Forestar Group Inc. (FOR): Cove Street and SpringOwl Issue Letter; Express Disappointment with Stock’s Underperformance

Back in June 2012, Forestar Group Inc. (NYSE:FOR) announced its plans to acquire Credo Petroleum Corporation for $146 million. The investors consider that the fact that the company has spent around $300 million to diversify into Oil & Gas over the last three years was a “misguided shareholder-funded adventure”. This spending led to a dilution of the company’s stock and increased the company’s exposure to a cyclical business, which has a negative impact on the company with the recent declines in oil prices.

Therefore, SpringOwl and Cove Street consider that Forestar Group Inc. (NYSE:FOR) should stop its drilling and land acquisition in order to reduce its spending and also it should review whether the company should keep operating in the Oil & Gas exploration segment, as well as set up a cost-saving plan in order to realize profits from some of its previous investments.

Another important issue that Forestar faces is its board composition, the letter added. The investors believe that the current board cannot effectively oversee the management in order to maximize the value of the company. The background of the current board does not show a significant experience or expertise in capital markets and corporate finance. Moreover, as the company has made several moves that involved high-cost debt and diluted the equity of Forestar Group Inc. (NYSE:FOR), the investors consider that the board needs someone with more corporate finance and capital markets expertise.

“The current Board composition highlights a number of current and past relationships amongst the members of your Board. Notably, there are overlaps and presumed preexisting relationships with organizations including: Temple-Inland, Goldman Sachs, Countrywide Financial, KB Home, Genesis Energy and the University of Texas. We have specific concerns about the extent to which these interlocking relationships center around your Chairman, Kenneth M. Jastrow, II,” the letter added.

In this way, both Cove Street and SpringOwl consider that the company needs changes at the level of the board of directors and management in order to review its strategies and find opportunities to increase shareholder value. Moreover, the investors consider that their principals can bring substantial expertise in capital markets and corporate finance that the company needs. Therefore, the shareholders of Forestar Group Inc. (NYSE:FOR) should request for changes and fresh perspectives that could provide better returns for shareholders, or otherwise they will support a Board with a record of failed strategies and declined shareholder value.

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