Orange Capital, LLC issued the following statement regarding Strategic Hotels & Resorts’ (NYSE:BEE) (“Strategic” or the “Company”) February 19, 2013 public response to Orange Capital’s letter urging an immediate sale of the Company.
Orange Capital’s statement is as follows:
We are disappointed by Strategic’s response to our February 1st letter (“Letter”) urging an immediate sale of the Company, and its continued refusal to address the issues we raised as evident in yesterday’s earnings release.
Our Letter clearly outlined why a sale, with estimated proceeds of $11 – $14 per share, is the best path to maximize shareholder value. Despite claims of transparent communications with its shareholders, the Company failed to communicate which of our “assumptions and conclusions” it disagrees with, and why a sale is not in the best interests of shareholders.
In addition, Strategic alleged that we made our Letter public to advance our short-term trading interest. In fact, we have increased our holdings to 6,625,800 million shares since we published our Letter. We remain one of the Company’s top 10 shareholders.
One key consideration in our urging for a sale is Strategic's poor corporate governance. The Company has made numerous arrangements that have entrenched and enriched management at the expense of shareholders. In light of this pattern of behavior, including the Board’s failure to respond adequately to our Letter, we demand Strategic immediately form a Special Committee of Independent Directors and retain a financial advisor. The objectives of the Special Committee would be to overhaul existing governance to conform with industry "best practices" and explore all strategic alternatives, including a sale, which we maintain is the best alternative for shareholders. Should the independent directors fail to do so, they should be replaced.
We are not alone in identifying the governance shortcomings plaguing the company. Institutional Shareholder Services ("ISS"), a leading independent proxy voting and corporate governance advisory firm, recommended that shareholders withhold votes for four of the Company’s 10 directors at Strategic’s 2012 annual meeting, including the Company’s CEO Raymond Guellein.
The following are examples of how Strategic’s flawed governance practices have impaired shareholder value:
THE GELLER AGREEMENT
In November 2012, the Company entered into a Separation Agreement with the Company’s Former CEO, Mr. Laurence Geller. Under the agreement, Mr. Geller, for a period of 18 months, is prohibited from making an offer to acquire the Company or any of its assets. We see no circumstance whereby prohibiting an individual, particularly one with the ability to assess the true value of Strategic's assets, from buying the Company is in the best interests of shareholders. We demand the Board immediately waive this standstill provision in Mr. Geller’s Separation Agreement.
In August 2009, following a 99 percent drop in the Company’s share price, the Board approved a “Value Creation Plan” awarding up to 2.5 percent of the Company’s market capitalization to certain executives. This award was in addition to already significant executive compensation, including an annual cash bonus, restricted stock units and share options. We are perplexed that this Board of Directors would approve an exceptional reward for the same management team that overleveraged the Company and nearly wiped out its entire market capitalization. Shareholders have suffered while management has prospered. Strategic’s share price remains 68 percent below its previous high.
ISS shares our concerns on executive compensation. For three consecutive years, it has highlighted a “pay-for-performance disconnect… due to guaranteed equity grants, increases in long-term equity incentive values, poor benchmarking practices and culmination of the Company's Value Creation Plan, which provides excessive awards unlinked from Company performance.”
In November 2008, Strategic adopted a one-year shareholder rights plan (“Poison Pill") citing the “significant dislocation in the equity markets and challenging economic environment and outlook, particularly in the lodging sector.” This Poison Pill was never put to a shareholder vote. While equity markets have stabilized, Strategic has renewed its “one-year” Poison Pill four consecutive times without a shareholder vote. There is no justification for maintaining the Poison Pill other than to entrench management. We demand the Board immediately terminate the Poison Pill.
ISS also gives Strategic poor marks on matters involving shareholder rights, citing the Board’s failure to put the poison pill to a shareholder vote, amongst other concerns.
We reiterate our beliefs that:
- The best alternative to maximize shareholder value is an immediate sale of the Company;
- A sale would likely result in proceeds of $11-$14 per share, or 49-90 percent above the Company’s last closing price;
- Private market values for luxury hotel properties far exceed public market valuations;
- There is a large pool of well capitalized buyers for the Company’s luxury hotels;
- Strategic’s large portfolio of luxury hotels is unique and has outstanding scarcity value;
- Strategic is burdened with material corporate overhead diluting shareholder returns;
- The Company has a material cost of capital disadvantage when compared to other owners of luxury hotels;
- Strategic’s leveraged balance sheet offers few prospects for a return of capital to shareholders for the foreseeable future;
- Strategic lacks brand value; and
- Management lacks a credible plan for creating shareholder value.
We remain open to discussing our views with the Board.
About Orange Capital LLC
Orange Capital, LLC (“Orange Capital”) is a New York based investment firm. The firm is a value oriented investor in event-driven securities. The firm allocates across the capital structure on an opportunistic basis. Orange Capital was co-founded in 2005 by Daniel Lewis and Russell Hoffman. Prior to founding the firm, Orange Capital's portfolio manager, Daniel Lewis, was a director with Citigroup's Global Special Situations Group.