Good Grief; Dividend at Risk at Greif (NYSE: GEF/GEF.B)

Spruce Point is pleased to issue an investment research opinion on Greif, Inc (NYSE: GEF/GEF.B). Our presentation is accessible as an attachment and on our website  www.sprucepointcap.com . Please follow us on Twitter  @Sprucepointcap  for updates.

In our opinion, there are numerous reasons we are short shares of Greif (GEF) :

• GEF's industrial packaging and product businesses appear largely commoditized, are capex intensive, and under severe pressure from FX headwinds (Venezuela, Brazil, Russia, Europe) and slackening demand tied to pressures in various end markets (e.g. energy). Overall, the company is experiencing deflationary-like pricing power and very low single digit / declining volumes
• In addition to market weakness, GEF struggles from a leveraged acquisition spree where it acquired 40 companies for $1.2 billion. GEF appears to be obfuscating its financial performance including 1) Reducing disclosures on segment price/volume trends 2) Distorting and confusing presentation of its EBITDA with lots of adjustments, and 3) Using gimmicks such as adding in sale of business units and timber properties to inflate continuing operating income and operating cash flow

• We believe all of these measures are intended for one purpose: minimize the appearance that its annual dividend is at risk of being cut or eliminated . Using our traditional measure of free cash flow, we believe GEF has done a terrible job of historically covering its dividend, and is at extreme risk of having to cut or eliminate it (its credit facility contains a Restricted Payment Leverage Ratio condition at 3.0x (currently at 2.5x)). A large shareholder has pledged 1.5 million Class B shares as collateral for a loan; a share price decline caused by a dividend cut could cause an adverse outcome

• GEF has had accounting issues and material weaknesses in its financial controls. Its auditor E&Y resigned in 2014 (previous auditor PWC was dismissed in 1999) and its 10-K filing was delayed. Deloitte was appointed as the new auditor, doubled E&Y’s audit fee, and upon recent filing of its 10-K, still could not attest that GEF had maintained adequate effective internal control over financial reporting

• GEF is trying to convince analysts/investors it can execute a turnaround. However, history shows that it has repeatedly failed to meet many of its financial objectives dating back to 2004! Its dual class share structure, and egregious managerial compensation schemes geared toward cash compensation (no stock options), disadvantage future wealth creation. GEF also recently eliminated operating cash flow (a key determinant of its ability to pay its dividend) as a bonus condition for management and classifies its EBITDA threshold as “confidential.” Class B (voting) insiders have reduced ownership from 59% in 2008 to just 14% today. Meanwhile, senior executives are slowly jumping ship as indicated in year-end 8-K filings

• We believe sell-side analysts are still giving GEF too much credit for sales and earnings growth in 2015/2016, which make the stock look cheap on current valuation metrics, but are at risk of further deterioration. There is only one “Sell” rating on GEF, although we applaud analysts for recently questioning management on the sustainability of its dividend, and for getting agitated with management’s inability to execute

About Spruce Point Capital Management 

Spruce Point Capital Management, LLC is a New York based investment manager founded in 2009. The firm focuses on short-selling, special situations, and value investment opportunities. The firm conducts in depth forensic fundamental research and takes an activist approach to investing. Our research challenges conventional thinking with deep fundamental analysis, analytical rigor, and conclusions rooted with our unique viewpoints. For more information visit us at  http://hvst.co/1tKPaP9 and follow us on Twitter  @Sprucepointcap

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