JANA Makes Offer for Houston Exploration at $62 per Share
JANA Partners LLC sent an offer letter to the Board of Directors of The Houston Exploration Company proposing to purchase the Company for $62 per share. JANA, a hedge fund with over $5 billion in assets located in New York and San Francisco, currently beneficially owns 12.3% of the Company's outstanding shares. JANA noted that while its offer is subject to customary due diligence and documentation, which it believes could be completed quickly, it is not subject to any financing condition, and requested that the parties begin immediate discussions.
"We believe that there is still tremendous value in Houston Exploration, but that it will continue to be destroyed as long as the Company remains in the hands of those who show far less interest in maximizing this value than they do in transferring it to the Company's management," JANA Managing Partner Barry Rosenstein wrote in today's letter. "Particularly given the Board's recent confirmation that it intends to proceed blindly ahead with demonstrably wasteful acquisitions despite the shareholder outcry this has generated, we believe action must be taken now to protect the value of our investment in the Company. Therefore, we hereby inform you that we wish to purchase the Company at a price of $62 per share in cash."
JANA has previously called upon the Company to maximize shareholder value through a $650 million share repurchase and the exploration of strategic alternatives, including a sale of the Company. Mr. Rosenstein noted in today's letter that, despite having had almost three months to review JANA's detailed analysis demonstrating what it believes are the substantially higher shareholder returns this share repurchase would generate compared to new acquisitions and debt repayment, the Board has yet to substantively respond or to offer any analysis to support their stated plans. Last April, in response to the Board's silence, JANA encouraged shareholders to withhold their votes for the current directors at the Company's annual meeting. Despite the fact that JANA first did so less than one week before the meeting and despite having only a small percentage of its current ownership represented, approximately 30% of the shareholders who voted joined JANA in withholding their votes, a number which Mr. Rosenstein estimated in today's letter would currently be closer to 50% based on JANA's full ownership position, increased awareness and shareholder turnover.
JANA has also questioned what it has called excessive compensation increases for Houston Exploration's management, including a compensation increase of more than 500% for Houston Exploration CEO William Hargett between 2003 and 2005, a period during which JANA has said that the Company's shares have underperformed compared to industry peers. Last week, JANA on behalf of an affiliated fund demanded access under Delaware state law to the Company's books and records, citing what it called strong indications that the Board had breached its fiduciary duties and wasted corporate assets through the payment of excessive compensation to executives and the failure to diligently pursue maximum shareholder value. Houston Exploration in response has offered to allow JANA to review a limited number of materials. Mr. Rosenstein noted today that the Company's response raises a number of questions and, more importantly, offers nothing in response to JANA's demands for information regarding what it believes is the Company's failure to pursue maximum value for shareholders.
Mr. Rosenstein also noted that "it appears that the Board may have in the past rebuffed private inquiries regarding a potential acquisition of the Company at a significant premium, in which case the Board has not only failed to generate maximum value for shareholders, it has stood in the way of shareholders potentially realizing this value through a sale, thus further perpetuating the cycle of value destruction at Houston Exploration."
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