Barnwell shareholder demands breakup
The company's largest investor wants to sell off its Canadian oil and gas business
Barnwell Industries Inc.'s largest shareholder is demanding that the Honolulu-based company's board of directors maximize shareholder value by looking into selling off the company's oil and natural gas business in Canada.
Greenwich, Conn.-based Mercury Real Estate Advisors LLC, which owns 19.2 percent of Barnwell, said yesterday there remains "substantial unrealized value" in the assets of the company's energy business and in its real estate holdings on the Big Island.
"We believe the company's current corporate structure, egregious executive compensation and disparate business divisions are fundamentally flawed," Mercury said in a letter to Barnwell's board dated yesterday, issued via an electronic press release.
The letter called Barnwell "a dramatically undervalued company" and said the combined value of its real estate and energy divisions implied a minimum price of $29 a share.
Barnwell's stock, which hit a 52-week low of $17.22 on Oct. 5, jumped $2.36, or 12.4 percent, yesterday on the American Stock Exchange. The shares have risen $4.10, or 23.8 percent, since closing at $17.25 on Monday.
Mercury also demanded that Barnwell hire an investment bank to evaluate strategic alternatives, immediately implement a substantial stock buyback program, and set up a meeting with the seven independent directors on Barnwell's 11-member board.
Alexander Kinzler, president, chief operating officer and general counsel of Barnwell, said yesterday that Mercury had yet to contact Barnwell directly with its demands.
"Barnwell is not going to take any precipitous action based on shareholder comments put in a press release without the courtesy of sending it to the company," Kinzler said. "Shareholders make recommendations to companies and board of directors all the time and we're going to take it under advisement and deal with it in due course in an appropriate manner."
Barnwell was the best-performing Hawaii stock in each of the last two years, with a share price that doubled in both 2004 and 2005 to achieve a gain of more than 375 percent during the period. The company also split its shares twice last year, 2-for-1 in January and 3-for-1 in November.
But so far in 2006, even with the rise of the past two days, Barnwell's stock is down 14.9 percent for the year.
Mercury, in its letter, blasted Kinzler and his father, Chairman and Chief Executive Morton Kinzler, for their "million-dollar-plus salaries," which Mercury said is partly responsible for driving general and administrative expenses to 21 percent of revenue for the nine months that ended June 30.
Barnwell most recently reported Morton Kinzler's 2005 compensation as $1.1 million. He also is Barnwell's second-largest shareholder with 16 percent of the company. Alexander Kinzler's total compensation in 2005 was $1.3 million. He owns 3.6 percent of the company.
The younger Kinzler declined to comment on the compensation issue. However, he said that Barnwell's objective for "a number of years" has been to increase shareholder value and the liquidity of its stock.
"They're free to take any shots they want, but that doesn't mean there's any basis to make that statement (about the company not maximizing shareholder value)," Alexander Kinzler said. "Look at the shareholder value that's been created in the last 10 years. ... Mercury has acquired its shares in the last two years and (its holdings are) in a profit position right now."
Alexander Kinzler questioned Mercury's motives for sending out the letter.
"It's a lot like letters they've sent to other companies," Kinzler said. "What their intentions are aren't really clear and so you've got to take it with a grain of salt. Their intention may be to drive up the stock price."
Mercury demanded that Barnwell buy back stock using the $10.8 million in cash and cash equivalents on the company's balance sheet, as well as proceeds received from real estate sales from its majority-owned Big Island development. Mercury valued Barnwell's real estate interests alone at $11 a share and its energy interests at $18 a share.
"We believe there is no synergistic advantage to the current corporate structure and believe that the full value of Barnwell will only be recognized if the energy division, which would be an attractive acquisition candidate for any of the energy companies with a presence in Canada, is sold immediately," Mercury said.
Alexander Kinzler vehemently denied that there no synergy between the businesses and said that often times one helps balance out the other if one of the industries is down.
Equity analyst Dan Pratt of John S. Herold Inc., an energy research and consulting firm in Norwalk, Conn., said yesterday that now would be a good time to sell energy interests in Canada.
Over the last several years there has been a big increase in activity in Canada by royalty trust companies, which acquire oil and natural gas assets and distribute excess cash to shareholders, he said.
Pratt covered Barnwell as an analyst until the end of 2003 but said he didn't have any insight into Barnwell's current situation.
