PENNY WATCH

[Pennybuster]

How to Steal a Billion Dollar Company: The Bizarre Story of Horsehead Holdings


$ZINCQ



Posted on August 24, 2016
horsehead

Greedy hedge fund managers.

A corrupt management team.

Hundreds of people out of jobs.

Millions of dollars of shareholder money vanished.

Every now and then people hear stories about greedy hedge fund managers, but most stories often go unnoticed, with most hedge fund managers being smart enough to keep quit.

That’s all about to change.

Meet Horsehead Holdings (OCTMARKETS: ZINCQ), one of the world’s largest recyclers of steel dust, that only few months ago was valued at over $1 billion and close to $20 a share.

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Fast forward only a few months, Horsehead is forced into bankruptcy by a ‘vulture’ hedge fund and corrupt management team, and now worth only $25 million and trading at less than 50 cents a share.

The scariest part of the story? Horsehead never even needed to file for bankruptcy.

Let’s take a step back.

Horsehead Holdings was once a very profitable billion-dollar company, and in only a matter of a few months, was pushed to file for bankruptcy with a ‘vulture’ hedge fund claiming it was all of a sudden worth less than $300 million.

How can a company be valued hundreds of millions of dollars less in a few months?

A couple months ago, Horsehead unveiled a plan to open a state of the art steel dust recycling facility, that would be one of the most advanced and lowest cost in the world, and generate excessive amounts of profits for shareholders.

Then things went wrong very, very fast.

It cost much more than planned to open the facility, as management severely underestimated the total costs, and when the facility was open, new problems kept popping up and ultimately prevented the facility from ever running at full capacity. Horsehead’s profits suffered dramatically, and the company started running into liquidity and cash flow issues.

Enter Grey Wolf Capital Management, the ‘vulture’ fund of the story that was quietly biting into chunks of Horsehead’s debt in order to establish some influence over the company.

So what is a vulture fund? Let’s think of the animal for a second: a vulture is a bird that eats the flesh of dead animals. A free meal, for zero to no effort.

A vulture fund isn’t much different. Vulture funds circle companies that are currently in financial distress. They buy pieces of a company’s debt at very cheap prices, pray the company goes bankrupt, and if it does, they usually end up with a large chunk of equity in the reorganizated company and often make a hefty profit when the company returns to profitability.

It’s much more complicated than that though. There’s a great book on how vulture funds work here: http://amzn.to/2bj5Lrg

While Horsehead was struggling, Greywolf was quietly buying pieces of the company’s debt, and as you’d expect, was positioning themselves quite well for a Horsehead bankruptcy: steal the company for an extremely cheap price and sell it for close to triple their cost in a year or two. Easy money while hurting thousands of people in the process.

Horsehead started experiencing liquidity issues in the November 2015 to January 2016 timeframe, and eventually it culminated in the company missing a very small interest payment when management specifically stated wouldn’t be a big deal. Shortly after in early February, Horsehead filed for bankruptcy to the shock of many stock holders.

So here’s a few questions:

Why would management lie about everything being okay?

Why didn’t they do a secondary stock offering to fix their liquidity issues, when major investors like Guy Spier and Phil Town would have stated they would have been more than happy to participate?

Bankruptcy filings shows Greywolf valued the company at less than $300mm, when only months before the company was valued at over $1 billion. Enraged shareholders rallied together in court in Delaware to lobby for an equity committee, citing the dramatic and rapid change in valuation in only a few months, and the lies from management.

The reasoning for the equity committee was simple: if we get approval for a committee, we’ll get offers to buy all or parts of Horsehead and prove the company is worth much more than Greywolf is claiming. It’s a win, win, win for all parties involved.

In an extremely rare outcome for bankruptcy court, Judge Sontchi approved the formation of an equity committee stating “something doesn’t smell right” and demonstrated further conviction that there was true value in the equity of this so-called ‘bankrupt’ company.

As the equity committee got to work, they hired a consultant to value Horsehead, who ultimately put a $770 mm to $850 mm valuation on the company, valuing the equity at $5 – $5.3 a share.

In an additional turn of events, they discovered that management hid that there were offers in December to buy two of Horsehead’s subsidiaries for a price likely exceeding $600 million, more than double what Greywolf was saying the company was worth, and valuing the equity at greater than $1 a share for only parts of the company.

How does a company that had these kinds of offers go bankrupt only two months later?

Something clearly doesn’t smell right.

Bankruptcy filings have already revealed that recently there have been multiple bids to buy all or parts of the company, and Greywolf’s advisor Lazard even had to develop a formalized process to analyze all the bids.

Over a hundred Horsehead shareholders are already planning to rally at the next court hearing scheduled on Tuesday August 30th in Delaware, in hopes of thwarting Greywolf’s plan to steal the company on the cheap.

Even secured debt holder Northeast Trust has objected to Greywolf’s plan. How can Greywolf’s plan really be the best possible solution when a secured debt holder is even objecting and the company has multiple offers in place that will likely value the equity way above current market prices?

Is Horsehead really a bankrupt company, or just in this position because of a greedy hedge fund and corrupt management team?

It’s becoming pretty clear it’s the latter.

Shareholders anticipate the company will get bought for a much larger sum than Greywolf is claiming, making Horsehead a landmark case in bankruptcy, and recovering millions of dollars for preyed upon shareholders.



http://alphatreegroup.com/how-to-steal-a-billion-dollar-company-horsehead-holdings/