Andrew Wallach and Jason Ader‘s SpringOwl Associates together with Jeffrey Bronchick‘s Cove Street Capital have disclosed an open letter sent to the shareholders of Forestar Group Inc. (NYSE:FOR). Springowl holds around 344,200 shares of the company, which represent 1.0% of the common stock, while Cove Street owns 2.10 million shares, equal to 6.0% of the common stock.
The activists expressed their disappointment in the company’s significant underperformance and stated that even though the company has addressed several of its issues, its initiatives are either “(i) pushed so far into the future that they seem to lack any meaningful effect or (ii) their respective implementation lies at the discretion of your current Board, one which is responsible for many of the decisions that have led to the recent stock price underperformance.”
Forestar Group Inc. (NYSE:FOR)’s stock has lost more than 30% in the last year, which is significantly below the company’s peer group that declined by around 12.4%. Forestar is a $500 million real estate company that owns around 147,000 acres in nine states and also owns 595,000 acres of mineral interests. According to the letter issued by SpringOwl and Cove Street, the company’s main problems represent a lack of a focused strategic direction, which led to the company’s decision to turn into an operating Oil & Gas company, which was a poorly executed move that resulted in losses to shareholders through equity-related issuances and expensive debt financing. Moreover, the company has made several poor Capital Allocation decisions, which, the investors stated, show the Board’s lack of understanding of appropriate valuation methodologies. Forestar also has some “questionable corporate governance practices”.
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.
Disclosure: none
