Stability project and cochairs the
Business Economics PhD program. Mr. Greenwood also currently serves as
a member of the Financial Advisory Roundtable of the Federal Reserve
Bank of New York and a Research Associate at the National Bureau of
Economics Research, which he joined in 2017. Mr. Greenwood received a
PhD from Harvard in Economics, and BS degrees in Economics and
Mathematics at MIT.
We believe that Mr. Greenwood’s prowess in the insurance and
pension industries, as well as his research in these and other
financial industries, makes him an excellent prospective addition to
the Board.
• Liesl
Hickey, 46,
is a veteran political strategist who has worked at the highest levels
of politics and issue advocacy. Since 2016, Ms. Hickey has served as a
senior advisor at each of Guide Post Strategies, Blitz Canvassing and
Pathway Partners, and as a partner at Ascent Media. In addition, since
2015, she has provided political consulting services through RAE LLC.
Prior to that, from 2015 to 2016, she served as an executive director
of Right to Rise and a partner at Patchwork Productions. From 2013 to
2014, Ms. Hickey was the Executive Director of the National Republican
Congressional Committee (NRCC). She was a fellow at the University of
Chicago’s Institute of Politics and a contributor to the Wall Street
Journal’s former “Think Tank.” Ms. Hickey is a graduate of Southern
Methodist University.
We believe that Ms. Hickey’s strategic consulting background,
policy experience and regulatory insights make her a valuable
prospective addition to the Board.
• Jay
Newman, 68,
is currently serving as the Managing Member of Ginzan Management Ltd.,
a family office he founded in 2016. He has over 40 years of experience
working in the finance industry as a lawyer, investment banker and
principal investor. Immediately prior to establishing Ginzan, Mr.
Newman was a Senior Portfolio Manager and Member of the Management
Committee at Elliott Management Corporation where he worked for over
20 years. He is a graduate of Yale College, Columbia Law School and
completed an LLM in Tax at NYU.
We believe that Mr. Newman’s vast experience in the financial
industry as an investor and executive would make him a beneficial
addition to the Board.
We
look forward to continuing to engage with all stockholders in the
coming weeks, with the goal of sharing additional information about
our case for change and campaign to unlock the tremendous upside value
trapped within HC2’s underperforming shares.
Sincerely,
Michael Gorzynski
***
FORWARD-LOOKING STATEMENTS
Any
statements contained herein that do not describe historical facts,
including future operations, are neither promises nor guarantees and
may constitute “forward-looking statements” as that term is defined in
the U.S. Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may include words such as “may,” “might,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential” or “continue,” the negative of
these terms and other comparable terminology. Any such forward-looking
statements contained herein are based on current assumptions,
estimates and expectations, but are subject to a number of known and
unknown risks and significant business, economic and competitive
uncertainties that may cause actual results to differ materially from
expectations. Numerous factors could cause actual future results to
differ materially from current expectations expressed or implied by
such forward-looking statements, including the risks and other risk
factors detailed in various publicly available documents filed by the
Issuer from time to time with the Securities and Exchange Commission
(SEC), which are available at www.sec.gov,
including but not limited to, such information appearing under the
caption “Risk Factors” in Issuer’s Annual Report on Form 10-K filed
with the SEC on March 12, 2019. Any forward-looking statements should
be considered in light of those risk factors. The Reporting Persons
caution readers not to rely on any such forward-looking statements,
which speak only as of the date they are made. The Reporting Persons
disclaim any intent or obligation to publicly update or revise any
such forward-looking statements to reflect any change in Issuer
expectations or future events, conditions or circumstances on which
any such forward-looking statements may be based, or that may affect
the likelihood that actual results may differ from those set forth in
such forward-looking statements.
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
MG
Capital Management, Ltd together with the other participants named
herein (collectively, “MG Capital”), intends to file a preliminary
proxy statement and an accompanying proxy card with the Securities and
Exchange Commission (“SEC”) to be used to solicit votes for the
election of its slate of director nominees at the upcoming 2020 annual
meeting of stockholders of HC2 Holdings, Inc., a Delaware corporation
(the “Company”).
MG
CAPITAL STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ THE
PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE
BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS
WILL BE AVAILABLE AT NO CHARGE ON THE SEC’S WEB SITE AT HTTP://WWW.SEC.GOV.
IN ADDITION, THE PARTICIPANTS IN THIS PROXY SOLICITATION WILL PROVIDE
COPIES OF THE PROXY STATEMENT WITHOUT CHARGE, WHEN AVAILABLE, UPON
REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS’
PROXY SOLICITOR: SARATOGA PROXY CONSULTING LLC (TEL: (888) 368-0379 OR
(212) 257-1311; EMAIL: JFERGUSON@SARATOGAPROXY.COM)
The
participants in the solicitation are anticipated to be MG Capital
Management, Ltd., a Cayman Islands company limited by shares (“MG
Capita”), Percy Rockdale LLC, a Michigan limited liability company
(“Percy Rockdale”), Rio Royal LLC, a Delaware limited liability
company (“Rio Royal”), Michael Gorzynski, a natural person, (“Mr.
Gorzynski,” and, together with MG Capital, Percy Rockdale and Rio
Royal, the “ MG Capital Participants”), George Brokaw, a natural
person (“Mr. Brokaw”), Kenneth Courtis, a natural person (“Mr. Courtis”),
Robin Greenwood, a natural person (“Mr. Greenwood”), Liesl Hickey, a
natural person (“Ms. Hickey”), and Jay Newman, a natural person (“Mr.
Newman” and together with Mr. Brokaw, Mr. Courtis, Mr. Greenwood, Mr.
Gorzynski and Ms. Hickey, each a “Nominee” and collectively, the
“Nominees”; the Nominees and the MG Capital Participants collectively,
the “Participants”).
As
of the date hereof, the Percy Rockdale is the direct owner of
2,422,000 shares of common stock of the Company, $0.001 par value
(“Common Stock”). As of the date hereof, the Rio Royal is the direct
owner of 10,000 shares of Common Stock. MG Capital Management, as the
investment holding company of Rio Royal, may be deemed the beneficial
owner of the 10,000 shares of Common Stock owned by Rio Royal. Mr.
Gorzynski as the sole Manager of Percy Capital and the sole Director
MG Capital Management, may be deemed the beneficial owner of (i) the
2,422,000 shares of Common Stock owned by Percy Rockdale and (ii) the
10,000 shares of Common Stock owned by Rio Royal. As of the date
hereof, Mr. Brokaw is the beneficial owner of 18,000 shares of Common
Stock. As of the date hereof, Mr. Courtis is the beneficial owner of
137,336 shares of Common Stock. Except as described herein, no other
Participant beneficially owns any Common Stock as of the date hereof.
1 As
of market close on January 14, 2020, which is the day before the
Reporting Persons filed a 13D with the Securities and Exchange
Commission, HC2’s shares were trading at $2.27. A sum-of-the-parts
valuation of $12.50 was set forth by B.B. Riley FBR, Inc. in its
February 10, 2020 report.
2 Bloomberg;
TSR reflects share price and performance up until January 14, 2020,
which is the day before the Reporting Persons filed a 13D with the
Securities and Exchange Commission. TSR assumes dividends reinvested.
3 The
“2019 proxy peer group” includes: Cannae Holdings, Inc., Carlisle
Companies, Inc., Compass Diversified Holdings, 2CSW Industrials, Inc.,
E.W. Scripps Co., Entravision Communications, Gannett Co., Inc., Legg
Mason, Inc., Meredith Corp., Opko Health, Inc., Prestige Brands
Holdings, Inc., Raven Industries Inc., Spectrum Brands Holdings and
Steel Partners Holdings LP
4 HC2
press release dated February 10, 2020 (link
here).
5 New
York State Department of Financial Services press release dated
October 20, 2013 (link
here).
6 HC2’s
2019 Proxy Statement.
7 Securities
and Exchange Commission press release dated February 28, 2008 (link
here).
8 HC2
press release dated November 12, 2018 (link
here).
9 HC2’s
Fourth Quarter and Full Year 2018 Results.
10 HC2’s
2019 Proxy Statement.
11 HC2’s
Third Quarter 2019 Results.
12 HC2’s
FORM 10-Q For Third Quarter 2019.
13 HC2’s
FORM 10-Q For Third Quarter 2019.
Contacts
For
Investors:
Saratoga Proxy Consulting LLC
John Ferguson / Joe Mills, 212-257-1311
jferguson@saratogaproxy.com / jmills@saratogaproxy.com
For Media:
Profile
Greg Marose / Charlotte Kiaie, 347-343-2999
gmarose@profileadvisors.com / ckiaie@profileadvisors.com
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