SCHEDULE 13D/A: Activist Investor Steel Connect Demands Action from DMC Global Board, Reiterates Acquisition Offers Amidst Value Destruction Concerns

Steel Connect, a significant shareholder in DMC Global Inc., has publicly urged the company's board to engage constructively on its acquisition proposals for the entire company or its key businesses, citing concerns over significant stockholder value destruction, poor financial performance, and governance issues.

Summary

• Steel Connect, along with its affiliates, beneficially owns approximately 9.9% of DMC Global Inc.'s outstanding shares, totaling 1,973,039 shares.
• Steel Connect has made three actionable proposals to DMC Global's Board of Directors: to acquire all outstanding shares of DMC not already owned for $16.50 per share in cash (May 2024), to acquire the DynaEnergetics and NobelClad businesses for $185-$200 million in cash (reiterated and simplified from September 2024 proposal), and to purchase preferred stock to enable DMC to acquire the remaining 40% of the Arcadia business (November 2024).
• The preferred stock purchase proposal involves funding the entirety of the issuance, an amount equal to $162 million minus existing debt at Arcadia.
• Steel Connect criticizes the Board for a lack of engagement and urgency regarding the strategic review process and its proposals.
• The company's strategic review process for DynaEnergetics and NobelClad was terminated after 10 months without completing any transactions.
• Steel Connect expresses concern over the 'massive destruction of stockholder value' at DMC, citing poor total stockholder returns compared to key indices over multiple periods.
• DMC Global has frequently missed targeted guidance and recently downgraded its 2024 expectations, subsequently only providing guidance on consolidated sales and adjusted EBITDA.
• The 2021 acquisition of a 60% interest in Arcadia for $282.5 million is described as 'disastrously structured,' leading to an over $140 million write-down and a substantial wealth transfer to an ex-DMC director and his family.
• Steel Connect highlights the remaining Arcadia put/call obligation, with the Munera family retaining a 40% interest and the ability to put it to DMC at a minimum price of $162 million, net of debt.
• The compensation package of $4.5 million granted to Executive Chairman and Interim CEO James O'Leary is deemed 'outrageous' and not tied to value creation metrics, raising concerns about his independence and commitment to stockholder interests.
• The Board is criticized for failed succession planning, with four CEOs/co-CEOs/interim CEOs in approximately two years and over $4 million in severance payments, alongside high management turnover at Arcadia.
• Steel Connect calls on the Board to redeem its 'poison pill,' instituted in June 2024 without stockholder approval, viewing it as an entrenchment mechanism.
• Steel Connect requests a response from the Board to its DynaEnergetics and NobelClad acquisition proposal by the close of business on January 31, 2025.

Sentiment

Score: 2

Explanation: The document conveys a highly negative sentiment towards DMC Global's current management, financial performance, and corporate governance. Steel Connect, as a major shareholder, expresses severe disappointment, highlights significant value destruction, and criticizes specific strategic decisions and compensation practices. The tone is confrontational, demanding immediate action and change.

Positives

• Steel Connect's proposals offer potential pathways to unlock value for DMC Global shareholders, including a full acquisition at $16.50 per share, a divestiture of key assets (DynaEnergetics and NobelClad) for $185-$200 million in cash, and a solution to the Arcadia put/call obligation.
• The offer to acquire DynaEnergetics and NobelClad for $185-$200 million fully in cash simplifies the bid and could provide immediate liquidity and focus for DMC Global.

Negatives

• DMC Global's total stockholder return is exceedingly poor, trailing the Russell 2000 and S&P 500 significantly over 1 year (-57.52% vs. 19.23% and 27.03%), 3 years (-82.40% vs. 18.47% and 44.86%), 5 years (-82.61% vs. 48.24% and 100.14%), and since Steel's first proposal became public on June 13, 2024 (-44.70% vs. 14.08% and 13.17%).
• The company has frequently missed its targeted guidance and recently downgraded its expectations for 2024.
• DMC announced it would only provide guidance on consolidated sales and adjusted EBITDA going forward, citing volatility and uncertainty.
• The 2021 acquisition of a 60% interest in Arcadia for $282.5 million is characterized as poorly designed and disastrous, with the company overpaying for the business.
• DMC has written down more than $140 million of its investment in Arcadia due to mismanagement.
• The Arcadia transaction resulted in a substantial wealth transfer from DMC stockholders to an ex-Board member and his family.
• The remaining 40% interest in Arcadia held by the Munera family includes a put right at a minimum price of $162 million, net of debt, which remains a major obligation.
• DMC paid $2.5 million to Gerard Munera to temporarily refrain from exercising his Arcadia put right.
• Executive Chairman and Interim CEO James O'Leary's $4.5 million compensation package (including $500,000 base salary, $2 million restricted stock, and a $2 million cash payment by June) is deemed excessive and not tied to value creation metrics.
• James O'Leary, elected as an independent director, is now considered conflicted and no longer independent due to his interim CEO role and significant compensation.
• The Board has failed in leadership succession planning, with four CEOs/co-CEOs/interim CEOs in approximately two years, resulting in over $4 million in severance payments.
• Arcadia has experienced excessive management turnover, cycling through three Presidents in as many years, and its current Interim President reportedly lacks P&L experience.
• The company's financial and business information provided during the strategic review process has been delayed, incomplete, and seemingly inaccurate.
• The poison pill instituted in June 2024 without stockholder approval is viewed as an entrenchment mechanism that limits investor purchases while the stock is declining.

Risks

• Continued destruction of stockholder value due to poor financial performance and strategic missteps.
• Failure to complete strategic transactions, such as the sale of DynaEnergetics and NobelClad, leading to prolonged uncertainty and advisory fees.
• Inaccurate, delayed, or incomplete financial and business information hindering potential bids and investor confidence.
• Significant financial overhang from the Arcadia put/call obligation, potentially requiring a large cash outlay.
• Risk of further write-downs or losses related to the mismanaged Arcadia business.
• Excessive executive compensation not tied to performance, potentially misaligning management interests with stockholders.
• Lack of effective leadership succession planning leading to high executive turnover and instability.
• Potential for continued mismanagement of key business segments like Arcadia due to inexperienced leadership.
• The presence of a poison pill may deter potential acquirers or limit investor purchases, hindering value realization.

Future Outlook

Steel Connect reiterates its interest in acquiring DMC Global Inc. as a whole or its DynaEnergetics and NobelClad businesses, and proposes a preferred stock purchase to resolve the Arcadia put/call obligation. The company's own future guidance has been limited to consolidated sales and adjusted EBITDA due to market volatility. Steel Connect believes any of its proposed transactions would create superior value for stockholders compared to remaining a standalone company with the Arcadia overhang.

Management Comments

• "We have consistently attempted to engage with you in a constructive manner to help maximize value for all stockholders of which we are the largest."
• "This lack of engagement and urgency from the Board has been disappointing."
• "It is critical, however, that we receive timely responses to our due diligence requests, and it is our hope that, through this diligence, the Company can demonstrate a higher valuation than today's stock price."
• "We believe that any of the above potential transactions would create superior value for DMC stockholders, as opposed to the alternative of inaction and remaining a standalone Company with the Arcadia overhang."
• "We believe the $4.5 million compensation package recently granted to Executive Chairman and Interim President and CEO James O'Leary is outrageous and runs counter to stockholders' best interests."
• "His compensation arrangement is not related to the Company's financial performance or value creation and seems to be the result of a complacent Board."
• "The Board has utterly failed in its duty to properly plan for leadership succession and has approved an outlandish amount of executive severance for a Company of its size."
• "This type of churn is not healthy for any business and is emblematic of the Board's failure to install competent leadership."
• "We believe the Company should redeem its poison pill, which was instituted in June 2024 without stockholder approval. We believe it runs directly contrary to the best interests of stockholders to limit investor purchases at a time when the Company's stock has been declining precipitously."
• "We call on the Board to act swiftly to address our concerns and respond to our proposals. We reserve all rights to take any action we deem necessary to protect stockholders' best interests."

Industry Context

DMC Global Inc. operates in the energy and construction markets, which are noted for volatility and uncertainty. Steel Connect, as a global diversified holding company, is acting as an activist investor, seeking to influence strategic direction and unlock value in a company that it perceives as underperforming relative to broader market indices and its own potential. This reflects a broader trend of activist shareholders pushing for corporate governance changes and strategic divestitures in companies with perceived undervalued assets or poor management.

Comparison to Industry Standards

• DMC Global's 1-year total stockholder return of -57.52% significantly underperforms the Russell 2000 (19.23%) and S&P 500 (27.03%).
• DMC Global's 3-year total stockholder return of -82.40% significantly underperforms the Russell 2000 (18.47%) and S&P 500 (44.86%).
• DMC Global's 5-year total stockholder return of -82.61% significantly underperforms the Russell 2000 (48.24%) and S&P 500 (100.14%).
• Since Steel Connect's first proposal became public on June 13, 2024, DMC Global's stock has declined by 44.70%, while the Russell 2000 gained 14.08% and the S&P 500 gained 13.17%.

Corporate Governance

Related Party Transactions

• The 2021 acquisition of a 60% interest in Arcadia Inc. for $282.5 million was from Gerard Munera, an ex-DMC director, and his family, who retained a 40% interest and received a put right at a minimum price of $162 million, net of debt. This transaction is criticized as a 'substantial wealth transfer' from DMC stockholders to an ex-Board member and his family.

Stakeholder Impact

• Shareholders: Directly impacted by significant value destruction, poor stock performance, and the Board's perceived inaction and governance issues. Steel Connect's proposals aim to create superior value for them.
• Management/Executives: The compensation package of Interim CEO James O'Leary is under scrutiny, and past executive turnover has led to substantial severance payments. The Board's succession planning is heavily criticized.
• Employees: High management turnover at Arcadia and the overall instability could impact employee morale and operational efficiency.
• Creditors: The Arcadia put/call obligation represents a significant potential liability that could impact the company's financial health and ability to meet obligations.

Next Steps

• DMC Global's Board is requested to provide timely responses to Steel Connect's due diligence requests.
• DMC Global's Board is requested to respond to Steel Connect's proposal to acquire DynaEnergetics and NobelClad for $185-$200 million in cash by the close of business on January 31, 2025.
• Steel Connect calls on the Board to redeem the poison pill.
• Steel Connect urges the Board to act swiftly to address its concerns and respond to its proposals.
• Steel Connect reserves all rights to take any action deemed necessary to protect stockholders' best interests.

Key Dates

Recommendation

Keywords

DMC Global, BOOM, Steel Connect, Steel Partners Holdings, Activist Investor, Schedule 13D, Corporate Governance, Shareholder Value, Acquisition Proposal, Tender Offer, Divestiture, DynaEnergetics, NobelClad, Arcadia, Executive Compensation, Poison Pill, Strategic Review, Financial Performance