Sculptor Capital Stock: Boardroom Battle Has Created An Attractive Valuation (NYSE:SCU)

Sculptor Capital Administration (NYSE:SCU) is a worldwide different asset administration agency with about $35 billion in property below administration. The corporate was initially based by Daniel Ochs in 1994 below the title Och-Ziff or OZ Administration.

Within the early years, Och-Ziff turned a serious participant within the hedge fund business by producing stable risk-adjusted efficiency. However since 2015, the corporate has gone by a tricky interval. There was a bribery scandal in 2016 the place the corporate agreed to pay over $400 million to settle the case.

SCU is a publicly traded holding firm that owns a number of working partnership models. There are numerous totally different share lessons with totally different voting rights and financial pursuits that may make it onerous to know the possession percentages of the totally different events concerned. Beneath is an organization diagram from the final 10K report that maps out the assorted possession pursuits:

Lately, the corporate has been embroiled in a boardroom battle between Daniel Ochs and the present CEO, Jimmy Levin. The dispute between Ochs and Levin started in 2018 when Levin was appointed CEO of the corporate. Ochs, who nonetheless controls about 12% of the corporate’s shares, was sad with Levin’s compensation degree, management type and strategic route. Levin at present controls about 20% of the vote. Notice that this share step by step will increase yearly when Levin receives fairness compensation awards.

The dispute between Ochs and Levin got here to a head in late 2020 when the corporate’s board voted to increase Levin’s contract for an additional 5 years. Ochs, who had been pushing for Levin’s elimination, was reportedly livid with the choice and threatened to take authorized motion towards the board.

In October 2022, Ochs despatched a letter to the Sculptor board members.

Listed here are some key excerpts from the letter:

“the Firm’s board has didn’t discharge its duties by, amongst different issues, enabling and enriching a administration crew that’s extra targeted by itself compensation than the Firm’s future.“

“Final month, a number of founding companions and I filed a lawsuit searching for elevated transparency concerning the latest actions of the Firm. For the reason that submitting, I, in addition to different founding companions, have been contacted by a number of third events who’ve requested us whether or not the Firm may be open to a strategic transaction that will not contain present senior administration persevering with to run the Firm. It isn’t shocking that third events would see the potential for such a transaction provided that exterior analysts have beforehand recognized the Firm’s administration points and concluded that, at its present buying and selling value, the Firm could also be value lower than the sum of its components.“

The boardroom battle between Ochs and Levin has had a major affect on Sculptor Capital Administration’s inventory value. For the reason that dispute started, the corporate’s shares have fallen by greater than 50%, and plenty of buyers are involved concerning the firm’s future.

The Sculptor board responded to Och’s letter, by saying they have been at all times open to 3rd get together provides. They shaped a committee to research among the following alternate options:

• Promote the entire firm to a 3rd get together purchaser.
• Levin could wish to take the entire firm non-public in an effort to take away Och’s remaining possession.
• Levin might additionally unload a part of the enterprise, then take the rest non-public.

Due to the excessive compensation at present paid out, it may be onerous to judge what the general enterprise is at present value. The construction of the corporate could be very complicated. There may be quite a lot of working leverage, but in addition very excessive mounted price because of the excessive compensation ranges which might be paid out.

Levin has stated that he thinks concerning the earnings energy of the enterprise in two buckets.

• First bucket: Administration charges earned minus mounted bills. The aim is to develop administration charges whereas decreasing mounted bills. The expansion of administration charges comes from incoming asset flows and compounding capital inside the funding partnerships.
• Second bucket: This contains incentive earnings for above common efficiency weighed towards the upper variable bonus expense that have to be paid out towards it.

The Steadiness Sheet

SCU has a stable stability sheet which is proven beneath. There may be $259 million in money and about $237 million in shareholder fairness within the Class A shares. Compensation paid out in 2022 dropped significantly from 2021 due to the bear market circumstances and decrease incentive charges.

Levin has estimated that the core earnings potential of the corporate from simply the primary bucket is “simply shy of $1 earnings per share”. A lot of the peer publicly traded different asset managers commerce at 15 instances administration price earnings or increased. Due to the boardroom preventing and previous issues, I believe a decreased worth of 12 instances core administration price earnings plus the web property on the stability sheet make it straightforward to justify an approximate buy value within the excessive teenagers for SCU, particularly if an acquirer might exchange Levin and cut back the compensation ranges paid out.

A exact valuation of SCU will be very advanced. This paper from Houlihan Lokey, “Independent Valuation Insights“, describes the various elements that go into the valuation of an asset supervisor.

I consider the value of SCU could be very low cost now, however there’s a time-based danger that an eventual sale of the corporate could not occur within the close to future. Jimmy Levin could choose to simply hold the established order, which might permit him to step by step enhance his possession of SCU. He might wait a number of extra years earlier than deciding to take the corporate non-public or permit a 3rd get together to purchase the corporate.

Due to this, I believe a great way to spend money on SCU inventory now could be to promote out of the cash money coated places. That means, you’re paid to attend if SCU simply trades sideways for a number of years. On the finish of February, I wrote a number of money coated SCU $7.50 places expiring in September 2023 for $1.10. The places are illiquid and may commerce with a big bid-asked unfold, so you want to be affected person and put out a restrict order someplace between the bid and requested value.

For example, suppose you’ll be able to promote a money coated Sept. 2023 $7.50 put at this time for $0.90. If SCU stays above $7.50 on the expiration date, you’ll earn a return of $0.90/$6.60 or about 13.6% in 5 months. If SCU falls beneath $7.50 at expiration, you’ll get assigned on the put and would have a price foundation of $6.60 in your SCU shares.