Letter from GKH to HC dated 10/15/2001:
Re: Wind-up of GKH Investments, L.P.
and GKH Private Limited
As previously communicated, it has been our goal to implement the
dissolution of GKH Investments, L.P. (the "Fund") and GKH Private Limited (the
"Parallel Investor") by January 25, 2002, the 14th anniversary of the closing
date of the Fund. Hanover Compressor Company ("HC"), of which the Fund and the
Parallel Investor own a remaining 18,274,795 shares, is the only major remaining
holding. As you know, the Fund and the Parallel Investor sold 21% of their HC
shares in a secondary offering completed on March 15, 2001. The Fund and the
Parallel Investor currently own approximately 20% of HC's outstanding shares
representing nearly 40 days' average trading volume of HC's stock.
The March 2001 secondary offering of HC shares was the first stage of a
multi-faceted exit strategy planned by GKH Partners, L.P. to liquidate or
distribute all HC shares held by the Fund and the Parallel Investor by January
25, 2002. Under the terms of the offering, the remaining shares held by the Fund
and the Parallel Investor were subject to a "lock-up" agreement that expired on
July 15, 2001. However, shortly after the expiration of the above-referenced
lock-up period, a series of events unrelated to HC or its business have
unfolded, all of which have negatively impacted both HC's valuation and the exit
plan which had been in process.
Since the March 2001 secondary offering, the equity market's valuation of energy
service companies' shares has fallen dramatically with the commodity price of
gas, driven primarily by concerns related to the slowing economy. HC's business
is largely insulated from declines in the commodity price of natural gas and
thus has consistently outperformed its peers. Despite that fact, since the March
2001 offering, HC's share price has been carried down indiscriminately with the
roughly 38% decline in the Philadelphia Oil Service Index ("OSX"), the primary
stock index for energy service companies. The many factors contributing to the
decline in energy service stocks have not had a significant impact on Hanover's
business, which remains very strong. This temporary trading phenomenon has
reduced HC's valuation multiple to approximately 7x 2002 EBITDA, the lowest
multiple Hanover has seen in its four years as a NYSE-listed company and roughly
two-thirds of the average valuation multiple that HC has
carried over the past four years.
In addition, substantial evidence exists that HC's valuation has been
further negatively impacted by the disclosure that the Fund intends to liquidate
or distribute all of its HC shares in the near future. Securities analysts and
fund managers are aware of our intention to liquidate or distribute all of our
holdings before January 25, 2002, and the prospect of a sizeable distribution
and/or secondary offering over the next three months may be creating an
"overhang" on the stock.
Hanover Compressor Company itself continues to do extremely well; it
possesses a dominant market position and has excellent future growth prospects
consistent with its outstanding past record. Additionally, a recent major
acquisition by the company has added to Hanover's leading market position,
significantly expanded its growth opportunities, and added Schlumberger, the
world's largest energy service company, as a long term 10% shareholder as part
of a major inter-company business development alliance. Other transactions that
could act as catalyst for HC's significant upward revaluation and our continued
exit strategy are now the subject of active discussion. While it is too early to
determine whether these discussions will culminate in any further developments,
based on HC's current projected 2001 and 2002 results alone, HC shares should
achieve a minimum price of $40-$45 if the company merely regains the average
valuation multiple it has attracted since its mid-1997 initial public offering.
As HC's leading and very involved shareholder, we have significant
confidence in HC's projected financial performance and are committed to taking
the steps necessary to assist the company in its efforts to regain an
appropriate and full valuation and complete an optimal exit strategy with
respect to the HC shares held by the Fund and the Parallel Investor.
Nonetheless, during this period of extreme weakness and volatility in the
capital markets, we are concerned that the interests of the Fund, the Parallel
Investor or the company may not be best served by completing our scheduled
liquidation or distribution of HC shares prior to January 25, 2002.
These factors all must be carefully considered when strategizing an
appropriate exit. The Partnership Agreement provides that the winding-up process
upon dissolution may take up to twelve months (with an additional twelve month
period provided under certain circumstances). It remains our goal to wind-up as
expeditiously as possible while retaining value for HC; however it is likely
this may not be completed before January 25, 2002 as had been our intention when
we last communicated.
You are hereby notified that we shall continue the wind-up of the
partnership, which could extend beyond January 25, 2002 with the hope for
completion well before the expiration of the initial 12-month term of the
"wind-up period".
If you have any questions, do not hesitate to contact us.
Very truly yours,
GKH Partners, L.P. |
