Billionaire Takes Superior for Ride

The proxy battle at Superior Industries Inter-national Inc. should end next week, but the strategic tensions behind it may take years to unwind. For shareholders of the Van Nuys manufacturer of aluminum wheels, the immediate question is whether to elect a board slate proposed by Superior management or to support a dissident slate of three nominees from Gamco Asset Management Inc., a $30 billion New York investment fund run by Wall Street billionaire Mario Gabelli. But it’s also a fight between those loyal to what had been essentially a family-run manufacturing company versus Wall Street types more interested in financial returns. “They have no clue how to make money for shareholders,” Gabelli told the Business Journal. “We do not need more manufacturing people on the board; we need people who understand how to create value for shareholders.” During the early 2000s, Superior performed well as automakers fitted its wheels on new cars and hobbyists tricked out their vehicles. Between 2000 and 2005, the stock traded above $30 and spiked above $50. But the company’s fortunes turned with the Great Recession, as auto sales plummeted and discretionary income shrank. Meanwhile, shares have languished in a narrow trading band between $17 and $22. Since the beginning of 2011, the stock has lost 9.5 percent, closing Aug. 6 at $18.77. Gamco has held shares in Superior for years, but in May 2011 its holdings reached the 5 percent threshold. According to Superior’s most recent filings, Gamco is the company’s largest institutional stockholder with 3.5 million shares, or about 13.2 percent of outstanding shares. Since late 2012, Gabelli’s fund has tried and failed to get board representation, but the pressure has caused changes at Superior, including the separation of the board chair and chief executive positions, a $30 million share repurchase program and the replacement of Steven Borick, the chief executive who was the son of the man who founded the company in 1957. Don Stebbins was appointed as his replacement in May. Stebbins, too, has a background in the industry, including a stint as chief executive at publicly traded auto part supplier Visteon Corp. Still, Borick wields power as he remains the company’s biggest shareholder with a 17.2 percent stake. Late last month, ISS Proxy Advisory Services in New York recommended that shareholders vote for Superior’s nominees, noting that recent changes – including separating the chairman and chief executive positions, and new plants in Mexico – tip the scale in favor of staying the course. “Shareholders appear better served by supporting the management nominees as they continue executing on recent initiatives,” ISS stated. Later, Glass Lewis LLC, the other major proxy advisory service, also backed the management slate of directors. But Gabelli is not backing down. While he approves the hiring of Stebbins, he thinks that without a strong voice in the boardroom, the company will miss opportunities to continually improve shareholder returns, arguing that management only took action when the activism began. “It is true that last year they listened, but here’s my concern: Training wheels are necessary for some companies,” he said. “I can tell you how to make money on Wall Street.” The final vote for the board election will be tallied at Superior’s annual shareholder meeting, set for Aug. 15 at the Airtel Plaza Hotel in Van Nuys. Superior declined to comment for this article. Leadership change Superior began in 1957 making radiator bug screens. In 1961, it launched a new product – seat belts – and built a plant in Van Nuys. Then, in the 1970s, the company established aluminum cast wheels as its major product, both for auto manufacturers and auto enthusiasts. Founder Louis Borick eventually turned leadership over to his son Steven. In 2007, revenue reached $957 million fueled mostly by sales to automakers Ford Motor Co., General Motors Co. and Toyota Motor Sales USA Inc. But by 2009 sales had fallen by 56 percent to $419 million as the financial crisis caused new car sales to nosedive. Jim Smith, editor of Tire Review, a trade publication in Akron, Ohio, said the recession caused a dramatic drop in wheel prices and encouraged wheel production to move to low-cost factories in China, Southeast Asia and Mexico. “Wheels that people used to spend $3,000 or $4,000 on now sell for $500,” he said. “That whole market just cratered.” In recent years, Superior has shifted production to Chihuahua, Mexico, where it has three plants and is building a fourth. On July 30, the company announced it would close its plant in Rogers, Ark., with work shifting to Mexico and a remaining facility in Fayetteville, Ark. Superior’s competitors include Citic Dicastal Co. Ltd., a Chinese supplier to Japan’s automotive industry, and mining giant Alcoa Inc., which maintains a wheel division. A recent report from Research in China, a private market data firm in Beijing, found that an average Dicastal wheel cost $55, while Superior’s ran $66, showing the company’s need to cut production costs. While the company hopes the new plant in Mexico will achieve cost savings, the move comes with risks. Jimmy Baker, an analyst at B. Riley & Co. in Chicago, estimates the company will need to spend at least $120 million of its cash to build its plant in Mexico, which will reduce near term financial results. “While we acknowledge that the business appears to be healing, it has a long way to go before it generates enough earnings per share or free cash flow to support a materially higher valuation,” wrote Baker in a May 5 note to investors. The analyst maintains a “neutral” rating and a price target of $20.50 on the stock. Long fight Gabelli is a former stock analyst who specialized in the auto sector. In 1977, he started a fund based on a value investing methodology. Earlier this year, Forbes estimated his net worth at $1.7 billion. His proxy battle with Superior started in late 2012, when Gabelli representatives met with Superior executives to discuss putting a Gamco nominee on the board. Gamco proposed Walter Schenker, another former auto analyst, but the Superior board didn’t put him on the company-sponsored ballot. A proxy campaign to elect him at last year’s annual meeting failed. Then in December, Gamco proposed a Dutch auction tender offer to repurchase $40 million worth of the company’s stock. A Dutch auction is used when a large number of identical items, such as Superior shares, are sold individually. In this case, Gamco proposed that investors would pledge to sell a specific number of shares at a specific price, and Superior would repurchase the maximum number of shares available for $40 million. Gabelli said the idea was to buy up shares while they were cheap, not to support the stock. Gamco continued to talk with Superior to avoid a proxy battle, but on June 27 the fund withdrew the Dutch auction proposal and nominated three people for the board. Gabelli said the auction idea didn’t work because Superior management didn’t understand how to execute it. Gamco’s proxy materials note that last year Superior delivered a total return of 14.2 percent, compared to an average of 18.5 percent for the S&P 500. However, over the previous 10 years, total return was -1.5 percent, compared to an average return of 5.6 percent for the S&P 500. Gamco maintains that “without the shareholder activism, the current board and senior management will not implement actions to enhance shareholder value.” In response, Superior has issued a series of letters to shareholders urging them to vote for its board candidates. The letters point out that the company’s candidates are manufacturing professionals, while Gamco’s candidates have no managerial experience in manufacturing or the automotive sector. “Once again, (Gamco) is waging another needless, costly and distracting proxy contest to elect its own director candidates to your board,” Superior stated in its proxy materials. For now, Gabelli’s biggest hurdle may be overcoming the ISS decision to side with management. He acknowledged the proxy contest is an “uphill battle” but he is not giving up. “Sometimes I agree with ISS and sometimes I disagree,” he said. “It becomes a placebo for some fund managers. It’s a tough challenge for us to overcome because some of them will just vote along with ISS.”