SCHEDULE 13D: Steel Connect Completes Go-Private Merger, Delists from NASDAQ

Steel Connect, Inc. has completed its short-form merger, becoming an indirect wholly-owned subsidiary of Steel Partners Holdings L.P., with public shareholders receiving $11.45 cash and a Contingent Value Right per share.

Summary

• Steel Connect, Inc. completed a short-form merger on January 2, 2025, becoming an indirect wholly-owned subsidiary of Steel Partners Holdings L.P.
• Public shareholders received $11.45 in cash and one Reith Contingent Value Right (CVR) for each common share.
• The total cash consideration and related fees amounted to approximately $31.2 million, funded by Steel Holdings' Amended and Restated Credit Agreement.
• Shares of Steel Connect, Inc. ceased trading on NASDAQ on January 3, 2025, and the company expects to delist and deregister its shares.
• Prior to the merger, significant preferred stock conversions occurred, including 112,043 Series E Preferred Stock and 3,387,957 Series E Preferred Stock, and 35,000 Series C Preferred Stock, all converting into common shares.
• Several common stock transactions took place where related parties sold shares to Steel Excel Inc. at $11.45 per share, including WHX CS (636,447 shares), WF Asset (1,311,700 shares), Warren G. Lichtenstein (182,526 shares), Jack Howard (114,828 shares), and Steel Partners, Ltd. (6,428 shares).
• An internal reorganization merged WebFinancial into Steel Excel, with Steel Excel surviving.

Sentiment

Score: 6

Explanation: Neutral to slightly positive for public shareholders receiving cash and potential CVR value, but negative for loss of public equity and CVR limitations. Overall, it's a planned corporate action with clear outcomes.

Positives

• Public shareholders received a defined cash value ($11.45 per share) for their equity, providing liquidity.
• The Reith CVR offers potential additional value from future litigation proceeds.
• The transaction simplifies Steel Connect's ownership structure by making it a wholly-owned subsidiary of Steel Partners Holdings L.P.

Negatives

• Public shareholders lose direct equity ownership and future upside potential in Steel Connect as it becomes private.
• The Reith CVRs are non-transferable (except in limited circumstances), not SEC registered, and do not have voting or dividend rights, limiting their liquidity and utility.
• Certain related parties (SP Investors, Lichtenstein, Howard) waived their rights to Reith Net Litigation Proceeds for a significant portion of their shares, potentially reducing the pool for other CVR holders or indicating a complex internal arrangement.

Risks

• The value of the Reith CVRs is contingent on future litigation proceeds, which are uncertain and may not materialize or may be less than anticipated.
• The non-transferability and lack of registration of CVRs limit their liquidity and make it difficult for holders to realize their value before any distribution.
• The delisting and deregistration of shares mean there will be no public market for Steel Connect's equity.

Future Outlook

The Issuer expects to file a Form 15 to formally delist and deregister all shares, completing its transition to a private entity.

Management Comments

• The resignations of directors were in connection with the consummation of the Short-Form Merger and not due to any disagreement with the Issuer.

Industry Context

This transaction represents a 'go-private' move, a common strategy for companies seeking to reduce regulatory burdens, gain greater operational flexibility, and consolidate ownership, particularly when a majority shareholder already exists. It aligns with a trend where parent companies fully integrate subsidiaries to streamline operations and capture full value without public market scrutiny.

Comparison to Industry Standards

• The cash consideration of $11.45 per share is a specific valuation agreed upon by the parties involved, including the Audit Committee of Steel Connect's Board, in accordance with the Stockholders' Agreement. This is a negotiated price for a take-private transaction, which typically includes a premium over the pre-announcement trading price, though the document does not provide historical price data for comparison.
• The use of a Short-Form Merger (pursuant to Section 267 of the DGCL) is standard practice when a parent entity already owns over 90% of a subsidiary's outstanding shares, simplifying the merger process by bypassing the need for a full shareholder vote.
• The inclusion of a Contingent Value Right (CVR) is a mechanism sometimes used in mergers to bridge valuation gaps or provide shareholders with potential future upside from specific assets or contingent liabilities (like litigation proceeds) that are difficult to value definitively at the time of the merger. Examples include CVRs issued in the acquisition of Allergan by AbbVie or the acquisition of Celgene by Bristol-Myers Squibb, though the specific terms and transferability vary widely.
• The delisting from NASDAQ and subsequent deregistration are standard procedures for companies transitioning from public to private ownership.

Management Changes

Corporate Governance

Legal Proceedings

• The Reith CVRs are tied to 'Reith Net Litigation Proceeds,' indicating an ongoing or past legal matter whose financial outcome will be distributed to CVR holders. The document does not provide details on the nature or status of the litigation itself.

Related Party Transactions

• The Short-Form Merger itself is a related-party transaction, as Steel Partners Holdings L.P., the acquirer, already owned over 90% of Steel Connect's shares.
• Sales of common shares by WHX CS, WF Asset, Warren G. Lichtenstein, Jack Howard, and Steel Partners, Ltd. to Steel Excel Inc. (all related parties) at the merger consideration price of $11.45 per share.
• Conversion of preferred stock held by Steel Excel and WebFinancial (related parties) into common shares prior to the merger.
• Waiver of Reith CVR proceeds by SP Investors (for shares held as of May 1, 2023) and current directors/officers (Lichtenstein, Howard) for their shares.

Stakeholder Impact

• Shareholders (Public): Received cash consideration and CVRs, losing direct equity in a publicly traded company.
• Steel Partners Holdings L.P. (Parent Company): Gained full ownership and control of Steel Connect, simplifying its corporate structure and operations.
• Employees (with Restricted Shares): Their restricted shares vested and were converted into the merger consideration, providing immediate liquidity.
• Creditors (of Steel Holdings): The Steel Holdings Credit Agreement was utilized to fund the cash portion of the merger, potentially impacting their exposure to Steel Holdings.

Next Steps

• The Issuer expects to file a Form 15 to formally delist and deregister all Shares from the SEC.
• Distribution of Reith Net Litigation Proceeds to CVR holders in accordance with the CVR Agreement terms.

Key Dates

Keywords

Steel Connect, Steel Partners Holdings, Short-Form Merger, Go-Private Transaction, Delisting, Contingent Value Right, CVR, SEC Filing, Schedule 13D, Corporate Action, Shareholder Buyout, NASDAQ Delisting, Preferred Stock Conversion, Related Party Transaction