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Tickers in this Article: NPO


EnPro Industries (NYSE:NPO) is worth at least $47 per share - at least according to one activist hedge fund. Steel Partners not only made the claim, the hedge fund also backed it up with a standing offer to acquire the industrial product maker for that very price, which is more than 50% higher than its current market price of about $31. (To learn how to profit by following the lead of these ruthless investors, see Activist Hedge Funds.)

EnPro's board of directors privately rejected the offer, but that only prompted the belligerent hedge fund to make the argument public. After several public exchanges, the situation escalated into a proxy battle that could lead to a sale of the company. Steel Partners has nominated its own two candidates to the company's board whose agenda would be to solve the company's dire legal situation, unlock value, and put it up for sale to the highest bidder in a simple three-step process.

Step 1: Solve the Legal Problems
EnPro has been struggling with asbestos-related legal problems for several decades now. In fact, the company has settled more than 900,000 claims for some $1.3 billion since the first lawsuits were filed in 1975. The lawyer bills alone cost the company more than $400 million!

The good news is that the number of new claims has been in steep decline since 2003, but EnPro still has around $519 million in remaining liabilities. Unfortunately, its insurance company will only foot $382 million of that bill, leaving the company with $137 million in unfunded liabilities that it must pay out of pocket.

This huge legal bill is the primary reason that the stock has been undervalued, and Steel Partners believes that more could be done to address the problem. In particular, the hedge fund proposed a thorough analysis of the current strategy by a third party in order to find potential solutions to minimize and contain potential liability.

Obviously, the removal of these legal liabilities would not only allow the stock to appreciate but also open the door to potential strategic or financial buyers interested in acquiring the firm. (For related content see Does a company have to notify its investors when it faces legal proceedings?)

Step 2: Cut the Fat
EnPro's $137 million in unfunded liabilities combined with its long-term debt spells bad news for a company that can't generate a lot of cash. That's probably why the company opted to keep its admittedly "non-core segment" around despite an obvious lack of synergies. (To learn about debt ratios and how to use them to assess a company's financial health, check out Debt Reckoning.)

The Engine Products and Services segment was a bright spot for the company during the fourth quarter of last year. The segment's sales increased 15% to $45 million on increased shipments while its profits moved up 46% to $7.3 million.

Steel Partners believes that it is the perfect time to sell. A high multiple could be obtained on the latest revenue figures, and the excess cash could be used to pay off most of its unfunded legal liabilities. The divestiture would also have the added benefit of making the remaining company much cheaper for an acquirer.

Step 3: Sell the Company
Steel Partners' final recommendation was that EnPro work to solicit bids from potential acquirers. This includes not only the hedge funds own $47 per share bid, but also those from strategic buyers (who tend to pay more than financial buyers).

The alternative would be a restructuring of EnPro's balance sheet that it mentioned in earlier communications with the company. This would include a public recapitalization followed by a tender offer or buyback for at least $150 million of common stock. (For related reading, check out How The Big Boys Buy and Cashing In On Corporate Restructuring.)

Conclusions
In the end, EnPro Industries is clearly an undervalued stock due to its huge legal liabilities. Steel Partners offers a solution to these problems - a solution that could ultimately result in a sale of the company at an attractive premium. The question is whether shareholders will vote for their board candidates during the next annual meeting.

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