He's working on Star also.
Sevin's working for his mom.............
Guy needs a shrink.
m2
February 21, 2005
LENGTH: 994 words
HEADLINE: Star Gas CEO Is In The Hot Seat
BYLINE: Joy Ferguson
BODY:
It looks like Star Gas Partners' chairman, president and CEO, Irik Sevin is in the hot seat. That's because debtholders, namely hedge fund Third Point LLC and its CEO, Daniel Loeb, have had enough of the company's lackluster performance. And now, Loeb's firm is calling for drastic changes to the company, with the resignation of Sevin on top of Third Point's list of requests.
In a fiery letter filed publicly along with a 13D filing last week, Loeb asked for the resignation of Sevin. In the letter, Loeb, who is also the largest unitholder of the company with a 6% interest in common units, addressed Sevin's "various acquisition and operating blunders..., [which have] cost unitholders approximately $570 million in value destruction."
The letter comes after Star Gas, a diversified home energy distributor and services provider specializing in heating oil and propane, reported a $74.6 million fourth quarter loss from ongoing operations, mostly due to the steep rise in the wholesale price of oil. The company, which has 334,000 customers from Massachusetts to Virginia, has also suffered a 15% decrease in heating oil volume, a roughly 10% decrease in gross margin per gallon and a 6.5% annual net loss of its customer base in 2004. Also, EBITDA declined to "$0 million" from $26 million the prior year and fixed costs increased 8%, according to Loeb's letter.
To be sure, debtholders had thought Star Gas' credit quality would improve after it sold its propane operations last year and issued a new $260 million revolver priced at Libor plus 225 basis points through lead arranger JP Morgan. "The partnership believes that its recent liquidity crisis has ended as a result of the successful completion of these two transactions," the company said in a December announcement.
Even Fitch Ratings thought Star Gas' credit quality was looking up. Following the announcement in November that Star Gas had agreed to sell operations to Inergy, LP for $475 million in cash, Fitch placed the company's debt on rating watch positive.
But just months later, Fitch's outlook took a negative turn, as the benefit of the asset sales seemed less effective than originally expected. On February 9, Fitch announced that the company was on rating watch negative. In addition to the company's recent poor operating results, "the debt reduction/liquidity benefits of the sale of the propane operations have not been as great as previously believed due to poor operating results and elevated working capital needs," said Fitch.
Get Mom
Off The Board
In response to the company's failure to improve its grim financial status, shareholders, including Third Point, urged the company to address its problems in a conference call, Loeb wrote in the letter, "to discuss the company's plight and to set forth a plan of action." That call has not happened, however, Loeb said, noting that calls made to Sevin were not returned because Star Gas' "legal counsel advised [Sevin] against speaking to bondholders and shareholders due to the torrent of shareholder litigation currently being brought against senior management and the company."
But the executive's problems do not stop with the company's debt and unitholders, Loeb wrote. "A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America," said Loeb.
Loeb asked why the company's margins are significantly lower than those of its competitors. "We do not see any reason why a properly managed heating oil distribution business should not operate at least at your historical margin levels, if not at levels similar to the 17% margins enjoyed by your competitors."
Indeed, Loeb admonishes the current use of the company's capital, in part, for Sevin's $650,000 annual salary, his personal use of the company car, and for directors' fees of $27,000.
In addition, after quoting the company's code of conduct and ethics, Loeb asked, "how is it possible that you selected your elderly 78-year-old mom to serve on the company's board of directors and as a full-time employee providing employee and unitholder services? We further wonder, under what theory of corporate governance does one's mom sit on a company board? Should you be found derelict in the performance of your executive duties, as we believe is the case, we do not believe your mom is the right person to fire you from your job."
Essentially, Loeb wrote that he considers Star Gas little more than a "honey pot" from which Sevin can "extract salary for yourself and family members, fees for your cronies and to insulate you from the numerous lawsuits that you personally face due to your prior alleged fabrications, misstatements and broken promises." With that said, Loeb advised it was time for Sevin to step down from his role as CEO and director, "so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites. The matter of repairing the mess you have created should be left to professional management and those that have an economic stake in the outcome."
Market Reacts
To Loeb's Letter
High yield investors were shocked and amused by Loeb's letter, and many said they agreed with Loeb's points. "Loeb is right," said a hedge fund manager. "Sevin is messing up a very uncomplicated business. It's the kind of company that probably requires a pretty hands-on manager." The manager said that it was still unclear whether Loeb will try to actively get Sevin removed from the company, but if he succeeds, it will benefit both bondholders and shareholders. "It will get them a management team who is actually there," he said.
Loeb commented to BLR that he is still waiting for a response from the company. He also noted that anyone who holds Star Gas' debt is welcome to contact him. Calls to Sevin were not returned.
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