Voss Capital backs a strategic review at Griffon, and a new opportunity to create value may emerge

Investing

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Company: Griffon (GFF)

Business: Griffon operates through two segments. Consumer and Professional Products (“CPP”) conducts its operations through AMES. Founded in 1774, AMES is the leading North American manufacturer and a global provider of branded consumer and professional tools and products for home storage and organization, landscaping and enhancing outdoor lifestyles. CPP sells products globally through a portfolio of leading brands including True Temper, AMES, and ClosetMaid. Home and Building Products (“HBP”) conducts its operations through Clopay. Founded in 1964, Clopay is the largest manufacturer and marketer of garage doors and rolling steel doors in North America. Residential and commercial sectional garage doors are sold through professional dealers and leading home center retail chains throughout North America under the brands Clopay, Ideal and Holmes. Rolling steel door and grille products designed for commercial, industrial, institutional, and retail use are sold under the CornellCookson brand. The CPP business has approximately $1.2 billion in annual revenue and $115 million in EBITDA, and the HBP business has approximately $1 billion in annual revenue and $181 million in EBITDA.

Stock Market Value: $1.8B ($31.75 per share)

Activist: Voss Capital

Percentage Ownership: 5.17%

Average Cost: $25.91

Activist Commentary: Voss is a Houston-based hedge fund focused on underfollowed special situations. They are not traditional activists but have successfully used activism as a tool in the past.

What’s Happening?

On Aug. 15, Voss expressed its support for Griffon’s May 2022 announcement that the board has initiated a review of strategic alternatives, including a possible sale, merger, divestiture, recapitalization or other strategic transaction. Previously, at the company’s annual meeting, Voss commenced a proxy fight and successfully gained a board seat for H.C. Charles Diao, one of Voss’s two director nominees.

Behind the Scenes

Voss first reported holding Griffon in their Q3 2021 13F filing. On Nov. 23, 2021, prior to exceeding 5% ownership, it nominated three directors for election to the board and later reduced it slate to two directors.

Throughout their proxy fight, the firm released letters and presentations detailing its belief that Griffon has poor corporate governance and excessive executive compensation, and that the company should commence a strategic review. In a January 2022 presentation, it stated that Griffon’s stock could be worth $50/share (it’s currently in the low $30’s) through the implementation of a plan that includes (i) selling the Defense Electronics business, (ii) exploring alternatives for Home and Building Products, (iii) using cash to reduce debt and pay a special dividend, (iv) right-sizing corporate overhead, and (v) improving margins at the Consumer segment. Voss also criticized Griffon’s M&A strategy, specifically highlighting its disapproval of the company’s acquisition of Hunter Fan for $845 million from MidOcean Partners. Ultimately, at the 2022 Annual Meeting, shareholders elected one of Voss’s director candidates, H.C. Charles Diao, to the board where he currently serves as a director.

Fast forward six months: Voss has now increased their ownership from 2.3% to 5.2% today. In its 13D filing, the firm states that it is “pleased by the Issuer’s announcement in May 2022 that the Board had initiated a process to review a comprehensive range of strategic alternatives to maximize shareholder value including a sale, merger, divestiture, recapitalization or other strategic transaction.” Voss then noted that it increased its investment based on its hope that the strategic review will result in a transaction that will unlock value.

So, the hard part is done. Voss launched a proxy fight, won a board seat and now it is endorsing the company’s strategic review. Since Griffon sold its Defense Electronics business earlier this year for $330 million, the strategic focus likely is concentrated on a potential sale of the Home and Building Products business.

This is not the first time Voss had a strategic thesis at a portfolio company. In their 13D on Benefytt Technologies filed in December 2019, they highlighted the strategic opportunities at the company and the active M&A environment in that space – Benefytt Technologies was acquired by Madison Dearborn Partners in August 2020. Also, in January 2020, Voss filed a 13D on Rosetta Stone with no Item 4 language, but the company was acquired by Cambium Learning on October 15, 2020.

There are several reasons to expect that some strategic transaction is likely to take place here: (a) Voss’s presence in the boardroom, (b) the company already sold the Defense Electronics business after Voss had advocated for that, and (c) the company’s announcement that they are now pursuing an additional strategic review. Moreover, the next annual meeting of shareholders will be in February of 2023 and for the first time the Griffon will have a majority of directors (9 of 14) up for election because they recently started the process of declassifying the board. So, if the company is not responsive to Voss’s suggestions, the firm could launch another proxy fight for majority control this time.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Griffon is a holding in the fund. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.

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