Engine Capital Pushes MRC Global to Explore Sale

Engine Capital is urging pipe, valves and fittings distributor MRC Global Inc. to consider exploring a sale.

(Bloomberg) — Engine Capital is urging pipe, valves and fittings distributor MRC Global Inc. to consider exploring a sale.

The activist investor said in its third-quarter letter to investors, which was viewed by Bloomberg News, that the company’s stock is “deeply undervalued.”

MRC Global could benefit from a private buyer that is less concerned about volatility and mark-to-market risks, according to the letter.

While the company has gained a larger presence in the gas-utility end market and improved gross margins, its shareholder returns “trail relevant benchmarks and peers,” Engine Capital said. The investor has about 4% stake in MRC Global, according to a person with knowledge of the matter. 

“At MRC Global, we’re focused on driving shareholder value every day by growing our businesses, creating capital efficiency, increasing cash flow and profitability, and prudently managing our balance sheet,” a representative for Houston-based MRC Global said in a statement. “The MRC board and management team are committed to serving in the best interests of all our shareholders and we will continue to take actions that are in the best interests of driving long-term value creation.” 

A representative for Engine Capital declined to comment.

MRC Global rose 3.4% to $10.36 at 12:11 p.m. in New York trading Monday, giving the company a market value of about $870 million. The stock has fallen about 11% this year. It’s valued at $1.8 billion including debt and preferred equity, according to data compiled by Bloomberg.  

Cornell Capital, a private equity firm that holds all of MRC Global’s Series A convertible perpetual preferred stock, sued the company this year to prevent it from refinancing a senior-secured term loan. The deal was postponed as a result, the company announced in April. 

Engine Capital said in the letter that MRC Global doesn’t need Cornell Capital’s consent for a refinancing transaction, according to lawyers it consulted. A sale of the company could also make it easier to reach a deal with Cornell Capital, according to the letter.

“We believe it would be a lot easier for the board to pay Cornell what it wants in the context of a successful transaction that would allow shareholders to simultaneously get fair value for their shares,” Engine Capital said. 

The investor also said MRC Global could fetch $14 to $18 per share in a sale, representing a premium to its current stock price. 

“This path is vastly superior to the board’s alternative of keeping the company public, having to potentially litigate the issue with Cornell and then engaging in M&A that is introducing significant new risks and is unlikely to create shareholder value given MRC’s high cost of capital,” the hedge fund said. 

(Corrects size of Cornell’s ownership of MRC’s preferred equity.)

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