In an earlier post on Vogel Talks RVing, I reported that Skyline Corporation had signed a letter of interest for Middlebury, Indiana-based Evergreen Recreational Vehicles LLC to acquire substantially all of the assets of Skyline’s Recreational Vehicle Division.
The announcement came shortly after news of the tentative agreement to sell Skyline’s RV division to EverGreen Recreational Vehicles LLC was released.
During the past several weeks, Cavco Industries has attempted to open a dialogue with the board of directors of Skyline through a series of formal communications, according to a news release. Cavco has suggested that it would be in the best interest of Skyline shareholders for its board to discuss the various proposals by Cavco to improve shareholder value, including a purchase by Cavco of all outstanding shares of Skyline at an attractive premium to current market prices.
Cavco, a leading producer of manufactured homes, said that Skyline did not respond to any of its attempts over an approximately 30-day period to engage in a productive dialogue, which included a series of letters addressed to Skyline’s board of directors, phone calls to Skyline’s longest serving board member and former CEO, and Joseph Stegmayer, president and CEO of Cavco, attending Skyline’s annual meeting of shareholders in an effort to discuss the matter with any of Skyline’s directors who would be open to exploring options for maximizing shareholder value.
After Cavco sent two additional written communications addressed to Skyline’s board of directors, one of which asked Skyline to respond within one week to simply schedule a time for preliminary discussions between the companies, Cavco received a letter on September 25 from Skyline’s lead director stating without further explanation that the board would not be able to respond to Cavco’s request within the requested time frame.
Cavco’s proposed offer set forth in its letter would provide liquidity for Skyline shareholders at a substantial premium of 29 percent to 66 percent above the September 24 closing price of $2.71 per share. Cavco’s offer would have no financing contingencies. Cavco also offered other possible concepts that would assist Skyline.
While a successful sale of the RV division may provide short-term liquidity for Skyline, it would not address the substantially larger operating losses incurred by the housing segment in the last seven fiscal years, Cavco said. The RV division of Skyline’s business represented less than half of Skyline’s fiscal 2014 loss before income taxes of $11.9 million. In contrast, Cavco has proposed to purchase all of Skyline’s operations at a significant premium to market that Cavco believes will provide a greater and more assured and definitive return to Skyline’s shareholders.
Stegmayer commented, “Cavco has a great deal of respect for the Skyline brand and for Skyline’s experienced and highly credentialed board members. Unfortunately, Skyline has experienced difficult times during the past seven years and has meaningfully underperformed.”
Skyline has reported annual losses before income taxes for seven consecutive fiscal years, 2008 through 2014. These cumulative losses total approximately $122 million before income taxes, the majority of which were incurred by the housing segment. Skyline shareholders’ equity declined from approximately $178 million at the beginning of fiscal 2008 to approximately $34 million at May 31, 2014. On August 22, 2014, Skyline’s independent accounting firm issued a qualified opinion regarding Skyline’s ability to continue as a going concern.
Skyline’s Form 10-K for the fiscal year ended May 31, 2014, further disclosed, “Due to recurring losses, the corporation experienced negative cash flows from operating activities. As a result, the corporation has utilized its cash, investments in U.S. Treasury Bills, proceeds from the sale of assets and borrowings from the cash surrender of life insurance policies. The level of historical negative cash flows from operations and not having available funding from outside financing sources raise substantial doubt about the corporation’s ability to continue as a going concern.”
Cavco said it remains interested in holding productive discussions with Skyline. With the cooperation of Skyline’s officers and directors, Cavco and its advisors are prepared to conduct an expedited due diligence review and expect that a transaction can be concluded in a relatively quick time frame.
The release stated, “Although Skyline’s operating losses and financial distress and its board’s unwillingness to even entertain preliminary discussions have made it difficult for Cavco to determine the precise valuation it will apply in a transaction, Cavco has been able to establish the range mentioned in the letter attached based on Cavco’s and its advisors’ analysis of Skyline’s public filings. It is possible that a higher figure could be justified following open discussions with Skyline.”
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