AAI's parent fights outsider rush to sell it

Boardroom battle reflects rift over urgency of sale

CEO may lose director's seat

Defense subsidiary in Md. has key stake in outcome

September 22, 2002|By Robert Little | Robert Little,SUN STAFF

The directors of United Industrial Corp., under assault by a dissident board member who wants to sell the company, are sending this calming message to their anguished shareholders:

Relax, they say. We want to sell the company, too.

The boardroom battle for control of United Industrial will reach its peak Oct. 4 at the company's annual meeting in New York, where shareholders will elect two members of the company's six-seat board of directors.

Regardless of the vote, the course of debate suggests that grumbling shareholders have assured the company's fate.

United Industrial will be sold, it seems, by one board or another.

Majority control is not at stake, though the power of the chief executive officer is. The final tally of votes could hand his board seat to an invading contrarian intent on dealing the company away as soon as possible, in pieces if necessary.

The outcome could have broad implications in Maryland, where subsidiary AAI Corp. has 900 employees and accounts for practically all of its parent company's revenue and profit.

Although a sale seems certain, the nature of that sale is not. The current directors are proceeding slowly and deliberately, while the others could act immediately and violently.

"It's a good company, with good management, but it seems like a takeover is the likely next step," said Mario Ferro, senior securities analyst for Value Line Inc. in New York. "They're not large enough to continue the way they are now, not in the defense sector. And of course, they are getting a lot of pressure from within."

The pressure comes from Warren G. Lichtenstein, manager of the hedge fund Steel Partners II, which owns more than 10 percent of United Industrial's stock. Lichtenstein has a seat on the board, and he wants control of another one.

An "activist" investor with a long history of buying into companies, then breaking them apart, Lichtenstein wants United Industrial to quickly auction itself to the highest bidder. He has nominated a colleague at Steel Partners, Glen M. Kassan, to join the board of directors and help him pursue that goal.

Although two seats are up for election, Lichtenstein is targeting the one held by Chief Executive Officer Richard R. Erkeneff, calling him a vested company insider who lacks the kind of independent perspective so recently brought into vogue.

"We believe that the full value of our investment will never be realized under the existing board," Lichtenstein wrote in a letter to shareholders. "In Steel's opinion, maximum stockholder value will only be achieved through a prompt sale of all or substantially all of UIC."

When Lichtenstein revealed his intentions six months ago, the directors of United Industrial responded by announcing that they, too, wanted to sell the company, and had hired Wachovia Corp. to search for buyers.

When Lichtenstein later nominated Kassan for the board, the company promptly announced that it would "intensify and accelerate" that search.

And so the proxy battle, taking place in letters to shareholders and filings with the Securities and Exchange Commission, rarely has touched on the question of who is best suited to run the small defense contractor. Rather, the sides argue over who can best dismantle the company and package it for sale.

United Industrial has gradually sold its less-desirable components to focus on AAI, the core business. A pioneer in the manufacture of unmanned aircraft for the military, AAI is regarded as an attractive takeover target and reportedly has attracted interest from at least three would-be buyers.

"We are committed to maximizing shareholder value," the United Industrial board wrote in its own letter to shareholders. "Our nominees are eminently qualified to lead the company and bring about a sale."

Even though both sides seem to want the same thing, industry sources say they are poles apart in their views about how to accomplish it.

Lichtenstein is content to gather offers and pick the highest one, while company officials are seeking a buyer that would keep the business largely intact, without disrupting employees and customers.

The task has not been easy. United Industrial operates Detroit Stoker, a small manufacturer of industrial equipment that few defense companies seem to want.

Suitors had been turned off by the company's difficulty in shedding its transportation equipment overhaul business, an under-performing unit that was finally sold in late July.

Lichtenstein calls the sluggish pace evidence that the company is not serious about a sale. "Management," he says, "has wasted valuable time."

Board members, meanwhile, question Lichtenstein's commitment to the company and the industry.

He and Kassan are experienced investors, but they have little expertise in the defense industry and virtually no history with United Industrial.

Several of their filings with the SEC mention the AAI facility in "Huntsville, Maryland," an apparent reference to the headquarters in Hunt Valley.

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