Activist investor takes aim at Crown Castle

Elliott Management, the activist investor, has gone public with its criticisms of Crown Castle. In short, Elliott believes the company has under performed because it has invested heavily in fiber investments which give a low return on investment.



Crown Castle has a market capitalization of $71 billion, the largest of any company with its head office in Houston. It owns 40,000 wireless towers in the US. The company is one of the big three US players in wireless towers along with American Tower (market cap $113 billion) and SBA Communications (market cap $32 billion).

The company suffered an accounting embarrassment in February when it admitted it had overstated equity by $463 million as it had recognized too much revenue on tower installation services. It had to restate its financial statements for 2017 and 2018. The SEC are still investigating.

Elliott stated it had a $1 billion economic interest in the company and has been conducting a private dialogue with the management for the past month.

Elliott is very complimentary about the tower business. As a market, tower leasing is very profitable and highly cash generative. For the Crown Castle’s tower business, EBITDA minus capex has been over $2 billion a year.

Low return Fiber business

However, while the other two big players are expanding into international towers, Crown Castle made the decision to expand into fiber. It owns 80,000 route miles of fiber in the US, primarily through five acquisitions made since 2012 for a combined $11 billion. According to Elliott, capex is 149% of EBITDA for the fiber business. As a result, towers have a return on investment of 20%, while fiber has a return of 3% (compared to a cost of capital of 8%).

Moving the goalposts on the compensation plan

Elliott also takes aim at the current Crown Castle compensation plan. Currently annual bonuses are based on only two metrics – adjusted EBITDA and Adjusted Funds from Operations (AFFO) per share. AFFO is a complicated non-GAAP metric but it is basically net income plus real estate depreciation. The major difference between the two metrics is interest expense. Neither metric takes into account discretionary capex.

Elliott also complains that, in 2018, Crown Castle changed its Long Term Incentive Plan so that instead of measuring total stockholder returns against its peers, it switched to measuring against a mix of the S&P 500 and a goal of 11.5% annualized return. Given the high growth rates in the tower business, this lowered the bar for achievement.

Entrenched Board

Elliott would also like to see changes to the Board. 8 of the 11 non-executive directors have served for at least 13 years. This includes two former CEOs of Crown Castle. The Chairman of the Board, Landis Martin has been in that role since 2002.

The company responded by stating it had a proven track record for creating shareholder value. It didn’t commit to any changes but said it would remain open to having a continuing dialogue with Elliott.

Elliott presentation on Crown Castle

Crown Castle responds to Elliott

 

Centerpoint appoints former Halliburton executive as its new CEO

Former Halliburton CEO Dave Lesar has been appointed the new CEO at Centerpoint Energy. He replaces Scott Prochazka, who left in February. He has been a non-Executive director since May.

Centerpoint is an electric and gas utility that serves more than 7 million metered customers in Arkansas, Indiana, Louisiana, Minnesota, Mississippi, Ohio, Oklahoma and Texas.



Mr Lesar joined Halliburton in 1993 and was Chairman and CEO from 2000 to 2017. For the past year he has been serving as the interim CEO at Health Care Service Corporation, the largest private health insurer in the US.

Compensation package

In his new role, Mr Lesar will receive a base salary of $1.35 million (same base as his predecessor). He will also receive a sign-on equity award of $1 million that will vest over three years. The company will also facilitate the relocation of Mr Lesar from Dallas to Houston by buying his Dallas residence for $1.2 million. (The head office of Halliburton was in Dallas until it moved to Houston in 2002).

Executive changes

Centerpoint has been in some turmoil recently. Former CEO Prochazka left with a cash severance payment of $7.3 million. He was also received the vesting of stock awards ($4.7 million) and the continued vesting of performance share units (could be worth up to $7.9 million).

In April, Xia Liu, the CFO, bolted after less than a year in the role, for a similar role at WEC Energy. Kristie Colvin, the Chief Accounting Officer, was appointed the interim CFO, pending the appointment of a new CEO.

In February, the company announced the sale of its Infrastructure Services and Energy Services divisions, in two separate transactions, for a combined $1.3 billion. The divisions made up about a third of Centerpoint’s total revenues, but weren’t very profitable. The company took a loss on sale of $234 million, after taking into account goodwill impairment.

Activist Investor

In May, Centerpoint also received new equity funding of $1.4 billion from a group of investors  that includes activist investor, Elliott Management. Elliott first invested in Centerpoint in 2015.

Elliott appears to be following a similar playbook to its investment in NRG Energy in 2017. NRG has its head office in New Jersey and its operations in Houston. It took over the retail operations of Houston’s Reliant Energy in 2009. It then overstretched itself after a series of acquisitions. Elliott’s pressure forced it into cost cutting and asset sales. I wouldn’t be surprised if Centerpoint is taken over within the next couple of years.

SEC Filing – Centerpoint appoints Lesar as CEO

 

 

 

Houston blank check company makes big merger deal

Steve Jurvetson

Graf Industrial Corp, which went public in October 2018, has announced that it has entered into a reverse merger agreement with San Jose-based Velodyne Lidar. Velodyne makes radar-like sensors used in autonomous vehicles. In 2005 it invented a real time 3D Lidar ( Light Detection and Ranging).

Velodyne was founded by David Hall and is backed by Ford, Baidu, Nikon and Hyundai Mobis. They will continue to own 80% of the combined company after the deal closes in the third quarter.



Valuation

The proforma enterprise value of the combined entity is $1.6 billion. Graf will issue $1.5 billion in new stock to existing Velodyne shareholders. Cash sitting on the Graf balance sheet ($117 million) and from the issuance of $150 million of new shares to institutional investors will be used to add $190 million of cash to Velodyne’s balance sheet and to pay $50 million to the existing Velodyne shareholders.

For 2018 through 2020, Velodyne has negative EBITDA of approximately $50 million each year. Its revenue of approximately $100 million in 2020 is projected to grow to $684 million.

Blank check company

Graf is based in NW Houston and was formed by blank check veteran James Graf. A blank check company is a company that goes public without any underlying business. Normally it has 18 months to make an acquisition, otherwise the money has to be returned. However, a company can ask its shareholders for an extension.

[Sentinel Energy, another Houston blank check company, went public in November 2017, failed to make an acquisition and returned funds to its shareholders two years later]. 

Purecycle deal falls through

Back in April, just before the proxy vote requesting an extension, Graf announced it was in negotiations to buy Purecycle, a PE-backed polypropylene recycling company in Ohio. Purecyle is developing technology (under license from Proctor and Gamble) that takes contaminated plastics and converts it into a reusable resin on a commercial scale. It’s not clear why this deal fell apart.

Earlier this week, the other Houston blank check, Landcadia Holdings II announced it would be buying Golden Nugget Online Gaming.

SEC Filing – Graf Velodyne reverse merger

Another Oilfield Services CFO steps down

Lyle Wiliams has been appointed CFO of Forum Energy Technologies, replacing Pablo Mercado, who has resigned.

Forum is based in NW Houston. It manufactures equipment servicing drilling and downhole, completions and production. The company currently has a market cap of $59 million and a share price of 51 cents.



At the end of March the company had $389 million of unsecured notes due in October 2021 and a $55 million credit facility due in July 2021. The company has since bought back $70 million of these notes for 38.5 cents on the dollar.

Mr Williams joined the company in 2007 from Cameron International (now part of Schlumberger) and has held various operational and financial roles. Most recently he was the Senior VP of Operations. No new compensation has been finalized.

Mr Mercado had been the CFO since February 2018. He joined the company in 2011 and was previously at Credit Suisse.

The company press release and the SEC filing didn’t spell out the financial terms of his departure. However, assuming that Mr Mercardo will receive a severance, he is in line to receive a cash payment of $1.4 million dollars (2 times base salary of $410,000 plus 2 times target bonus of $307,500).

Mr Mercado’s predecessor, Jim Harris, recently stepped down as the CFO of Pacific Drilling.

SEC Filing – Forum Energy CFO change

 

 

Houston man and disgraced lobbyist charged with $5.6m fraud

Marcus Andrade of Missouri City has been charged with conspiracy to commit wire fraud and violating the Lobbying Disclosure Act. Also charged was Jack Abramoff of Maryland.



Mr Abramoff was the center of a large corruption scandal in 2005 that led to 21 people pleading or being found guilty. Abramoff and other lobbyists grossly overbilled Native American tribes who were seeking to develop casino gambling on their reservations. Abramoff illegally gave gifts and made campaign donations to legislators in return for votes. As a result he served three and a half years in prison.

Abramoff has filed notice that he intends to plead guilty to the charges. It appears he has agreed to a settlement that will require him to repay the $50,000 in commissions he received. He will also pay $5,500 in interest. He may be subject to civil penalties arising out of a separate suit brought by the SEC against Andrade and Abramoff.

Mr Andrade developed a new cryptocurrency called AML BitCoin that purportedly would prevent money laundering and anonymous use through ‘biometric technologies’. Andrade claimed this would allow AML to comply with anti-money laundering and know-your-customer laws and regulations.

Investors misled

Between July 2017 and December 2018, Andrade raised more than $5.6 million from more than 2,400 investors by selling tokens that could later be converted to AML BitCoin. Allegedly, Andrade and Abramoff misled investors by;

  • engaging in a false ‘rejection campaign’ regarding a television commercial that they falsely stated was going to be aired during the 2018 Super Bowl. They claimed the networks and the NFL deemed the commercial too politically controversial as it involved a Kim Jong-un lookalike.
  • making false statements regarding the state of development of the technology
  • making false statements that they were about to finalize agreements with various government agencies for the use of AML Bitcoin.

Money used for personal expenses

The charging document alleges that Andrade diverted more than $1 million to buy

  • a 5-bedroom house in Sienna Plantation ($747,000)
  • a house for his father ($226,000)
  • a Cadillac Escalade ($69,000)
  • a Ford F250 truck ($60,000)

Andrade claims he is innocent and that Abramoff was working with the government to try and get him to sell the technology.

If convicted, Andrade faces a maximum fine of 20 years and a fine of $500,000 plus restitution. The government has already started legal proceedings to get the house.

https://www.justice.gov/usao-ndca/pr/lobbyist-jack-abramoff-and-ceo-rowland-marcus-andrade-charged-fraud-connection-5

Tilman Fertitta blank check company to buy business from Tilman Fertitta

Landcadia Holdings II, the blank check company that went public in May 2019, has agreed to buy Golden Nugget Online Gaming (GNOG) from Landry’s, the restaurant and casino business owned by Tilman Fertitta.

After the IPO, Mr Fertitta still owns 21% of Landcadia II. Jefferies, the financial backer, owns 10%.



The transaction will result in a combined enterprise value of $745 million, which is approximately 6.1 times estimated 2021 revenues of $122 million. Landcadia II is paying $30 million in cash and issuing equity worth $314 million. In addition, the buyer is paying down $150 million of debt of GNOG, plus related prepayment fees ($24 million) and transaction fees ($30 million).

GNOG currently pays its parent company a 3% royalty rate on net gaming revenue and will continue to do so, even after it is acquired by Landcadia II.

Currently GNOG is involved in online casino gaming in New Jersey, where it has a 13% market share. It is planning to expand into Pennsylvania and Michigan, where online betting is now legal. It is not planning to enter the sports betting market, where DraftKings is dominant.

DraftKings recently went public and has projected revenues in 2021 of $733 million. It has an enterprise value of over $11 billion. The pandemic has led to an increase in online betting and gaming and a rise in valuation of companies involved in that business.

The transaction helps divert cash to the struggling Landry’s business. The business operates many restaurant chains including Saltgrass Steak House, and Bubba Gump Shrimp. It also owns 5 Golden Nugget casinos. Understandably, the businesses have been hard hit by the economic downturn caused by COVID-19 and furloughed 45,000 employees at the peak.

The transaction is expected to close in the third quarter. Afterwards, the company will be renamed Golden Nugget Online Gaming and will change its Nasdaq trading symbol to GNOG.

Landcadia I, the first blank check company formed by Mr Fertitta, acquired Waitr in November 2018, an online food ordering and delivery service. It’s had a rough time since them (3 CEOs and 3 CFOs!) but business has picked up a bit during the pandemic.

SEC filing – Landcadia to buy GNOG

Houston Funeral Director charged with PPP fraud

A Houston Funeral Director, Jase Gautreaux, has been charged with fraudulently seeking over $13 million in Paycheck Protection Program (PPP) loans.



Mr Gautreaux allegedly submitted several fraudulent loan applications to multiple banks. He applied on behalf of a business that did not exist and sought loans for a business with which he had no affiliation. He allegedly falsified the number of employees, payroll expenses, tax documents and bank account information. Mr Gautreaux ultimately received over $1.6 million in PPP funds.

Mr Gautreaux, 38, is currently a Funeral Director at Wingate Funeral Home. According to LinkedIn, until January 2020, he spent 11 years in Procurement at Tema Oil and Gas (which became part of Rosehill Resources in 2017). During that time, he also appeared to operate his own funeral home business.

Bank fraud is a crime punishable by up to 20 years in prison. Making a false statement within the jurisdiction of a federal agency carries a potential maximum sentence of five years in prison.

In the past day, there were a number of other people around the country who were charged with PPP fraud. These included;

  • Virginia couple ($1.4 million paid out), arrested as they attempted to flee to Poland.
  • Dayton, Ohio businesswoman ($1 million paid out but flagged and recalled by the bank).
  • New York opthalmologist ($630,000 paid out) already under indictment for healthcare fraud.
  • ‘Arkansas Mo’, who appeared in Love & Hip Hop: Atlanta ($3.7 million). He used some of the money to lease a Rolls-Royce
  • Fahad Shah, a Dallas-area man, was charged with a fraudulently seeking $3 million in PPP loans. He allegedly used part of the money to buy a Tesla.

https://www.justice.gov/usao-sdtx/pr/houston-man-charged-covid-relief-fraud

CFO of Drilling Contractor resigns after less than a year

Jim Harris, CFO of Pacific Drilling, has resigned, effective September 14, 2020. No reason was given for his departure and no new CFO has yet been appointed.

Pacific Drilling operates seven deepwater drill ships, though only four are under contract. Technically, it has its corporate offices in Luxembourg, however its operational headquarters are in west Houston.



The company filed for bankruptcy in November 2017. It emerged from Chapter 11 a year later and its shares were relisted on the NYSE in December 2018.

The company currently has $1.1 billion of gross debt, however no principal payments are due until 20123. It has $280 million of cash on hand, though it burned through $50 million in the first quarter of 2020. It currently has a market capitalization of $47 million.

Mr Harris was only appointed CFO in July 2019. He replaced John Boots who had been promoted to CFO in August 2017. Prior to joining Pacific, Mr Harris was the CFO of Forum Energy Technologies between 2005 and 2018.

SEC filing – Pacific Drilling Harris resignation

 

 

Houston helicopter companies complete merger

ERA and Bristow, have completed their all-stock merger. The deal was first announced in January 2020.

Both companies have their head office in west Houston and both were publicly traded until Bristow filed for bankruptcy in May 2019. The combined company will keep the Bristow name but will now trade under a new ticker symbol ‘VTOL’.



The combined group

For the year ended March 2020, Bristow had revenues of $1.2 billion and ERA $232 million. Bristow shareholders own 77% of the combined company, ERA shareholders 23 %. Technically, Bristow acquired ERA for a preliminary purchase price of $108 million. The net assets acquired were $175 million, resulted in a gain on bargain purchase of $67 million.

Since 2015, from time to time, the companies held informal discussions about a business combination. However, the bondholders who took control of Bristow in the bankruptcy reorganization really pushed the Bristow management for a merger.

The merger is expected to result in annualized cost savings of at least $35 million through the elimination of duplicate corporate expenses and greater operational efficiencies.

Management team

ERA CEO Chris Bradshaw becomes CEO of the combined group. David Stepanek, who was Senior VP of Business Development at ERA, becomes COO.  Jennifer Whalen, the CFO of ERA becomes the interim CFO. A permanent CFO will be named at a future date.

Don Miller, CEO of legacy Bristow and Brian Allman, CFO of legacy Bristow, were not named in new management team. I presume they have left the company, though that has not been explicitly stated in any SEC filings by the company.

Severance

Mr Miller will receive a cash payment of almost $3 million comprising 2x base salary ($1.4 million), target annual bonus ($0.8 million) and an incentive bonus of $750,000. Mr Allman will receive a cash payment of $1.1 million.

As a reminder, Mr Miller, who was only promoted from CFO to CEO in March 2019, got a $945,000 cash retention bonus in May 2019 and was eligible for cash bonuses (annual target $942,000). For Mr Allman, who was the Chief Accounting Officer before being promoted to CFO, the retention bonus was $400,000.

SEC filing – Bristow ERA merger completed

Weatherford CFO resigns after 6 months

Christian Garcia, the CFO of Weatherford International, has resigned. He will leave the company in early August after they have filed the second quarter report. The company will announce a successor at a later date.

Just a few days ago, Mr Garcia was named, along with COO Karl Blanchard as co-interim CEOs following the sudden departure of CEO Mark McCollum. Mr Garcia steps down from the office of the CEO role with immediate effect.



Mr Garcia only became the CFO in January. There’s no reason given for his departure, but it appears to be a personal decision he made. However he was close to Mr McCollum. Mr Garcia replaced Mr McCollum as Halliburton’s CFO during Halliburton’s proposed merger with Baker Hughes (2015-2016).

When Mr Garcia joined Weatherford, he received a sign-on bonus of $500,000. Under the terms of his employment contract, he will have to repay this.

Mr Garcia replaced Christoph Bausch as CFO. When Mr Bausch left in December 2019, he received termination pay of $3.6 million. Adding in Mr Bausch’s retention bonus and quarterly cash bonuses, he received $7.7 million in total cash payments in 2019.

Interim CEO

Karl Blanchard, interim CEO, will get an increased salary while performing those duties. As COO, he was making $700,000 a year. This was temporarily reduced by 20% due to the downturn caused by COVID-19. As interim CEO, his salary has been increased back up to $700,000. In addition he is eligible for monthly cash bonus payments of $370,296.

Non-Execs resign

It’s been a rough few days for Weatherford. In addition to the turmoil in the executive suites, three non-exec directors, who were nominated for re-election to the board, had to resign after failing to obtain the necessary votes at the Annual General Meeting of shareholders. This followed a campaign by an activist investor.

In addition to announcing the departure of Mr Garcia, Weatherford announced the appointment of a new non-exec director, Benjamin Duster. He serves on a number of boards as a non-exec director and is a corporate governance expert specializing in companies going through reorganizations.

SEC filing – Weatherford CFO resigns