Julian Treger: Cornering Walter Energy's Board
Issue 40, April 2013
In 1960s offices above Fabergé off London’s Bond Street, Julian Treger sits behind a boardroom table topped with green baize. A plastic thermometer sits on a marble side table beneath an Andy Warhol of Marilyn Monroe. As lead partner of activist investor Audley Capital, Treger faces shareholders of Walter Energy this afternoon, the US met coal miner he helped to shape.
Having bought into Cambrian Mining in 2007, Audley took convertible debt in one of its holdings, Western Canadian Coal, after it breached debt covenants. Audley folded one into the other, replaced management, broadened then consolidated its asset base and in 2010, sold the company to Walter Energy for $3.3bn in cash and stock.
It is stock that Audley has largely sold and which has since dropped from $120 to $18. “We’ve been dismayed at the way in which their great inheritance has been destroyed by sequential poor decision making,” Treger says, “but we believe there’s a lot of value to be recovered here.”
Including Treger, Audley has nominated five new directors to Walter’s board. They plan to refinance $1.5bn of the company’s $2.5bn debt, secure off-takes worth $500m, introduce joint-venture partners to share capital costs and pull earnings forward, lowering borrowing and borrowing costs.
Debt, Treger says, is “killing the company when allied with the volatility of met coal prices.” In two years, realised prices have dropped from $217 to $149 per tonne, whilst quarterly interest payments have risen from $4m to $50m, equal to 40 per cent of free cash flow. “It can’t be blamed on the met coal price. What you can blame it on is a miscalculation about the met coal price, but that’s a different cause.”
Proxy voting firms Glass Lewis and ISS have both advised investors to vote in favour of Walter’s existing directors, arguing that they are making “encouraging progress” and hold “the necessary qualifications.”
Treger counters that their analysis failed to compare Walter to its met coal peers, grouping it with lower margin thermal coal. “Walter has done a terrible job at differentiating itself from other coal peers in the US. They don’t think of themselves properly and they don’t sell the story of being a premium player enough.” He adds that US proxy advisors show a “tremendous bias” towards incumbent boards.
Walter has attacked each of Audley’s nominees, detailing insider trading charges against Bob Stan (since dropped) and accusing Larry Clark of lacking experience, contending he was fired by a hedge fund after losing $250m in less than 45 minutes.
“It was interesting that they tried that as a defence,” Treger says. “They initially tried to characterise our intervention as a distraction and I think that is the way they’ve tended to view shareholder concerns historically. They believe they are running the company well and they know best, even though evidence is obvious to the contrary. We’ve deliberately tried to avoid personalising the campaign by looking in detail at each individual’s peccadilloes.”
Given to polo necks, there is a deliberated ruthlessness to Treger’s investment gait. Walter has accused him of “hit-and-run” practices, saying he sold a third of his shares in the company after writing and then leaking a letter marked “Private & Confidential” calling for Walter’s sale.
The charge fails to grasp Audley’s approach, which takes stakes in junior miners where assets are deeply discounted due to financing risk. Holdings are not public, but regulatory filings disclose interests in Ironveld, Sable Mining and Sylvania Platinum. Treger, who comes from a Zimbabwean manufacturing family, is also a director of Firestone Diamonds and Rwanda focused Tinco. In each case, Audley aims to restructure a company over several years, as with Western Coal.
Less visibly, Audley takes 1 to 3 per cent stakes in mining big-caps, leading transition behind closed doors without undermining management or trapping Audley in stock the sale of which would represent a public climb down. It is a strategy that tacitly adds weight to the threat of a public battle, as Walter’s board has failed to observe.
If Audley wins today’s vote, Walter Energy will change from being a company dependent on a cyclical uptick to being one with an aggressive strategic objective. Should Audley lose, Walter’s board will simply find the battle longer running. “In a sense, they’ve painted themselves into a corner through this campaign by saying they’re going to pay down debt, improve operations and that met coal prices are going to go up. I’m sceptical that all those things will come to pass.”
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