Inside Steel Connect’s Merger with Steel Partners: A Deep Dive (STCN, SPLP)

Adam Mitchell
Dec 13, 2024
3 min read

*Update - STCN to be delisted from trading after the close of extended hours on Thursday, January 2nd 2025

Steel Connect, Inc. (STCN) and Steel Partners Holdings L.P. (SPLP) have finalized a merger that signifies a major transformation in the corporate landscape. As a "short-form" merger, this strategic consolidation streamlines ownership and operations, benefiting both entities. This article explores the financial specifics, strategic rationale, shareholder implications, and potential long-term impacts of this landmark deal.

Key Features and Structure of the Merger

Short-Form Mechanics
Under Delaware General Corporation Law (DGCL), Section 267, the short-form merger allows SPLP, owning over 90% of STCN's stock, to merge without additional board or shareholder approvals. This structure accelerates the consolidation process and minimizes transaction costs.
Merger Consideration
Shareholders of Steel Connect will receive:
1. $11.45 in cash per share as immediate consideration.
2. Contingent Value Rights (CVRs) entitling holders to proceeds from the pending Reith v. Lichtenstein litigation, provided they haven’t been distributed before the merger’s effective date
Timeline
The merger is expected to close in early 2025, subject to logistical and administrative formalities. SPLP reserves the right to abandon the deal prior to final execution.

Strategic Implications of the Merger

Efficiency Gains

Consolidation enables SPLP to reduce the financial and administrative burden of operating STCN as a public entity. By taking the company private, SPLP eliminates reporting obligations and regulatory constraints, enhancing operational flexibility.

Operational Realignment

The merger provides SPLP an opportunity to optimize Steel Connect's ModusLink business, addressing challenges like customer concentration risks and declining revenues. As a private subsidiary, STCN can prioritize long-term growth strategies without market pressures.

Tax Efficiency

Full ownership allows SPLP to better utilize deferred tax assets, which could significantly benefit the merged entity’s financial performance.

Impact on Stakeholders

For Minority Shareholders

Benefits:
- Liquidity via cash consideration.
- Potential upside through CVRs if litigation proceeds materialize.
Challenges:
- Loss of future equity appreciation.
- Taxable transaction implications.

For SPLP

Benefits:
- Full control over STCN's operations and resources.
- Greater flexibility to implement strategic initiatives.
Risks:
- Assumes full financial and operational risk of STCN’s performance.
- No liquidity for its investment post-merger.

Litigation and the Role of CVRs

The Reith v. Lichtenstein litigation plays a pivotal role in the deal structure. If unresolved by the merger date, CVRs will distribute proceeds to shareholders, excluding SPLP affiliates and key executives. The CVRs ensure that eligible shareholders share in potential litigation outcomes while aligning stakeholder interests.

Conclusion: A Strategic Leap Forward

This merger signifies a strategic realignment for both Steel Connect and Steel Partners. While minority shareholders receive immediate liquidity and potential future returns through CVRs, SPLP positions itself to unlock long-term value by fully integrating STCN into its portfolio.

As STCN transitions into a private subsidiary, it can focus on operational efficiencies, strategic growth, and financial optimization, setting the stage for a new chapter in its corporate journey.

Stay tuned for further updates as this significant corporate event unfolds.

FAQs

Why was a short-form merger chosen?

Short-form mergers reduce administrative hurdles and costs, making it an efficient mechanism for consolidating ownership when one entity already holds a majority stake.

What happens to STCN’s current operations?

Post-merger, STCN will operate as a private subsidiary, focusing on streamlining its business and addressing operational challenges without the scrutiny of public markets.

How do CVRs work?

CVRs entitle holders to potential payouts based on litigation outcomes. They don’t represent equity or voting rights, ensuring that only eligible shareholders benefit from post-merger litigation settlements.