The Eastern Company (EML) received a non-binding preliminary bid from Synalloy Corp. (SYNL) of $19.09 per share which was rejected by EML’s board of directors, stating it was not in the best interest of the shareholders. The Eastern Company manufactures and sells industrial hardware, security products, and metal products in the United States and internationally.

Here are the reasons the GeoTeam is tracking this story:

  • Recent 13D and 13G filings showing institutional/activist investors taking stake in the company Barington Capital Group taking an active role, as evident from their 13D filed on September 30, 2014 . The purpose of the transaction, as stated, follows:

“Barington representatives informed Mr. Leganza that they believed that the Company has underperformed its value potential for a substantial period of time and that shareholder value could be significantly improved by growing the Company through acquisitions, as well as by accelerating organic growth and increasing product innovation.  The Barington representatives informed Mr. Leganza that they could help the Company improve shareholder value, and Mr. Leganza asked if they would send him a proposal regarding ways Barington could assist the Company. “

  • On February 6, 2015, Barington Capital sent a letter to Leonard F. Leganza, the Chairman, President and Chief Executive Officer of the Company, which contains recommendations from Barington Capital:
    • Improve Eastern’s strategic focus.
    • Accelerate growth and product innovation in high-potential businesses, both organically and through targeted acquisitions.
    • Improve Eastern’s corporate governance.

Minerva Advisors File 13D With 6% Equity Interest

  • In addition, on January 16, 2014 another activist investor named Minerva Advisors also filed a 13D with 6% equity interest in the company. Purpose of Transaction from the 13D contains:

“the Reporting Persons have become aware of a reluctance on the part of the Issuer to engage in constructive conversations with potential business partners relating to strategic alternatives open to the Issuer.  Issuer’s dismissive response to the recent 8-K filed by Synalloy is the latest example of such reluctance.  Given the Issuer’s lack of meaningful growth and lack of any clear management succession plan, the Reporting Persons believe it is time to engage in an energetic review of strategic alternatives including hiring an investment banking firm to consider the sale of the issuer or substantial changes to the Issuer’s capital structure.”

  • Latest financial results from Q3 2014 (reported in October 2014)
    • Q3 EPS of $0.39 vs $0.29
    • Q3 Rev of $35.8 vs $34.2
  • A recently announced accretive acquisition of Argo Tansdata (will add about 4% to top line)
  • Applying a P/E multiple of 25 on trailing EPS of $1.21 gives us a price target of $30.25 or nearly 70% upside from current prices. 

Caveats:

  • Our price target is probably aggressive, given that EML has not been able to deliver consistent revenue and EPS growth for some time.  Fortunately, now that activist are involved, management may be forced to take measures to improve performance.
  • Our attempts to interview management have been unsuccessful

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