In a significant turn of events surrounding the proposed acquisition of Sculptor Capital Management (US:SCU) by Rithm Capital (US:RITM), activist investor Daniel Och from Willoughby Capital and his group of investors have publicly voiced their disapproval, setting the stage for a potentially contentious transaction battle.

In a letter filed in a 13D/A Wednesday, Och and his consortium took issue with the sale process, specifically the deal price which they feel “substantially undervalues the Company.” Their prime grievance? That the board of directors has failed in its fiduciary duty, leading to a continuous erosion of shareholder value.

A glaring example pointed out by the group is the board’s approval of a compensation package for CEO James Levin back in December 2021 when SCU stock was trading at $20.02 a share. Now, shareholders are offered a deal at $11.15 per share, more than a 40% decline.

The investor letter also puts board chair Marcy Engel in the spotlight by questioning her recent claim that the Rithm deal delivers a favorable outcome for Sculptor shareholders. With a discerning undertone, the letter highlights, “Memories are not that short.”

However, the concerns don’t just stop at the valuation.

Special Committee Skeptics

Based on the intel gathered from public disclosures and third-party interactions, the group is skeptical of the Special Committee’s dedication to ensuring a sale process that serves the interests of all shareholders. They’re alarmed by potential exclusions of bidders before the Rithm transaction was agreed upon.

The group’s solution? A transparent approach. They’ve called upon the Special Committee to lift any restrictions that would inhibit potential bidders from making public their offers or indications of interest.

Moreover, the investors insinuated potential foul play by the senior management of Sculptor.

Their suspicion? That the senior management may have had undue influence over the outcome of the sales process, which in their view explains the structure of the Rithm deal.

The acquisition, announced last month, pegged the value of Sculptor at $639 million. Sculptor Capital Management, formerly known as Och-Ziff Capital, was set to be acquired in an all-cash deal. The firm boasts an impressive $34 billion assets under management (AUM) and a diversified portfolio, including opportunistic credit, institutional credit, real estate, and multi-strategy

Analyst Valuations

Fintel’s consensus target price of $14.28 suggested that analysts in the market believe SCU is currently trading 30% below its fair valuation.

Forward sales estimate predictions suggested that the market expects an inflection point in earnings from 2024 back to a period of growth.

Rithm Capital, on the other hand, sees the acquisition as a strategic move. The transaction is expected to be a significant expansion for Rithm into asset management, granting the company instant scale, broadening its reach, and enhancing its investment capabilities. Their belief is that Sculptor will augment Rithm’s private capital platform and fortify its fundraising prowess. However, despite the evident synergy, Rithm has maintained that the transaction will be earnings neutral in 2024, turning accretive only by 2025.

Daniel Och’s group has left the door ajar for potential reconciliation, stating they remain open to a transaction that guarantees maximum value to shareholders. They’ve even highlighted their continuous efforts to negotiate better terms with Rithm since the public announcement. Yet, they’ve drawn a line in the sand with a stern warning: “Absent material changes to the proposed transaction, we will vigorously oppose this transaction.”

Fintel’s View

Looking under the hood of SCU, we noticed that operating conditions have deteriorated to their worst levels in five years. Using the financial metrics and ratios page for SCU, it was easy to spot a deterioration in the Cash and Operating Cash return on investor capital measured by the CROIC and OCROIC metrics.

Given how management has performed over the last five years, maybe shareholders are better off taking a deal now before potentially seeing even more shareholder value destroyed in the coming quarters.

Given the fervent opposition and the significant concerns raised, the fate of this transaction hangs in the balance. What’s clear is that all eyes will now be on Rithm and Sculptor’s next moves in this high-stakes corporate drama.

This article originally appeared on Fintel

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