Heard Off the Street: Shareholder prodding spurs Calgon response

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Starboard Value, which won two board seats at Calgon Carbon this year, continues to prod the Robinson environmental products and services firm about how to improve its performance.

The New York investment fund, whose 9.2 percent stake makes it Calgon Carbon's third-largest shareholder, believes the company should improve profit margins, repurchase $150 million to $200 million of its stock, and reorganize its activated carbon business into a master limited partnership in order to reduce taxes and increase cash to the partnership's investors.

"We believe a substantial opportunity to improve value at Calgon still exists," wrote Starboard Value managing member Jeffrey Smith in a Monday letter to president and CEO Randy Dearth.

The letter was also filed with the Securities and Exchange Commission.

The company's initial response was limited to a statement that it "will be reviewing the recommendations." Mr. Dearth had a more complete response Thursday, when Calgon Carbon hosted a meeting for investors in Phoenix.

He told them the company had hired Morgan Stanley to evaluate the master limited partnership idea when it was presented a year ago. The Wall Street firm concluded that it would not deliver added value to shareholders. In August, a board subcommittee began studying the idea again with a different adviser, Mr. Dearth said. They are expected to report back to the full board in about two months.

"I am not against it if it makes sense," Mr. Dearth told investors.

He also told investors the company's cost-cutting target has expanded to $40 million. Calgon Carbon announced a three-phase initiative last year that was intended to reduce costs by $30 million by the end of 2015. The additional reductions will come from a number of measures including improving the way the company purchases coal -- which is used to make activated carbon, the company's main product. Activated carbon is used to purify water and air.

When it comes to trimming expenses, "We want more," Mr. Dearth promised, noting that profit margins have improved for four consecutive quarters.

Calgon Carbon also announced Thursday a new $300 million credit agreement that provides it with an additional $175 million in borrowing capacity. The money will be used for growth initiatives, acquisitions, share repurchases and other corporate purposes, the company said.

Mr. Dearth told investors that decisions on how the additional capital will be used will be made after the report on the master limited partnership is completed.

"The fact that the company has maintained an open ear [to Starboard] has been good for the stock," said Eric Fencil, a portfolio manager for C.S. McKee.

The Downtown investment firm owns 3.2 percent of Calgon's shares. Mr. Fencil agreed with Starboard's proposals on improving margins and buying back shares, but is skeptical the partnership structure would provide anything more than a short-term benefit. He also likes what Mr. Dearth has done since joining the company in August 2012.

"Randy Dearth has done a very good job during his short-term tenure as CEO. He's done everything he's promised," Mr. Fencil said.

Meanwhile, Shapiro Capital Management, an Atlanta investment adviser, revealed Friday it has purchased 5.3 million shares of Calgon Carbon for its clients, giving them a 9.8 percent stake in the company. The disclosure was made in an SEC filing.

Calgon Carbon shares closed Friday at $19.60, up 42 cents. They are up 38 percent this year.

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The London Metal Exchange last week announced new rules for operators of aluminum warehouses that are designed to reduce what aluminum users complain are unnecessary delays in getting the material.

The rules target warehouses where there is more than a 50-day wait to deliver the metal. They will be required to ship out a daily amount of aluminum that exceeds by a prescribed amount the quantity of aluminum they take in daily.

Aluminum users have complained that warehouse delays have increased the price they pay for the metal. Some have filed suit against warehouse operators and the LME, accusing them of restricting supply and raising prices.

When the proposal was announced three months ago, Alcoa said the London Metal Exchange was "trying to solve a nonexistent metal availability problem." The aluminum producer said prices have fallen 40 percent over the last five years and that there is plenty of aluminum available at mid-2009 prices.

In addition to what they pay for the metal, aluminum users also pay a premium based on the cost of warehousing and delivering the material. Those costs have nearly doubled over the last three years.

A statement that Alcoa issued in response to the new LME rules did not address the measure targeting warehouses with waits of more than 50 days. It commended the metals exchange for "taking steps to create a more transparent marketplace."

The aluminum producer also said it supports the LME's plan to consider creating contracts that would allow buyers to hedge the premium for warehousing the metals the same way they can hedge the price of the actual metal.

The LME said the changes should be implemented April 1.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.


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