FrontFour Capital Group, a Greenwich, Connecticut-based fund led by Stephen Loukas, David A. Lorber, and Zachary George, has boosted its position in OM Group, Inc. (NYSE:OMG) and went activist on the company. As a new filing with the Securities and Exchange Commission showed, FrontFour owns over 1.79 million shares of OM Group, up from 268,200 shares held earlier. The stake is equal to 5.8% of the company’s common stock. Moreover, the investor issued a letter sent to Joseph M. Scaminace, Chairman of the Board and CEO of OM Group, in which it expressed concerns with the company’s performance and destruction of shareholder value.
In their letter, FrontFour mentioned that one of its concerns is the fact that the company has missed its financial targets and cut down its revision of EBITDA guidance twice over the course of last year along with the reduction in long term revenue growth estimates. Moreover, the investor stated that OM Group, Inc. (NYSE:OMG) has provided weak returns on capital and keeps pursuing a distructive M&A strategy.
“Additionally, the Company has a bloated cost structure, and is significantly overcapitalized given the Company’s net cash position and the excess cash trapped within working capital. We believe these cumulative factors have caused the Company’s shares to significantly underperform both the broader equity market and its peer group over a sustained period of time,” the letter added.
In addition, the fund stated that the stock of OM Group, Inc. (NYSE:OMG) is significantly undervalued, but there are ways that can fix this situation, such as undertaing some cost-cutting initiatves worth at least $50 million, the release of $30 million in working capital, and a buyback of $250 million. The implementation of this measures could bring the stock to trading at around $60 per share, which is more than double comparing to the current price of the stock.
Regarding OM Group’s M&A strategy, FrontFour stated that it destructed the value of the company, since the company acuired around $1.5 billion in net assets, which is significantly above the current market capitalization of the company, which amounts to around $840 million. The investors considers that the shares are undervalued because shareholders are afraid that OM Group, Inc. (NYSE:OMG)’s cash balances and debt capacity will be used for further destructive acquisitions. Therefore, the company should cease any acquisitions until it can get some new perspectives.