Sunset Financial (NYSE:SFO)
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Western Investment LLC announced that it had sent the
following letter to the Board of Directors of Sunset Financial
Resources, Inc. (NYSE: SFO).
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WESTERN INVESTMENT LLC
2855 East Cottonwood Parkway, Suite 110
Salt Lake City, Utah 84121
June 16, 2006
Sunset Financial Resources, Inc.
10245 Centurion Parkway North, Suite 305
Jacksonville, Florida 32256
Attention: Board of Directors
Gentlemen:
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Western Investment LLC, together with certain of its affiliates,
is the beneficial owner of an aggregate of 1,016,300 shares of common
stock of Sunset Financial Resources, Inc., a Maryland corporation
("Sunset" or the "Company"), representing approximately 9.7% of
Sunset's outstanding common stock. As the beneficial holders of a
significant number of the Company's shares, we are deeply concerned
about the increasing disregard for stockholder interests that the
Board of Directors has displayed over the past several months,
culminating in the decision to merge with Alesco Financial Trust.
Since August 2005, the Board has taken the following actions to
the detriment of Sunset stockholders:
-- Making it more difficult for Sunset stockholders to call a
special meeting by increasing the percentage of the
outstanding shares required to call a special meeting from 25%
to 50%;
-- Implementing complex procedures governing
stockholder-requested special meetings and advance notice of
stockholder nominees for directors;
-- Refusing to appoint a stockholder representative to fill a
vacancy that existed on the Board; and
-- Failing to hold an annual meeting for the election of
directors on a timely basis consistent with past practice.
The crowning blow, however, was delivered to stockholders by way
of Sunset's proposed merger with Alesco. Alesco is a private company
(1) that commenced operations less than five months ago, (2) for which
sophisticated investors paid $10.00 per share on January 31, 2006 and
(3) whose book value was $9.40 per share on March 31, 2006 as opposed
to Sunset's book value on such date of $10.42 per share. Yet, in the
proposed merger, Sunset is offering Alesco stockholders a premium of
1.26 Sunset shares for each Alesco share, effectively valuing Alesco
at $13.13 per share. In addition, as a result of the proposed merger,
Sunset's senior executive officers will receive a severance package
estimated by Sunset to be between $2.3-$2.7 million. Furthermore,
Cohen Brothers Management, Alesco's external manager, is already
earning a 1.5% management fee to manage Sunset's assets, which are
being transitioned into assets consistent with Alesco's investment
strategy, a fundamental change in Sunset's investment strategy that
occurred without first obtaining stockholder approval. We question the
wisdom of fundamentally changing Sunset's investment strategy to
invest in what we believe to be a highly leveraged portfolio of
credit-sensitive assets at this point in the business cycle.
It appears that everyone wins in the proposed merger, except for
Sunset's stockholders, who will suffer a dilution in the book value of
their shares from $10.42 to $7.77. We do not understand how the
proposed Alesco merger could possibly be viewed as maximizing
stockholder value.
We do not believe the terms of the currently proposed merger are
advisable or in the best interests of Sunset's stockholders. It is our
current intention to vote against the proposed merger.
We also believe that the Board has superior alternatives to the
merger other than liquidating the Company or simply "staying the
course," one of which is to actively pursue better management for the
Company. We have had discussions with Michael Tokarz regarding his (or
his affiliate) managing all or a portion of Sunset's portfolio. Mr.
Tokarz has over 30 years of lending and investment experience,
including, currently, as Chairman and Portfolio Manager of MVC
Capital, Inc. (NYSE: MVC), a publicly traded business development
company that makes private debt and equity investments; and as
Chairman of The Tokarz Group, a private merchant bank that he founded;
and, formerly, as a General Partner with Kohlberg Kravis Roberts & Co.
(KKR), one of the world's most experienced private firms. We believe
that Mr. Tokarz is a superior portfolio manager with an exceptional
record, and that the Board should explore fully the opportunity to
retain his services.
We would like to discuss this matter further to determine if we
can reach an amicable resolution to our concerns relating to the
future direction of the Company and the maximization of stockholder
value. We sincerely hope that the Board will demonstrate a similar
commitment to Sunset stockholders by favorably responding to our
request. Please note, however, that, if an amicable resolution cannot
be reached, we are prepared to take any and all actions to protect
stockholder interests, including proceeding with a solicitation to
oppose the proposed merger.
We request that any correspondence concerning this matter be
delivered to the undersigned at the address set forth above and copies
of such correspondence should also be simultaneously delivered to our
counsel, Olshan Grundman Frome Rosenzweig & Wolosky LLP, Park Avenue
Tower, 65 East 55th Street, New York, New York 10022, Attention:
Steven Wolosky, Esq., telephone (212) 451-2333, facsimile (212)
451-2222.
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Sincerely,
WESTERN INVESTMENT LLC
By:/s/ Arthur D. Lipson
Arthur D. Lipson
Sole Member
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CERTAIN INFORMATION CONCERNING PARTICIPANTS
Western Investment LLC, together with the other Participants (as
defined below) named herein (collectively, the "Western Group"),
intend to make a preliminary filing with the Securities and Exchange
Commission of a proxy statement and accompanying proxy card to be used
to solicit votes against the proposed merger involving the Company and
Alesco Financial Trust and related proposals to be submitted to a vote
of the stockholders of the Company at a special meeting of
stockholders to be called by the Company.
THE WESTERN GROUP STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY
TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME
AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY
MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SECURITIES AND
EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE
PARTICIPANTS IN THE SOLICITATION WILL PROVIDE COPIES OF DEFINITIVE
PROXY MATERIALS, WITHOUT CHARGE, UPON REQUEST. REQUESTS FOR COPIES
SHOULD BE DIRECTED TO THE PARTICIPANTS' PROXY SOLICITOR, INNISFREE M&A
INCORPORATED, AT ITS TOLL-FREE NUMBER: (888) 750-5834.
The participants in the solicitation are anticipated to be Western
Investment LLC, Western Investment Hedged Partners LP, Western
Investment Institutional Partners LLC, Western Investment Activism
Partners LLC, Arthur D. Lipson, Matthew S. Crouse, James S.
Schallheim, D. James Daras, Marshall W. Coburn and Gerald Hellerman
(collectively, the "Participants"). Information regarding the
Participants and their direct or indirect interests is available in
their Schedule 13D initially filed with the Securities and Exchange
Commission on March 17, 2005, as subsequently amended on March 29,
2005, May 6, 2005, August 29, 2005, September 23, 2005, October 4,
2005, November 1, 2005, December 5, 2005, December 13, 2005 and May 3,
2006.