Sends Letter to Special Committee of Board Urging Rejection of
Warburg's and JLL's Self-Dealing Recapitalization Proposal BEND,
Ore., Sept. 24 /PRNewswire/ -- Stadium Capital Management, LLC
announced today that it sent a letter to the Special Committee of
the Board of Directors of Builders FirstSource, Inc. ("Builders" or
the "Company") (NasdaqGS: BLDR) urging rejection of the
self-dealing proposal of Warburg Pincus Private Equity IX, L.P. and
JLL Partners Fund V, L.P. to, among other things, recapitalize the
debt of Builders owned by JLL, Warburg and others, as unfair and
unnecessary at the present time. In its letter to the Special
Committee, Stadium highlights the serious financial, legal and
ethical issues, including that: -- The recapitalization proposal is
blatantly unfair to the minority stockholders and represents
extraordinary self-dealing by Warburg and JLL. -- Builders
FirstSource has adequate liquidity at the present time, making the
Recapitalization Proposal unnecessary, and any suggestion to the
contrary by Warburg or JLL is misleading and an attempt to pressure
the Company and the Special Committee into a recapitalization that
is shockingly self-serving to Warburg and JLL. -- While undoubtedly
Builders FirstSource (like most other companies) could find
potentially productive uses for additional capital, nothing about
Builders FirstSource's current circumstances warrants a
recapitalization on terms reflecting the desperation of the
recapitalization proposal - terms that are extraordinarily
beneficial to Warburg and JLL while being commensurately punitive
to the minority stockholders. -- Warburg and JLL are abusing their
position as control stockholders, have acted contrary to law and
are pressuring the Special Committee and the Company to proceed
with this transaction. Stadium is Builders FirstSource's largest
unaffiliated stockholder, beneficially owning, together with its
affiliates, approximately 14.9% of the Company's outstanding common
stock. The full text of the letter follows: September 24, 2009
Members of the Special Committee of the Board of Directors of
Builders FirstSource, Inc. Robert C. Griffin Cleveland A.
Christophe Craig A. Steinke Builders FirstSource, Inc. 2001 Bryan
Street, Suite 1600 Dallas, Texas 75201 Gentlemen: We are the
largest unaffiliated stockholder of Builders FirstSource, Inc.
("BLDR" or the "Company") and are writing regarding the unnecessary
and self-enriching proposal made by Warburg Pincus Private Equity
IX, L.P. ("Warburg") and JLL Partners Fund V, L.P. ("JLL") to the
Board of Directors of BLDR to, among other things, recapitalize the
debt of BLDR owned by JLL, Warburg and others (the
"Recapitalization Proposal"). The Recapitalization Proposal was
made to the Company in a letter from Paul S. Levy and Kevin Kruse
(both BLDR directors). Stadium Capital Management, LLC is the
advisor for four clients (collectively, "Stadium") that own a total
of 5,367,140 shares of BLDR common stock, or approximately 14.9% of
the Company's outstanding common stock. Despite our efforts to
contact the Special Committee of Independent Directors of BLDR (the
"Committee"), we have not been able to speak directly with the
members of the Committee. This delay has left Stadium with no
recourse but to submit this letter to highlight the serious
financial, legal and ethical issues within the Recapitalization
Proposal. To be absolutely clear, we urge the Committee to reject
this self-dealing Recapitalization Proposal as wholly inappropriate
and unwarranted at the present time. We believe: -- The
Recapitalization Proposal is blatantly unfair to the minority
stockholders and represents extraordinary self-dealing by Warburg
and JLL. -- BLDR has adequate liquidity at the present time, making
the Recapitalization Proposal unnecessary, and any suggestion to
the contrary by Warburg or JLL is misleading and an attempt to
pressure the Company the Special Committee into a recapitalization
that is shockingly self-serving to Warburg and JLL. -- While
undoubtedly BLDR (like most other companies) could find potentially
productive uses for additional capital, nothing about BLDR's
current circumstances warrants a recapitalization on terms
reflecting the desperation of the Recapitalization Proposal - terms
that are extraordinarily beneficial to Warburg and JLL while being
commensurately punitive to the minority stockholders. -- Warburg
and JLL are abusing their position as control stockholders, have
acted contrary to law and are pressuring the Special Committee and
the Company to proceed with this transaction. We believe the
Recapitalization Proposal is a simple and striking attempt by
Warburg and JLL to increase their ownership position substantially
at the direct expense of Stadium and the other minority
stockholders. We believe that these issues are so obvious, and the
terms of the Recapitalization Proposal are so egregious, that we
would have hoped that this letter is unnecessary. Our fear,
however, is that the Committee is ignoring basic economic realities
and true legal requirements and will instead make decisions based
on the undue influence of Warburg and JLL, whose motives for the
Recapitalization Proposal are clearly questionable. We believe the
problems with the Recapitalization Proposal are abundantly clear
and see them as follows: -- The Recapitalization Proposal reveals
the clear conflicts of interest of Warburg and JLL, and it is
shockingly unfair to the minority stockholders in several respects.
-- The share price that is proposed for the rights offering and the
exchange offer is unfairly low; indeed, startlingly so and
substantially undervalues the Company. There can be no rational
basis for the proposed $2.00 per share price, given that BLDR's
common stock was trading in the range of $7.50 to $8.50 per share
in the days immediately preceding the Recapitalization Proposal. We
believe there is no proper business reason for a discount in the
range of 75%, as currently proposed. We are particularly concerned
that the $2.00 share price was proposed because of the significant
benefits it would confer upon Warburg and JLL in the debt exchange
component of their proposal at the direct expense of other
stockholders. -- Warburg's and JLL's requirement that the proposed
rights offering be "backstopped" by them for a fee of $4.5 million
is also particularly outrageous. First, it is worth noting that
this fee is in return for a commitment to purchase BLDR stock at
discount of approximately 75% to its market price the day prior to
the Recapitalization Proposal. Second, of the proposed $75 million
rights offering, approximately 50%, or only $37.5 million would be
available to the minority stockholders. The other $37.5 million
would be purchased by Warburg and JLL. Accordingly, this "backstop"
commitment would, at first glance, cost the Company a 12% fee ($4.5
million/$37.5 million), which is egregious enough; in reality, when
calculated correctly, this would actually result in Warburg and JLL
receiving stock worth $18 million, a 48% fee, for this valueless
backstop ($4.5 million Fee $2.00 per share = 2,250,000 shares;
2,250,000 shares x $8.00 per share, BLDR's approximate stock price
prior to the Recapitalization Proposal, = $18 million). We believe
the inclusion of a backstop requirement in the Recapitalization
Proposal is just another remarkable example of Warburg's and JLL's
attempting to transfer value from the minority stockholders. We
believe any backstop is unnecessary. Furthermore, this particular
"backstop fee" request is especially absurd, and making such a
proposal demonstrates clear disregard for the minority
stockholders. It equally clearly violates Warburg's and JLL's
fiduciary responsibilities, as directors of BLDR, to the minority
stockholders. It is just one more example of the self-dealing that
pervades the Recapitalization Proposal. -- Even more disturbing is
the proposed conversion of Warburg's and JLL's $98 million in
principal amount of BLDR's Second Priority Senior Secured Floating
Rate Notes ("Notes") into common stock at $2.00 per share. This is
nothing more than a brazen attempt to transfer wealth from the
minority stockholders to Warburg and JLL and other participating
note holders. Given that the Notes do not mature until 2012 and the
Company has sufficient liquidity to meet its needs for the
foreseeable future, we see no compelling need for BLDR to convert
this debt to equity at this time. More importantly, the notion of
doing such a conversion at a price that is approximately
one-quarter of the pre-proposal market value of the Company's
common stock (and even further below what we believe is its
intrinsic value) is nothing more than self-dealing by Warburg and
JLL at the expense of the minority stockholders. The Notes were
quoted at approximately 50% of par prior to the proposal, and in
fact were likely purchased by Warburg and JLL for even less.
Warburg and JLL, notably, openly acknowledge that the "value" of
the Notes in the market was 50% of par prior to the
Recapitalization Proposal. Consequently, Warburg and JLL are
actually proposing trading their securities (the Notes) at a value
that is double their pre-proposal market value in exchange for BLDR
common stock at a value that is one-fourth of its pre-proposal
market value. In other words, under this proposal, for every
dollar's worth of common stock the Company issues, it gets in
return approximately 12.5 cents in market value of its debt
securities. We believe that there is no defensible reason why a
bona fide independent director would ever agree to such an absurdly
priced exchange at massive expense to the minority stockholders. --
Unbelievably, the Recapitalization Proposal was sent by a letter to
the Company signed by Paul S. Levy and Kevin Kruse, both BLDR
directors, as well as managing directors at Warburg and JLL,
respectively, resulting in a clear conflict of interest.
Additionally, four other handpicked directors on BLDR's board hold
senior and/or controlling positions at Warburg or JLL, resulting in
a total of at least six of ten directors on BLDR's board having
conflicted ties to Warburg and JLL. We believe Warburg and JLL are
taking an inherently coercive position to the detriment of all
other stockholders. -- We do not believe that BLDR has a need for
immediate liquidity, as evidenced by numerous written and spoken
statements by the Company confirming that it has sufficient
liquidity. We recognize that BLDR is experiencing a difficult
economic time and is in a troubled industry. We commend the efforts
of BLDR management to position BLDR to survive, control expenses
and operate during this downturn at a low cash burn-rate. As
recently as BLDR's July 24, 2009 second quarter conference call
with investors, however, BLDR announced improved operating results,
increased cash balances and liquidity and optimism about both the
industry and company's prospects, with Charles Horn, BLDR's CFO,
stating: -- "Net cash used during the quarter was only $2.2
million, and we ended the quarter with $112.4 million in available
liquidity, up from $83.5 million in the first quarter of 2009." --
"We feel our action plan has been successful and continues to be
the correct course of action to ensure both the short term and
long-term health of our Company." -- "We are optimistic that
through the consistent execution of this action plan, coupled with
over $112 million in cash, we will have adequate liquidity to
withstand these challenging conditions and that we will be a
stronger, more efficient company when the housing market recovers."
-- We believe that any suggestion by Warburg or JLL or their
handpicked board members that the Company is in fact "in crisis"
should be carefully evaluated. If true, it would seem to indicate
an unbelievable deterioration in the Company's performance and
liquidity in the past eight weeks, as well as call into doubt the
truthfulness of the Company's recent public filings and explicit
public comments to stockholders. We believe that Warburg and JLL
will attempt to characterize the current circumstances of BLDR as a
"crisis", a "crisis" for which Warburg and JLL at this time would
provide the only viable solution. This is ludicrous. In fact, the
opposite is true. Since July 24, 2009 the Company has not issued
any revised guidance or operating results, and the data in the
residential housing industry have been positive, not negative.
Specifically, data for housing starts, housing permits, housing
prices and consumer confidence since BLDR's July 24, 2009 second
quarter call with investors suggest no deterioration in the U.S.
residential housing industry; in fact, the data argue the opposite.
During the July 24, 2009 earnings call Charles Horn also stated, "I
think our feel is that we still believe that 2010 will see a little
bit of moderate growth, but really 2011 is when we'll see a more
pronounced increase in housing industry activity." Any attempts by
Warburg or JLL to characterize BLDR's circumstances specifically,
or industry conditions generally, as worsening are self-serving and
disingenuous and should be viewed with skepticism by the Committee.
-- We believe there is no rational reason to refinance at the
present time. The Notes are not due until 2012, the Company has
over $100 million of liquidity and a low burn rate, and management
is predicting moderate growth in 2010 and a pronounced increase in
housing activity in 2011. We believe in light of these factors,
other than unjustly enriching Warburg and JLL, the most prudent,
reasonable and advisable path is to hold off on financing at the
present time, and certainly not to enter into a significantly
dilutive and below market transaction designed to enrich Warburg
and JLL at the expense of minority shareholders. -- Even if capital
is to be obtained at the present time (which we do not believe is
necessary or appropriate), the current trading price for the
Company's shares, depressed as it is specifically because of the
Recapitalization Proposal, confirms that equity capital could be
obtained by the Company on significantly superior terms to those
provided in the Recapitalization Proposal. It is incumbent on the
board to use its best efforts to obtain the proper amount of
capital on the best terms available. The Recapitalization Proposal
is nothing more than a sweetheart deal for the Company's
controlling stockholders. -- Warburg and JLL, through their
directors, are abusing their position as control stockholders by
proposing actions to enrich themselves at the expense of the
minority stockholders. Warburg and JLL are the private equity
sponsors of BLDR and its strategy. To date, Warburg's and JLL's
investments behind BLDR have been financially unsuccessful, by any
reasonable measure. The Recapitalization Proposal is a transparent
attempt by Warburg and JLL to salvage incremental value for
themselves at the expense of minority stockholders. It is also no
coincidence that the Recapitalization Proposal comes at a time when
the risks to BLDR have diminished substantially as a result of
dramatic expense reductions, effective working capital management
and industry stabilization. BLDR's management, industry analysts
and experts have begun to see stabilization in the residential
housing markets; Warburg and JLL are seizing this opportunity to
enrich themselves at minority stockholder expense when the overall
risk to BLDR has decreased, not increased. We believe it is
revealing that neither Warburg nor JLL had previously publicly
proposed any kind of recapitalization for BLDR when the industry
and company specific risks were far more pronounced than they are
now. We also believe if Warburg and JLL, as directors and insiders,
had not usurped a corporate opportunity and purchased the Notes at
a substantial discount to its face value, they would have not
proposed this self-dealing Recapitalization Proposal. This wrongful
conduct should not be rewarded. -- The Recapitalization Proposal,
which could result in the issuance of as many as 108.75 million
shares, nearly three times the number of currently outstanding
shares, represents a sale of control of the Company under Delaware
law, and accordingly the Committee has specific legal duties and
obligations to insure that the best price is obtained. Regardless
of the fact that Warburg and JLL presently control the Company,
this proposed transaction would require the sale of a control block
of stock to Warburg and JLL. Before that is rubberstamped, to the
severe detriment of the Company's minority stockholders, the
Committee is legally required to exercise its fiduciary duties to
ALL of the Company's stockholders. We note that Warburg and JLL in
their proposal indicated that they are not interested in selling
their shares at the present time on any terms. Clearly this tactic
is to chill the Committee from having the ability to attract viable
alternative proposals for capital or for the sale of control. Just
to be clear, however, we believe that this is not the time to sell
the Company and that the current market price of the Company's
shares is trading at substantial discount to its intrinsic value.
-- We believe that the earlier purchase of the Notes by Warburg and
JLL at significant discounts potentially represented a usurpation
of a corporate opportunity and a breach by the Warburg and JLL
directors of their fiduciary duty. The repurchase of Notes at a
discount to face of 50% or more was an excellent investment and
would have greatly benefited the Company. As directors, the
representatives of Warburg and JLL on BLDR's board had an
obligation to bring this opportunity to the attention of the
Company and to not usurp the opportunity for a director's
individual benefit. Given that the Company had significant
liquidity, with minimal borrowings under its Revolving Credit
Facility, we believe the Company could have with minimal efforts
and cost put itself in the position to repurchase its Notes through
a tender offer, whether by amending its Revolver, obtaining
alternative financing, selling additional equity, or otherwise. The
Recapitalization Proposal, by seeking to obtain full value for the
Notes, in fact more than full value when you consider that the
Notes are being exchanged for below market stock, is exactly the
kind of transaction that a controlling stockholder is prohibited
from doing. -- Warburg's and JLL's actions are damaging their
reputation for fairness and equitable behavior, and showing them to
be predatory and stockholder unfriendly. We entered into the BLDR
investment, in part, because of Warburg's and JLL's solid and
longstanding reputation for sound governance, fairness and ethical
behavior. We recognize that this has been, to date, an unsuccessful
investment for Warburg and JLL. Nevertheless, as members of the
Special Committee, you should not permit Warburg and JLL to improve
the economics of their investment at the expense of the remaining
stockholders. All stockholders have suffered as a result of the
difficult economic conditions in the U.S. housing market, but the
Recapitalization Proposal disproportionately increases the
suffering for the minority stockholders by forcing enormous and
unnecessary dilution. The market's negative response to the
Recapitalization Proposal, including the recent filing of
litigation against the Company and each of the directors alleging a
breach of fiduciary duties by the directors, among other things, is
unequivocal and stands as confirmation that the market "agrees"
with our analysis. We believe that such response also evinces a
concern beyond the unfairness of the economic terms of the proposed
transaction, which goes to the integrity of the Board and its
ongoing ability to fulfill its fiduciary duties. In short,
investors have lost confidence in BLDR's board and its ability to
govern on behalf of stockholders in an objective fashion. In our
view, this concern is entirely reasonable, given the
Recapitalization Proposal and the fact that Warburg and JLL control
a majority of the seats on the Company's board. We are also acutely
aware of the interlocking and historical relationships between
certain independent directors of BLDR and Warburg and JLL. We ask
that we be permitted to meet directly with the Committee in order
to discuss our concerns in further detail. We further request that
the Committee commit to reject any proposed recapitalization that
does not fairly value the Company and that is not subject to
approval by a vote of the majority of the minority stockholders. To
the extent that BLDR prospers in the future as a result of strong
management execution and a rebounding housing market, this
prosperity must accrue to all of the current stockholders. We also
believe that it is incumbent that representatives of the minority
stockholders be added to the Company's Board and are asking that
the Board be immediately expanded to add two minority stockholder
representatives. Alternatively, one representative of each of
Warburg and JLL could voluntarily resign and their seats be filled
by representatives of the minority stockholders. Immediate actions
such as these would begin to restore investor confidence in BLDR's
board of directors. We are not activists by orientation, and our
firm does not have a history of public posturing or litigating.
However, the Recapitalization Proposal, which is rife with
self-dealing and conflicts of interest, has left us no choice but
to convey our profound concerns to the Committee and request the
foregoing protections. To be clear, we believe that this is the
wrong time to recapitalize the Company and in any event this is the
wrong proposal. Though we strongly hope that the Committee will
proceed in a fashion that is in the best interests of the minority
stockholders, we reserve all of our legal and other rights. In that
regard, we have simultaneously submitted to the Company a books and
records request to highlight our concerns that the representatives
of Warburg and JLL on BLDR's Board of Directors may have breached
their fiduciary duties to the Company. While we have not pursued
legal remedies at the present time, rest assured that we are fully
prepared to file a lawsuit to enjoin any transaction that we
believe is unfair to the minority stockholders. Though litigation
would be an unfortunate outcome, our fiduciary obligation to our
investors may require such action, and we take our fiduciary
obligations extremely seriously. We trust that the Committee does
as well. Sincerely, /s/ Bradley R. Kent Bradley R. Kent Managing
Member Stadium Capital Management, LLC Contact Bradley R. Kent,
Managing Member Stadium Capital Management, LLC 541-322-0600
DATASOURCE: Stadium Capital Management, LLC CONTACT: Bradley R.
Kent, Managing Member, Stadium Capital Management, LLC,
+1-541-322-0600
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