Investor Slams GenCorp

Hedge fund Steel Partners II LP on Thursday, Nov. 11, launched a $708 million hostile bid for GenCorp Inc., attacking the aerospace conglomerate for its subpar financial performance and questioning the company's deal making record. "Management and the board appear to have engaged in what can be best described as a game of gin rummy by buying and selling businesses with no clear corporate strategy and with very poor results, including the recent sale of the GDX Automotive business at a loss of over $300 million," said Warren Lichtenstein, managing partner at Steel, in a letter to GenCorp's board.

From TheDeal.com

RANCHO CORDOVA, CA — Hedge fund Steel Partners II LP on Thursday, Nov. 11, launched a $708 million hostile bid for GenCorp Inc., attacking the aerospace conglomerate for its subpar financial performance and questioning the company’s deal making record.

“Management and the board appear to have engaged in what can be best described as a game of gin rummy by buying and selling businesses with no clear corporate strategy and with very poor results, including the recent sale of the GDX Automotive business at a loss of over $300 million,” said Warren Lichtenstein, managing partner at Steel, in a letter to GenCorp’s board.

Lichtenstein, who owns 8.1 percent of GenCorp shares, has enlisted Imperial Capital LLC as a financial adviser on the $17 a share offer. He did not disclose in the filing how Steel Partners would fund a deal for GenCorp, saying only that he has had “encouraging discussions with several financing sources.”

In addition to pressing for a sale, Lichtenstein called on GenCorp to improve its corporate governance, including electing directors annually rather than staggering their terms.

In a statement, GenCorp said it is meeting with its advisers to respond to Steel Partners’ bid.

One analyst who follows Rancho Cordova, Calif.-based GenCorp seconded Steel Partners’ charges against the company. “Lichtenstein is bang-on right,” he said.

GenCorp erroneously took its focus off its core rocket propulsion systems unit, Aerojet, to concentrate on the less profitable auto parts industry, said the analyst, who asked to remain anonymous.

After the company bought Laird Group plc’s Draftex International Car Body Seals in 2001 for $188 million, GenCorp later that year sold its defense electronics unit to Northrop Grumman Corp. for $315 million. This year the company sold what is now known as GDX Automotive, for $147 million in cash to Cerberus Capital Management LP. In the second quarter GenCorp recorded a one-time charge of $261 million to reflect the sale.

“By buying into automotive and selling the defense electronics business, you are swapping a stable industry with a high multiple to expand a low-performing car parts business in the struggling auto industry,” the analyst said.

But Philip Finnegan, an analyst at defense research and consulting group Teal Group Corp. in Fairfax, Va., said GenCorp is again moving in the right direction by refocusing its energies on rocket engines. The company in October 2003 purchased Atlantic Research Corp.’s propulsion business for $133 million.

“This acquisition is useful because it helps GenCorp write off more of the costs of environmental cleanup because they have more of a government business,” he said.

Finnegan said Steel Partners’ offer could be an effort to stimulate acquisition interest in GenCorp, while noting that there are few natural strategic buyers. For instance, another prospective strategic buyer, Boeing Co., is not interested in expanding its rocket propulsion subsidiary.

Meanwhile, antitrust enforcers in Washington would likely reject a merger between Alliant Technologies LLC and GenCorp because it would weaken competition among makers of solid rocket propulsion systems.

The National Aeronautics and Space Administration uses such systems to power manned space shuttle aircraft because they are generally safer than liquid propulsion engines.

Another GenCorp investor, Gabelli Asset Management Co., which owns 17 percent of GenCorp, in March questioned the company’s M&A strategy. In a Securities and Exchange Commission filing, Gabelli managing partner Mario Gabelli expressed concern with GenCorp’s board and “its stance with respect to possible acquisitions as well as the financing for such acquisitions.”

In addition to criticizing GenCorp’s deal making, Lichtenstein blasted the company’s decision earlier this month to privately offer up to $75 million of its convertible debt and publicly offer up to 8.6 million shares to refinance its debt load.

“The financing will significantly dilute the value of the stock owned by current stockholders,” he said in the filing.

Lichtenstein, who did not return calls for comment, said GenCorp does not need the additional capital because it expects to sell a chemical business unit for roughly $120 million.

GenCorp, whose shares hit $17.50 Thursday, up more than 23 percent from Wednesday’s close of $14.15, had sales of $350 million for the first nine months of 2004, up from $245 million for the same period last year. In October the company said the increase in sales reflects contributions from the propulsion business of Atlantic Research Corp.

Earlier this year, Lichtenstein failed in bids to buy textiles company Sotoh Co. Ltd. and industrial oil maker Yushiro Chemical Industry Co. Ltd., both of Japan. The activist investor also is pressing United Industrial Corp., a Hunt Valley, Md., maker of unmanned surveillance aircraft, to find a buyer.

Lou Whiteman contributed to this report.

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