Capital Southwest Corporation (CSWC) is a business development company that has become a bit of a cult stock
in some dark corners of the Value Investing world. The company is most
well known for a large stake in Heely's (HLYS) that it desperately
tried to unload at the peak last Summer. CSWC had to shelve its plans
and watched the stock tumble from a peak of $38 down to $4.
Somewhere along the way, CSWC attracted an activist investor
called ZS Crossover II L.P. ZS Crossover II L.P. filed a lawsuit
yesterday in Texas trying to compel CSWC to turn over "certain books
and records it has requested to inspect pursuant to Texas law"
including shareholder lists. A previous letter from ZS Crossover II
L.P. asked the management of CSWC to do the following:
1) "Liquidate, in an expedited but orderly manner, the approximately $55 million of non-control interests in public securities
that it owns (i.e., the portfolio of various public securities other
than CSWC's four major public holdings of WIRE, ALG, PHHM, and HLYS).
These positions can easily be liquidated before the Company's fiscal
year end of March 31, 2008. The cash proceeds from these sales should
then promptly be distributed to shareholders in the form of a one-time
special dividend."
2) "The Company should hire a nationally-recognized
investment banking
firm to evaluate strategic options with regard to CSWC's four major
ownership stakes in public companies (WIRE, ALG, PHHM and HLYS)."
3)
"We believe that the Company should hire an independent firm to opine
on the valuation of some of its larger private company investments --
such as Rectorseal/Whitmore, Lifemark, and Media Recovery. This would
demonstrate to shareholders that CSWC is attempting to better
communicate to shareholders the intrinsic current value of its private
companies, as well as to better understand this value itself."
ZS
Crossover II L.P. owns 6.8% of the company according to a filing last
month, but insiders are major holders of CSWC which may make a proxy
battle a sisyphusian task to complete.
