Thomas Sandell’s Sandell Asset Management, which owns 445,718 shares of common stock in SemGroup Corp (NYSE:SEMG) responded yesterday to SemGroup’s own response to the open letter Sandell sent them on January 26, and expressed disappointment in the response they received from SemGroup’s board. Sandell Asset Management owns 1.2% of SemGroup’s common shares and has economic exposure to an additional 96,742 shares.
Sandell Asset Management, a New York-based hedge fund, was founded in 1998 by Thomas Sandell, and focuses on investing in lesser-known, mid-market companies that are not as well understood by other investors, believing the risk/reward factor of such investments to be more favorable. Nearly the entirety of their assets under management is devoted to the equity markets, with their equity portfolio as of September 30 holding $938 million in value.
Sandell’s current investment in SemGroup Corp (NYSE:SEMG) (they are a recurrent shareholder of the company), which took place entirely during the third quarter of 2014, now represents one of the largest positions in their relatively small portfolio, at 3.95%. As such, it’s an important investment for the hedge fund, and one they feel very strongly about, as evidenced by their January 26 letter.
In the open letter, they expressed the belief that by shedding unnecessary assets, SemGroup could unlock shareholder value, and bemoaned the fact that despite the expectation from shareholders that this would happen to some extent following the appointment of current CEO Carlin Conner in early 2014, that it appears not to be a priority of Mr. Connor, who outlined a more tentative plan in his November 2014 strategic review that did not contain firm commitments to sell non-core assets. Sandell also suggested that selling the company could maximize shareholder value.
As Sandell pointed out, analysts tend to agree with them on the intrinsic value in SemGroup Corp (NYSE:SEMG)’s business, with price targets typically falling within the $75 to $95 range, well above the stock’s current trading rate of $66.92 in afternoon trading Thursday. RBC Capital initiated coverage of the stock on January 22 with an ‘Outperform’ rating and $75.00 price target. While Zacks did downgrade their rating on the stock to ‘Neutral’ on December 31, they have an $81.80 price target on it. And early in December, Capital One also initiated coverage of the stock, giving it an ‘Overweight’ rating.
SemGroup Corp (NYSE:SEMG) responded to the initial letter on Tuesday, saying that they value the input of their shareholders and are doing what they can to maximize shareholder value, including some of the simplification strategies that had previously been recommended. That included dropping their oil assets into their MLP, Rose Rock Midstream LP (NYSE:RRMS) in the first quarter of this year. They also reiterated a plan to drop down their U.S gas assets at some point in the near future.
For their part, Sandell did not take too kindly to that response, calling it a “canned reply”, and bristling in particular at SemGroup Corp (NYSE:SEMG)’s vague suggestion that some of Sandell’s recommendations could be harmful to the company, saying they were “disturbed” by that comment, and that such talk was nothing but scare-tactics. Sandell intimated that they felt SemGroup’s lawyers played a part in the response, so as to best “thwart” their activist investing.
Sandell went out swinging this time, saying in closing that they would make full use of their power as the “true owners of the company” if need be, and take aim at some of SemGroup’s directors. As they pointed out, the charter and by-laws of SemGroup give the shareholders the power to do just that, removing directors with or without cause through a simple majority vote.
Other major hedge fund shareholders of SemGroup Corp (NYSE:SEMG)’s, who could play a major role in any such moves, include David Cohen and Harold Levy’s Iridian Asset Management, which owns 3.58 million shares according to a filing today with the SEC, Stuart J. Zimmer’s Zimmer Partners, which owned 1.06 million shares as of September 30, and Israel Englander’s Millennium Management, which owned 885,801 shares, also as of September 30. Overall, hedge funds tracked by Insider Monkey owned around 25% of SemGroup’s outstanding shares (see the list here). Given the fact that other institutional investors started supporting activists’ campaigns at an increasing rate in recent years, Sandell may get significant support from other shareholders in a proxy fight.
Disclosure: None
