Shareholders sue Warburg, JLL over recap plan

A shareholders group in Builders FirstSource has sued Warburg Pincus and JLL Partners over a proposed $173 million recapitalisation plan it alleges will slash the value of its shares.

In a biting class-action complaint filed with the Delaware Court of Chancery, the group alleges Warburg and JLL are attempting to enrich themselves at the expense of “minority, outside shareholders”.

Plaintiffs in the case are diversified financial services company Robotti & Company, which represents clients that hold 763,617 shares in the company, Ravenswood Investment Company, with 348,081 shares and Ravenswood Investments III, which owns 148,950 shares.

Meanwhile, another shareholder, Stadium Capital Management, which owns about 14.9 percent of the company's outstanding common stock, sent a letter to the company's board Thursday urging directors to reject the plan.

Stadium's letter outlines concerns including the alleged unfairness of the plan to minority shareholders and the “self-dealing” of Warburg Pincus and JLL. Stadium also said the recapitalisation plan is unnecessary since the company had “adequate liquidity”.

“While undoubtedly Builders FirstSource (like most other companies) could find potentially productive uses for additional capital, nothing about [the company's] current circumstances warrants a recapitalization on terms reflecting the desperation of the … proposal,” Stadium said in the letter. “Terms that are extraordinarily beneficial to Warburg and JLL while being commensurately punitive to the minority stockholders.”

Shares of Builders FirstSource plummeted earlier this month from $7.69 per share to $4.27 per share on news of the proposed recapitalisation. The Robotti-led group has asked the court to block the deal and for damages.

JLL did not return calls for comment Thursday, and Warburg Pincus declined to comment for this article.

JLL and Warburg own about 50 percent of the company’s common stock and have six representatives on the company’s board of directors, according to the complaint.

On 1 September, the firms proposed to recapitalise the struggling company by backstopping a $75 million rights offering and exchanging $98 million of debt for equity. The $98 million represents the firms’ entire debt holdings and about 35 percent of the company’s total debt load, according to the group. The firms are backstopping the rights offering for a $4.5 million fee, according to Stadium Capital.

The deal would allow holders of the company’s remaining debt to exchange each $1,000 of the principal amount of their holdings for $750 of principal amount in new notes, due to mature in 2017 with an interest rate of 7.5 percent. Alternatively, holders of old debt could exchange their holdings for equity, or a combination of equity and new notes.

The deal is expected to reduce Builders FirstSource’s debt by between $150 million and $172 million and increase cash by $75 million.

The plan would dilute the interests of all shareholders by issuing more than 95 million shares of new stock, the group said. By issuing the new shares at $2 a piece, the proposal would “substantially devalue the remaining outstanding shares of common stock held by public investors”, which are valued higher than $2, the group said.

Also, through the redemption of debt and participating in the rights offering, JLL and Warburg would increase their shareholdings, up to about 58 percent of the company, the group said.

Stadium argues only half of the rights offering would be available to minority shareholders because JLL and Warburg are picking up the other half. Also, the backstop fee is “absurd”, the firm said. “It is worth noting that this fee is in return for a commitment to purchase [the company's] stock at discount of approximately 75 percent to its market price the day prior to the recapitalization proposal.”

The recapitalisation proposal was sent by letter to the company signed by Paul Levy and Kevin Kruse, both of whom are company directors and managing directors at Warburg and JLL, respectively, Stadium said. Four other directors on Builders FirstSource's board hold senior or controlling positions at the firms. “We believe Warburg and JLL are taking an inherently coercive position to the detriment of all other stockholders,” Stadium said.

The Robotti-led group alleges that JLL, which at one time owned 95 percent of the company, commenced several recapitalisations to collect “huge” dividends. The recapitalisations “substantially” increased the company’s debt, so that its debt load stood at $313.5 million as of 2004, from $130 million in 2002.

JLL collected dividends of $201.2 million in 2005 from the company, after Builders FirstSource entered into a $350 million senior secured credit facility with a syndicate of banks, and issued $275 million of senior notes due 2012. By 2005, the group said, JLL had taken $310 million out of the company for itself.

JLL also collected windfall profits in 2005 when the firm took the company public. In early 2006, Warburg bought a stake in Builders FirstSource.

“Having nearly brought [the company] to its knees by forcing the company to incur debt that choked desperately-needed liquidity, JLL is now acting in concert with Warburg and, acting as one, JLL and Warburg have now proposed a low-ball deal to further increase the proportion of equity they own in the company at the expense of and by diluting the interests of outside minority shareholders,” the group said.