Capital Southwest Corporation last Tuesday announced that its Board of Directors has unanimously approved a plan to spin-off certain of its control assets into a standalone, publicly traded company. According to Capital Southwest, the separation is designed to unlock shareholder value immediately and to enhance long-term shareholder value by establishing two strong, independent companies with distinct growth strategies: one business will be a diversified industrial growth company and the other will focus primarily on lending to strong middle-market companies in the Southwest and across the country.
The proposed transaction is subject to certain conditions described below, including approval by CSWC's shareholders, the receipt of an order for exemptive relief from the Securities and Exchange Commission, the request for which has been filed, and other customary conditions. The spin-off is expected to be consummated by the end of the third quarter of 2015.
Upon completion of the spin-off, Industrial Co. will include the following businesses, which are currently control investments of CSWC:
- The Whitmore Manufacturing Company, which manufactures high performance, specialty lubricants for heavy equipment used in surface mining, railroads and other industries, lubrication equipment specifically for rail applications and lubrication-centric reliability solutions for a wide variety of industries. Whitmore also produces water-based coatings for the automotive and primary metals industries;
- Jet-Lube, Inc., which manufactures specialty lubricants and other products used in oil field and industrial applications; and
- The RectorSeal Corporation, which manufactures specialty chemical products and control devices for plumbing, HVAC, electrical and industrial applications.
"Shortly after joining CSWC, I concluded that we were operating two distinct business models an industrial growth company and an equity investment company within a corporate and regulatory structure that is ideal for neither, resulting in our stock trading at a significant discount to Net Asset Value ("NAV")," said Joseph B. Armes, Chairman and Chief Executive Officer of Capital Southwest. "After conducting an extensive review of strategic alternatives, we believe this transaction is the best way to eliminate the market discount to NAV by separating these business models, allowing the industrial growth company to trade independently and the business development company to refocus on a lending strategy more appropriate for its corporate and regulatory structure. We are confident that establishing two highly focused companies, each with its optimal corporate structure, will allow shareholders to benefit from the compelling value creation opportunities associated with each business."
Commenting on the transaction, Capital Southwest's Chief Investment Officer, Bowen S. Diehl, who is expected to become Chief Executive Officer of CSWC after the transaction is complete, stated: "Upon completion of the separation, CSWC is expected to have a significant capital base, which we intend to leverage to build an investment portfolio with attractive risk-adjusted returns to support a competitive market dividend. We are confident that over time this strategy will enable CSWC to trade at or above net asset value."
