Tuesday, April 15, 2008

Things Get Nasty at Capital Southwest Corporation

Capital Southwest Corporation (CSWC) is a business development company that has become a bit of a cult stock in some dark corners of the Value Investing world. The company is most well known for a large stake in Heely's (HLYS) that it desperately tried to unload at the peak last Summer. CSWC had to shelve its plans and watched the stock tumble from a peak of $38 down to $4.

Somewhere along the way, CSWC attracted an activist investor called ZS Crossover II L.P. ZS Crossover II L.P. filed a lawsuit yesterday in Texas trying to compel CSWC to turn over "certain books and records it has requested to inspect pursuant to Texas law" including shareholder lists. A previous letter from ZS Crossover II L.P. asked the management of CSWC to do the following:

1) "Liquidate, in an expedited but orderly manner, the approximately $55 million of non-control interests in public securities that it owns (i.e., the portfolio of various public securities other than CSWC's four major public holdings of WIRE, ALG, PHHM, and HLYS). These positions can easily be liquidated before the Company's fiscal year end of March 31, 2008. The cash proceeds from these sales should then promptly be distributed to shareholders in the form of a one-time special dividend."

2) "The Company should hire a nationally-recognized investment banking firm to evaluate strategic options with regard to CSWC's four major ownership stakes in public companies (WIRE, ALG, PHHM and HLYS)."

3) "We believe that the Company should hire an independent firm to opine on the valuation of some of its larger private company investments -- such as Rectorseal/Whitmore, Lifemark, and Media Recovery. This would demonstrate to shareholders that CSWC is attempting to better communicate to shareholders the intrinsic current value of its private companies, as well as to better understand this value itself."

ZS Crossover II L.P. owns 6.8% of the company according to a filing last month, but insiders are major holders of CSWC which may make a proxy battle a sisyphusian task to complete.

My previous posts on Capital Southwest Corporation.

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