The end of the first round is approaching in this years most underreported proxy fight, the battle over Wilshire Enterprises (WOC) between Phil Goldstein’s Bulldog Investors and Wilshire’s CEO Sherry Wilzig Izak. Two directors will be elected at Tuesday’s meeting, and shareholders will also vote on proposals to end the staggered board, seek a liquidity event and abolish the poisons pill. We have written extensively about the battle previously (here, here).
After management rejected Mercury Real Estate’s acquisition proposal as “undervalued”, Wilshire traded for $5.50 per share and dropped to the $3.80 level when Nick Jekogian attempted to buy it. That changed dramatically when management announced its new value enhancing strategy. The market assigns a negative value to that strategy: with cash on the balance sheet of over $2 per share, Wilshire trades slightly over $1.
We believe that the market’s skepticism is right. CEO Sherry Wilzig Izak has failed to show her ability to manage Wilshire profitably. Despite owning 950 rental units and 200,000 sf of office space, Wilshire is not profitable. A new COO, Kevin Swill, was hired in late 2008 to implement a new strategy: optimize rental income and gamble the cash hoard on distressed real estate. We are not convinced that Mr. Swill has the background to work on distressed real estate or manage a small publicly traded firm like Wilshire. He has no background in distressed real estate; according to Bulldog, he arranged the speculative acquisition of the most expensive office building in Manhattan ever, 666 Fifth Avenue, for $1.8 billion, or a meager cap rate of only 3.2%, marking the peak of the market.
That’s a tad more expensive than what Wilshire can hope to play in. In addition, running a small business like Wilshire requires a different skill set than managing acquisitions for one of the world’s largest real estate holders during boom times. Wilshire’s spending is profligate already, and it risks becoming even more so under the new strategy if consultants and advisers are hired to help with acquisitions, as is typical for large investors like Kushner. Shareholders will have to pay expensive tuition to get Swill up to speed on small public company management.
Wilshire’s management and Bulldog have been bombarding shareholders with proxy materials ahead of the vote. Management’s materials are printed in color on high quality glossy coated paper to give shareholders the feel of a billion dollar company. Bulldog’s mailings are more frugal and more appropriate for a small firm. This detail is symptomatic for the entire proxy campaign: we expect Bulldog to spend around $20,000 of its own money, whereas management will spend more than $150,000 of shareholder funds – other people’s money.
Shareholders are at risk of finding themselves holding shares of a defunct company if management’s candidates win this election. Shares will drop to penny levels and Wilshire will be delisted. Maybe that is the intention – it would allow management to acquire the firm on the cheap. We continue to bet that Sherry Wilzig Izak will do anything necessary to maintain control and anticipate litigation between management and Bulldog.
Shareholders can vote until the cutoff time, which is Monday at midnight Eastern time. And those of you who make the trip to Delaware, we look forward to meeting you on Tuesday at 8:30.
Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which owns shares of Wilshire Enterprises and has submitted a proposal to abolish the poison pill. He is the author of an e-book about alternative strategies as well as the forthcoming book Merger Arbitrage: How to Profit from Event-Driven Arbitrage (Wiley Finance, 2009).
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