From 13D Tracker
In a 13D filing after the close Friday on Hexcel Corp. (NYSE: HXL), O.S.S. Capital Management LP disclosed a 5.1% stake (4.8M shares) in the company and disclosed two letters sent to the company discussing their concern that the Company was under-performing.
On March 9, the firm sent a letter to the Company expressing its concern regarding the Company’s operating performance relative to its peers and with the management’s lack of concern regarding the gap in performance. The firm also noted that a member of the Company’s Board of Directors was stepping down and suggested a candidate for his replacement.
On April 9, the Company’s CEO visited OSS’s offices.
On April 26, the firm sent a letter reiterating its concern that the Company was under performing. The firm requested a committee of independent directors be formed and that the committee retain an independent investment bank to advise as to how shareholder value could be best maximized.
Copy of March 9th Letter:
Dear David:
As a long-term shareholder of Hexcel, we are concerned about the company’s operating performance relative to its peers and with management’s apparent lack of concern about this matter. Although Hexcel’s operating margin expansion from7% in 2002 to 10% in 2006 seems respectable, a different picture emerges when this performance is benchmarked against other industry competitors.
Specifically, Cytec Industries’ Engineered Materials segment generated operating margins of 18%, and the difference is even more pronounced at Toray Industries.For the nine months ended December 2006, Toray’s Composite Materials segment had operating margins of over 25%. In the past, you have said that the margin discrepancy between Hexcel and its competitors was due to corporate allocation nuances and/or product-mix issues. However, after conducting an extensive industry analysis, including talking to public and private competitors, we believe the lower margins are due to mismanagement of the company.
Had Hexcel achieved operating margins of only 17% on its 2006 revenues, the company would have earned an additional $78 million in operating income.Applying the current 17x multiple of enterprise value to operating income, this difference would result in a value increase of more than one billion dollars.Therefore, at current margins of lo%, shareholders are "forgoing" over $14.00per share.
You do not seem concerned about this gap. Although management has outlined a future target of mid-teens operating margins, by the time the company achieves this goal it will still be under performing its competition. The management and the Board must develop a plan of action for closing the gap; if you are unwilling or unable to do this, then it is incumbent on the Board to seek strategic alternatives and/or sell to a buyer that can run the company more profitably.
On a final note, it is our understanding that Mr. Martin L. Solomon will be stepping down as a Director of Hexcel in May. We have a candidate in mind who would be a valuable addition to the Board and would like to submit him for your consideration.
We look forward to your response.
Sincerely,
Oscar S. Schafer
Copy of April 26 Letter:
Dear David:
Thank you for visiting our office on April 9th. The answers we received reinforced our views outlined in our letter dated March 9, 2007 (which is attached) that (1) Hexcel is under-earning, (2) management is not addressing the shortfall in earnings, and (3) the shareholders are suffering from this situation. We think that Hexcel would benefit from an independent review of its prospects and strategy with a view toward taking action to maximize shareholder value. To accomplish this, we request a committee of independent directors be formed and that the committee retain an independent investment bank to advise as to how shareholder value can best be maximized.
We are filing a schedule 13D with the Securities and Exchange Commission disclosing our ownership of 4,810,900 shares of Hexcel stock. This letter and our earlier letter will be attached to that filing.
We look forward to the Board’s response.
Sincerely,
Oscar S. Schafer
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