Sec Form 13D Filing - Nierenberg David filing for Houston Wire & Cable CO (HWCC) - 2020-03-13

Since the Great Financial Crisis the public market has bid up large cap tech stocks and left behind small, micro, and nano-cap value.  This “undervaluation of value” recently hit its 99^th percentile historically, the highest since the tech bubble of March 2000.

The energy industry was the worst stock market performer in the past decade. Now, in some quarters, hydro-carbon energy is viewed as “politically incorrect” as well.

HWCC shares are so thinly traded that the company is barely public.  Its current average daily trading volume is only about $115,000.  Shareholders have little liquidity, hence HWCC trades at a depressed valuation.

HWCC is not a growth company, hence it trades at a depressed valuation.

Because of the cyclicality of the industries which HWCC serves and because of exogenous risks, HWCC cannot be expected to deliver predictable, linear earnings, hence it trades at a depressed valuation.

HWCC has no current analytical coverage.

For a thinly traded nano-cap, HWCC is too complicated for most analysts to cost-justify studying it, operating in so many different products, markets, geographies, and businesses:  offshore energy, land-based energy, master distributors of wire, cable, specialty fasteners, heavy lifting slings, and multiple served industries.

HWCC has been unlucky as an acquirer:  Its two offshore acquisitions, Southern Wire (SW) and Southwest Wire Rope (SWWR), were wounded by the subsequent explosion of Deepwater Horizon and the collapse of the price of oil, and Vertex by tariffs and trade wars. The aggregate purchase price HWCC paid for its acquisitions exceeds HWCC’s current market cap by nearly 100%.

Protect the independence of the company as it executes this strategy, and recognize  shareholders’ sense of urgency, by electing David Nierenberg a director and designating Damon Benedict a board observer.  This could enable HWCC to use D3’s networks in the activist and the governance communities and David’s four decades of turnaround experience.

Pursue a “sum of the parts” (SOTP) disaggregation strategy, similar to what D3 advocated successfully at MedCath (MDTH) and Garden Fresh Restaurants (LTUS).  SOTP works where a public company is so poorly followed that its total enterprise value is substantially less than what could be realized by selling each of its individual pieces to the right financial or strategic purchasers; paying off debt; and then repurchasing shares and/or distributing net proceeds to shareholders.  At MDTH this generated approximately a 200% gain and about 175% at LTUS.  HWCC’s aggregate purchase prices for SWWR, SW, and Vertex were approximately $80M. There is reason to hope that HWCC might be able to recoup much of what it paid for SW and SWWR.  And, with recent easing of international trade tension, the restocking of inventory, and closure of Vertex’ Attleboro site, perhaps HWCC could monetize most of what it paid for Vertex.  Possibly, the proceeds from these sales could pay off all or most of HWCC’s debt, leaving it with its large, profitable core copper wire and cable master distribution business.

We see four possible benefits from monetizing the non-core businesses:

HWCC’s management and board would free up time to focus entirely on optimizing HWCC’s core business, rather than spreading themselves thin across four different businesses.  We anticipate that focusing management on the core business should improve its growth, asset utilization, and cash flow, thereby generating free cash to improve shareholder returns.

We agree with the board that because HWCC serves cyclical end-user industries, it should not carry more debt than about 2.5X EBITDA.  But, after paying off all or most debt by selling the three non-core businesses, modest borrowing and free cash flow from the core could enable HWCC to repurchase a substantial portion of its shares, increasing the value for shareholders whose longer time horizons enable them to remain invested until completion of the SOTP program.  Working with its investment banker, HWCC should consider possible ways to repurchase shares, such as a Dutch Auction and a self-tender.  Repurchases could be done multiple times over several years.

As HWCC substantially reduces its share count, the company can explore de-listing its shares to reduce G&A expense.

Ultimately, within two to three years, HWCC could sell the core business.  We hope that focusing management entirely on growing and improving the core, then selling it, might generate an attractive exit price, particularly with proceeds distributed among substantially fewer shares.”