424B3 1 d321918d424b3.htm 424B3 424B3
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Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-215482

Offer by

STEEL PARTNERS HOLDINGS L.P.

to exchange each outstanding share of common stock of

STEEL EXCEL INC.

for

0.712 6.0% Series A preferred units of Steel Partners Holdings L.P.

THE OFFER AND THE WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, AT THE END OF FEBRUARY 6, 2017, UNLESS EXTENDED OR TERMINATED.

Steel Partners Holdings L.P. (“SPLP,” “Parent,” “we,” “us,” or “our”), is offering, upon the terms and subject to the conditions set forth in this prospectus/offer to exchange and in the accompanying letter of transmittal, to exchange for each outstanding share of common stock of Steel Excel Inc. (“Steel Excel” or the “Company”), par value $0.001 per share, not already owned by SPLP or any of its affiliated entities and which is validly tendered in the offer and not properly withdrawn, 0.712 (the “exchange ratio”) newly issued 6.0% Series A preferred units, no par value (the “SPLP preferred units”), of SPLP, together with cash in lieu of any fractional SPLP preferred units, without interest and less any applicable withholding taxes (the “transaction consideration”).

The offer is being made pursuant to an Agreement and Plan of Merger, dated as of December 7, 2016, as amended by the first amendment dated as of December 23, 2016 (the “merger agreement”), by and among SPLP, SPH Acquisition Co. (“Merger Sub”) and Steel Excel. A copy of the merger agreement and the first amendment to the merger agreement are attached to this prospectus/offer to exchange as Annex A and Annex B, respectively.

Based on the exchange ratio, receipt of the SPLP preferred units, which have a liquidation preference of $25.00 per unit, will thus provide Steel Excel’s unaffiliated stockholders with $17.80 of value for each share of Steel Excel common stock tendered in the offer. The SPLP preferred units will (1) bear a cumulative distribution at a rate of 6.0% per annum, payable in cash or in kind (or a combination) at the option of SPLP, (2) have a nine-year maturity, and (3) provide the Company’s stockholders with either cash or SPLP common units upon maturity or earlier redemption at the option of SPLP. In addition, SPLP will offer to repurchase or redeem, for cash on a pro rata basis, 20% of the SPLP preferred units to be issued in the transaction within the first three years after completion of the offer. This repurchase right, as well as the cumulative nature of the preferred distribution and the requirement to effect all redemptions on a pro rata basis (rather than permitting redemptions by lot), were provided for in the first amendment to the merger agreement, and resulted from discussions with significant stockholders of Steel Excel following the announcement of the transaction, including funds affiliated with GAMCO Investors, Inc. that own approximately 12.3% of Steel Excel’s outstanding shares. A complete description of the rights, powers and preferences of the SPLP preferred units is set forth in SPLP’s sixth amended and restated agreement of limited partnership, which will be entered into in connection with the completion of the offer and is attached to this prospectus/offer to exchange as Annex C.


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SPLP’s obligation to accept for exchange, and to exchange, shares of Steel Excel’s common stock for SPLP preferred units in the offer is subject to a number of conditions, including (a) a nonwaivable condition that there be validly tendered and not withdrawn prior to the expiration of the offer that number of shares of Steel Excel common stock that, when added to the shares already owned by SPLP and its subsidiaries, would represent at least a majority of all then outstanding shares of Steel Excel common stock (the “minimum tender condition”), (b) a nonwaivable condition that there be validly tendered and not withdrawn prior to the expiration of the offer that number of shares of Steel Excel common stock that would represent at least a majority of all then outstanding shares of Steel Excel common stock not owned by SPLP or any of its affiliates (the “majority of the minority tender condition”), (c) that the SPLP preferred units issuable in the offer and the merger (as defined below) have been authorized for listing on the New York Stock Exchange (the “NYSE”) or, if for any reason they cannot be so listed, on the OTC Bulletin Board or OTC Market, (d) shares of Steel Excel common stock held by stockholders that have properly exercised appraisal rights under Delaware law do not exceed ten percent (10%) of the shares of common stock of Steel Excel outstanding immediately prior to the expiration of the offer, and (e) the satisfaction of other customary conditions as described in this prospectus/offer to exchange. There is no financing condition to the obligations to consummate the offer. See “Merger Agreement — Conditions to the Offer” for a description of all such conditions.

The offer is the first step in SPLP’s plan to acquire all of the outstanding equity in Steel Excel it does not already own. Accordingly, if the offer is completed, pursuant to the terms and subject to the conditions of the merger agreement, as soon as practicable following the consummation of the offer, SPLP will consummate a merger of Merger Sub with and into Steel Excel, with Steel Excel continuing as the surviving corporation and as an indirect wholly owned subsidiary of SPLP (the “merger” and together with the offer, the “transactions”). The purpose of the merger is for SPLP to acquire all shares of Steel Excel common stock that it did not acquire in the offer. In the merger, each outstanding share of Steel Excel common stock (other than shares held by Steel Excel or any of its subsidiaries, SPLP, Merger Sub or any other subsidiary of SPLP, or held by stockholders who are entitled to demand, and who properly demand, appraisal rights under Delaware law), will be converted into the right to receive the transaction consideration, without interest. After the merger, Steel Excel will be an indirect wholly owned subsidiary of SPLP, and the former unaffiliated stockholders of Steel Excel will no longer have any direct ownership interest in the surviving corporation.

The board of directors of Steel Excel (the “Company board”) (upon the unanimous recommendation of a special committee of the Company board consisting solely of independent directors (the “Company special committee”)) has unanimously (i) determined and declared that the merger agreement and the transactions contemplated by the merger agreement (including the offer and the merger) are, on the terms and subject to the conditions set forth in the merger agreement, advisable and in the best interests of and are fair to the Company and its unaffiliated stockholders, (ii) approved, adopted and authorized in all respects the merger agreement and the transactions contemplated thereby (including the offer and the merger), and (iii) recommended that the unaffiliated stockholders of the Company accept the offer and tender their shares of Steel Excel common stock pursuant to the offer (collectively, the “Company board approval”).

SPLP common units are listed on the NYSE under the symbol “SPLP,” and Steel Excel common stock is quoted on the OTC Market under the symbol “SXCL.” We intend to file an application to list the SPLP preferred units on the NYSE under the symbol “SPLPPRA.” You are encouraged to obtain current market quotations for the Steel Excel common stock in connection with your decision whether to tender your shares in the offer.


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No appraisal rights are available in the offer. However, the merger will entitle Steel Excel stockholders to appraisal rights under Delaware law. To exercise appraisal rights, a Steel Excel stockholder must strictly comply with all of the procedures under the Delaware General Corporation Law (the “DGCL”). These procedures are described more fully in the section entitled “The Offer and the Merger — Dissenters’ Rights.”

For a discussion of certain factors that Steel Excel stockholders should consider in connection with the offer, please read the section of this prospectus/offer to exchange entitled “Risk Factors” beginning on page 21.

You are encouraged to read this entire document and the related letter of transmittal carefully, including the annexes and information referred to or incorporated by reference in this document.

SPLP has not authorized any person to provide any information or to make any representation in connection with the offer other than the information contained or incorporated by reference in this prospectus/offer to exchange, and if any person provides any information or makes any representation of this kind, that information or representation must not be relied upon as having been authorized by SPLP.

Neither the U.S. Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus/offer to exchange. Any representation to the contrary is a criminal offense.

The date of this prospectus/offer to exchange is February 7, 2017.


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TABLE OF CONTENTS

 

ADDITIONAL INFORMATION

     v   

QUESTIONS AND ANSWERS ABOUT THE OFFER

     1   

Who is offering to buy my Steel Excel shares?

     1   

What is SPLP proposing?

     1   

Why is SPLP proposing the offer and the merger?

     2   

Does the board of directors of Steel Excel support the offer and the merger?

     2   

What are the classes and amounts of Steel Excel securities that SPLP is offering to acquire?

     2   

What will I receive for my shares of Steel Excel common stock?

     2   

Will I have to pay any fee or commission to exchange my shares of Steel Excel common stock?

     3   

What are the conditions to the offer?

     3   

How long will it take to complete the proposed offer and the merger?

     4   

Until what time can I tender my shares of Steel Excel common stock in the offer?

     4   

How do I tender my shares of Steel Excel common stock?

     5   

Until what time can I withdraw tendered shares of Steel Excel common stock?

     6   

How do I withdraw previously tendered shares of Steel Excel common stock?

     6   

When and how will I receive the transaction consideration in exchange for my tendered shares of Steel Excel common stock?

     6   

What happens if I do not tender my shares of Steel Excel common stock?

     7   

Will I have the right to have my shares of Steel Excel common stock appraised?

     7   

Who should I contact if I have questions about the offer?

     7   

SUMMARY

     8   

Purpose of the Offer and the Merger (Page 39)

     8   

Transaction Consideration (Page 39)

     8   

The Offer (Page 91)

     9   

The Merger (Page 92)

     9   

The Companies (Page 38)

     9   

Conditions to the Offer (Page 106)

     10   

Treatment of Steel Excel Equity Awards (Page 75)

     11   

Listing of SPLP Preferred Units (Page 81)

     12   

Comparative Market Price and Dividend Matters (Page 112)

     12   

Comparison of Securityholders’ Rights (Page 174)

     12   

Material U.S. Federal Income Tax Consequences (Page 147)

     12   

Accounting Treatment (Page 81)

     13   

Questions About the Offer and the Merger

     13   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SPLP

     14   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF STEEL EXCEL

     16   

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

     17   

UNAUDITED COMPARATIVE PER SHARE DATA

     19   

RISK FACTORS

     21   

Risks Related to the Offer and the Merger

     21   

Risks Related to the SPLP Preferred Units

     24   

Risks Related to SPLP’s Business

     29   

Risks Related to Steel Excel’s Business

     30   

 

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FORWARD-LOOKING STATEMENTS

     36   

THE COMPANIES

     38   

SPLP

     38   

Merger Sub

     38   

Steel Excel

     38   

THE OFFER AND THE MERGER

     39   

General

     39   

Background of the Offer; Past Contacts or Negotiations with the Company

     39   

SPLP’s Reasons for the Offer and the Merger; Recommendation of the SPLP GP Board

     48   

Steel Excel’s Reasons for the Offer and the Merger; Recommendation of the Board of Directors of Steel Excel

     50   

Opinion of the Financial Advisor to the Company Special Committee

     58   

Certain Unaudited Prospective Financial Information of Steel Excel

     68   

Ownership of SPLP After the Offer and the Merger

     72   

Dissenters’ Rights

     72   

Plans for Steel Excel

     73   

Regulatory Approvals

     74   

Interests of Certain Persons in the Offer and the Merger

     74   

Certain Relationships With Steel Excel

     78   

Fees and Expenses

     80   

Accounting Treatment

     81   

Stock Exchange Listing

     81   

Resale of SPLP Preferred Units

     81   

EXCHANGE OFFER PROCEDURES

     82   

Distribution of Offering Materials

     82   

Expiration of the Offer

     82   

Extension, Termination and Amendment of Offer

     82   

Exchange of Shares

     83   

Withdrawal Rights

     84   

Procedures for Tendering

     84   

Grant of Proxy

     86   

Fees and Commissions

     87   

Matters Concerning Validity and Eligibility

     87   

Announcement of Results of the Offer

     87   

Approval of Merger

     88   

Non-Applicability of Rules Regarding “Going Private” Transactions

     88   

Effect of the Offer on the Market for Steel Excel Common Stock

     88   

Quotation on the OTC Market

     88   

Registration Under the Exchange Act

     89   

Exchange Agent Contact Information

     89   

MERGER AGREEMENT

     90   

The Offer

     91   

The Merger

     92   

Representations and Warranties

     94   

Material Adverse Effect

     95   

Conduct of Business

     96   

Additional Agreements

     98   

Conditions to the Offer

     106   

Conditions to the Merger

     107   

 

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Termination of the Merger Agreement

     107   

Amendment of the Merger Agreement

     110   

COMPARATIVE MARKET PRICE AND DIVIDEND MATTERS

     111   

Market Price History

     111   

Dividends/Distributions

     112   

OVERVIEW OF STEEL EXCEL

     113   

General

     113   

Segment Information

     114   

Services

     114   

Customers

     115   

Sales and Marketing

     115   

Competition

     115   

Government and Environmental Regulation

     116   

Employees

     117   

Properties

     117   

Legal Proceedings

     118   

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Steel Excel

     118   

Results of Operations

     119   

Liquidity and Capital Resources

     125   

Off-balance Sheet Arrangements

     126   

Contractual Obligations

     127   

Critical Accounting Policies

     127   

Recent Accounting Pronouncements

     130   

Quantitative and Qualitative Disclosures about Market Risk

     131   

Financial Statements and Supplementary Data

     132   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     132   

Evaluation of Disclosure Controls and Procedures

     132   

Changes in Internal Control over Financial Reporting

     133   

Inherent Limitations on Effectiveness of Controls

     133   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF STEEL EXCEL

     134   

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     136   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     147   

DESCRIPTION OF THE SPLP PREFERRED UNITS

     152   

Distributions

     152   

Ranking

     153   

Optional Redemption

     154   

Repurchase at the Option of the Holders

     154   

Mandatory Redemption

     154   

Voting Rights

     154   

Amount Payable in Liquidation

     156   

No Conversion Rights

     157   

Transfer Agent, Registrar and Paying Agent

     157   

DESCRIPTION OF THE SPLP COMMON UNITS

     158   

Description of Common Units

     158   

Material Provisions of SPLP Partnership Agreement

     159   

 

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COMPARISON OF SECURITYHOLDERS’ RIGHTS

     174   

LEGAL MATTERS

     186   

EXPERTS

     187   

WHERE TO OBTAIN ADDITIONAL INFORMATION

     188   

FINANCIAL STATEMENTS OF STEEL EXCEL

     F-1   

ANNEX A: MERGER AGREEMENT

     A-1   

ANNEX B: FIRST AMENDMENT TO MERGER AGREEMENT

     B-1   

ANNEX C: SPLP SIXTH AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT

     C-1   

ANNEX D: OPINION OF DUFF & PHELPS, LLC

     D-1   

ANNEX E: DIRECTORS AND EXECUTIVE OFFICERS OF SPLP AND MERGER SUB

     E-1   

 

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ADDITIONAL INFORMATION

As permitted by the SEC, this document incorporates by reference important business and financial information about SPLP and its subsidiaries from documents filed with the SEC that have not been included in or delivered with this document.

This information is available without charge at the SEC’s website at http://www.sec.gov, as well as from other sources.

You can obtain the documents incorporated by reference in this document, without charge, by requesting them in writing or by telephone at the following address and telephone number.

Steel Partners Holdings L.P.

Attn: Leonard J. McGill, Secretary

590 Madison Avenue, 32nd Floor

New York, NY 10022

(212) 520-2300

http://www.steelpartners.com

If you would like to request documents, in order to receive timely delivery prior to the expiration of the offer, please make your request at least five business days prior to the expiration date of the offer. The offer is scheduled to expire at 12:00 midnight, New York City time, at the end of February 6, 2017, unless earlier extended or terminated. Unless the offer is extended, this means that the latest you should request documents is January 30, 2017.

See also “Where To Obtain Additional Information.”

Steel Excel has supplied all information contained in this document relating to Steel Excel, and SPLP has supplied all information contained or incorporated by reference in this document relating to SPLP. Both Steel Excel and SPLP have contributed information relating to the offer and the merger.

Certain information relating to Steel Excel appears in its Solicitation/Recommendation Statement dated as of the date of this document (the “Solicitation/Recommendation Statement”). The Solicitation/Recommendation Statement is being mailed to Steel Excel’s stockholders.

 

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QUESTIONS AND ANSWERS ABOUT THE OFFER

Below are some of the questions that you as a holder of shares of Steel Excel common stock may have regarding the offer and answers to those questions. You are urged to carefully read the remainder of this prospectus/offer to exchange, the related letter of transmittal, the annexes to this prospectus/offer to exchange and the other information referred to or incorporated by reference in this prospectus/offer to exchange because the information contained in this section and in the “Summary” section is not complete. See “Where To Obtain Additional Information.”

As used in this prospectus/offer to exchange, unless otherwise indicated or the context requires: “SPLP,” “Parent,” “we,” “us” and “our” refer to Steel Partners Holdings L.P., a Delaware limited partnership; “Merger Sub” refers to SPH Acquisition Co., a Delaware corporation and wholly owned subsidiary of SPLP; and “Steel Excel” and the “Company” refer to Steel Excel Inc., a Delaware corporation.

Who is offering to buy my Steel Excel shares?

SPLP is making this offer to exchange (the “offer”), for each share of common stock of Steel Excel not already owned by SPLP or any of its affiliated entities and which is validly tendered in the offer and not properly withdrawn, 0.712 (the “exchange ratio”) newly issued 6.0% Series A preferred units, no par value (the “SPLP preferred units”), of SPLP.

SPLP is a diversified global holding company that engages in multiple businesses through consolidated subsidiaries, associated companies and other interests. It owns and operates businesses and has significant interests in leading companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics, banking and youth sports. SPLP beneficially owns, indirectly through its subsidiaries, approximately 64.2% of the outstanding shares of Steel Excel common stock.

What is SPLP proposing?

Pursuant to the terms and subject to the conditions set forth in the Agreement and Plan of Merger, entered into by SPLP, Merger Sub and Steel Excel on December 7, 2016, as amended by the first amendment dated as of December 23, 2016 (the “merger agreement”), SPLP proposes to acquire all of the outstanding equity in Steel Excel it does not already own.

The offer is the first step in SPLP’s plan to acquire all of such outstanding equity of Steel Excel, and the merger is the second step in such plan.

In the offer, if a sufficient number of shares of Steel Excel common stock are validly tendered into the offer and not withdrawn prior to the expiration of the offer such that (1) when added to the shares of Steel Excel common stock already owned by SPLP and its subsidiaries, SPLP will own at least a majority of the then outstanding shares of Steel Excel common stock and (2) such number of shares would represent at least a majority of all then outstanding shares of Steel Excel common stock not owned by SPLP or any of its affiliates, and subject to the satisfaction or waiver of the other conditions to the offer, SPLP will accept for exchange, and exchange, the shares tendered in the offer. Then, as soon as practicable thereafter, SPLP will consummate a merger of Merger Sub with and into Steel Excel, with Steel Excel surviving the merger as an indirect wholly owned subsidiary of SPLP (the “merger”). The purpose of the merger is for SPLP to acquire all remaining shares of Steel Excel common stock that it did not acquire in the offer. After the merger, Steel Excel will be an indirect wholly owned subsidiary of SPLP, and the former unaffiliated stockholders of Steel Excel will no longer have any direct ownership interest in the surviving corporation.

 

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Why is SPLP proposing the offer and the merger?

SPLP is proposing the offer and the merger to acquire the entire equity interest in Steel Excel it does not already own. The board of directors of the general partner of SPLP (the “SPLP GP Board”) determined that the terms of the merger agreement and the transactions contemplated by the merger agreement, including the offer and the merger, are advisable, fair to, and in the best interests of, SPLP and its securityholders. See “The Offer and the Merger — SPLP’s Reasons for the Offer and the Merger; Recommendation of the SPLP GP Board” for more information.

Does the board of directors of Steel Excel support the offer and the merger?

Yes. The board of directors of Steel Excel (the “Company board”) (upon the unanimous recommendation of a special committee of the Company board consisting solely of independent directors (the “Company special committee”)) resolved to recommend that Steel Excel’s unaffiliated stockholders accept the offer and tender their Steel Excel shares to SPLP pursuant to the offer and determined that the terms of the merger agreement and the transactions contemplated by the merger agreement, including the offer and the merger, are advisable, fair to, and in the best interests of, Steel Excel and its unaffiliated stockholders.

See “The Offer and the Merger — Steel Excel’s Reasons for the Offer and the Merger; Recommendation of the Board of Directors of Steel Excel” for more information. A description of the reasons for this recommendation is also set forth in Steel Excel’s Solicitation/Recommendation Statement (such Solicitation/Recommendation Statement, as amended or supplemented from time to time, the “Solicitation/Recommendation Statement”) that is being mailed to you together with this prospectus/offer to exchange.

What are the classes and amounts of Steel Excel securities that SPLP is offering to acquire?

SPLP is seeking to acquire all issued and outstanding shares of Steel Excel common stock, par value $0.001 per share, not already owned by SPLP or any of its affiliated entities.

What will I receive for my shares of Steel Excel common stock?

SPLP is offering, upon the terms and subject to the conditions set forth in this prospectus/offer to exchange and in the accompanying letter of transmittal, to exchange for each outstanding share of Steel Excel common stock not already owned by SPLP or any of its affiliated entities and which is validly tendered in the offer and not properly withdrawn, 0.712 SPLP preferred units, together with cash in lieu of any fractional SPLP preferred units, without interest and less any applicable withholding taxes (the “transaction consideration”).

Based on the exchange ratio, receipt of the SPLP preferred units, which have a liquidation preference of $25.00 per unit, will thus provide Steel Excel’s unaffiliated stockholders with $17.80 of value for each share of Steel Excel common stock tendered in the offer. The SPLP preferred units will (1) bear a cumulative distribution at a rate of 6.0% per annum, payable in cash or in kind (or a combination) at the option of SPLP, (2) have a nine-year maturity, and (3) provide the Company’s stockholders with either cash or SPLP common units upon maturity or earlier redemption at the option of SPLP. In addition, SPLP will offer to repurchase or redeem, for cash on a pro rata basis, 20% of the SPLP preferred units to be issued in the transaction within the first three years after completion of the offer. This repurchase right, as well as the cumulative nature of the preferred distribution and the requirement to effect all redemptions on a pro rata basis (rather than permitting redemptions by lot), were provided for in the first amendment to the merger agreement, and resulted from discussions with significant stockholders of Steel Excel following the announcement of the transaction, including funds affiliated with GAMCO Investors,

 

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Inc. that own approximately 12.3% of Steel Excel’s outstanding shares. A complete description of the rights, powers and preferences of the SPLP preferred units is set forth in SPLP’s sixth amended and restated agreement of limited partnership, which will be entered into in connection with the completion of the offer and is attached to this prospectus/offer to exchange as Annex C.

If you do not tender your shares into the offer but the merger is completed, you will also receive the transaction consideration in exchange for your shares of Steel Excel common stock.

Will I have to pay any fee or commission to exchange my shares of Steel Excel common stock?

If you are the record owner of your shares of Steel Excel common stock and you tender those shares in the offer, you will not have to pay any brokerage fees, commissions or similar expenses. If you own your shares of Steel Excel common stock through a broker, dealer, commercial bank, trust company or other nominee and your broker, dealer, commercial bank, trust company or other nominee tenders your shares on your behalf, your broker or such other nominee may charge a fee for doing so. You should consult your broker, dealer, commercial bank, trust company or other nominee to determine whether any charges will apply.

What are the conditions to the offer?

SPLP is not obligated to consummate the offer unless the following conditions, among others, have been satisfied:

 

    Minimum Tender Condition — Steel Excel stockholders having validly tendered and not validly withdrawn prior to the expiration of the offer that number of shares of Steel Excel common stock which, when added to the shares of Steel Excel common stock already owned by SPLP and its other subsidiaries, but excluding any shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee, represents at least a majority of all then outstanding shares of Steel Excel common stock (the “minimum tender condition”);

 

    Majority of the Minority Tender Condition — Steel Excel stockholders having validly tendered and not validly withdrawn prior to the expiration of the offer that number of shares of Steel Excel common stock (but excluding any shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee) which would represent at least a majority of all then outstanding shares of Steel Excel common stock not owned by SPLP or any of its affiliates (“majority of the minority tender condition”);

 

    Effectiveness of Form S-4 — the registration statement on Form S-4 of which this prospectus/offer to exchange is a part having been declared effective by the U.S. Securities and Exchange Commission (the “SEC”) under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and no stop order having been issued or proceeding seeking a stop order having been initiated or threatened in writing by the SEC;

 

    Listing of SPLP Preferred Units — the SPLP preferred units to be issued in the offer and the merger having been approved for listing on the New York Stock Exchange (the “NYSE”), subject to official notice of issuance, or, if for any reason they cannot be so listed, on the OTC Bulletin Board or OTC Market;

 

    Dissenting Stockholders — the shares of Steel Excel common stock held by stockholders having properly exercised appraisal rights under Delaware law do not exceed ten percent (10%) of the shares of Steel Excel common stock outstanding immediately prior to the expiration of the offer;

 

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    No Legal Prohibition — no governmental entity having jurisdiction over SPLP, Merger Sub or Steel Excel having enacted, issued, promulgated, enforced or entered any law, order, decree or ruling (whether temporary, preliminary or permanent) that is then in effect and has the effect of making the offer or the merger illegal or otherwise prohibiting consummation of the offer or the merger;

 

    No Material Adverse Effect — since the date of the merger agreement, no material adverse effect on the business, financial condition or results of operations of Steel Excel shall have occurred;

 

    Accuracy of Steel Excel’s Representations — the representations and warranties of Steel Excel contained in the merger agreement being true and correct as of the date of the merger agreement and the expiration date of the offer, subject to specified materiality standards;

 

    Steel Excel’s Compliance with Covenants — Steel Excel having complied with or performed in all material respects its obligations under the merger agreement; and

 

    No Merger Agreement Termination — the merger agreement not having been terminated in accordance with its terms.

For a more complete description of the conditions to the offer, see the section entitled “Merger Agreement — Conditions to the Offer.”

Since SPLP beneficially owns approximately 64.2% of the outstanding shares of Steel Excel common stock, the minimum tender condition would be satisfied without the tender of any additional shares. In order to satisfy the majority of the minority tender condition, SPLP must receive valid tenders (that have not been properly withdrawn) of at least 1,711,732 shares, assuming no change in the number of outstanding shares of Steel Excel since January 5, 2017. SPLP’s obligation to consummate the offer is not conditioned upon any financing arrangements or contingencies.

How long will it take to complete the proposed offer and the merger?

The offer and the merger are currently expected to be completed in the first quarter of 2017, subject to the satisfaction or waiver of the conditions described in “Merger Agreement — Conditions to the Offer” and “— Conditions to the Merger.”

Until what time can I tender my shares of Steel Excel common stock in the offer?

The offer is scheduled to expire at 12:00 midnight, New York City time, at the end of February 6, 2017, unless extended or terminated. Any extension, delay, termination, waiver or amendment of the offer will be followed as promptly as practicable by public announcement thereof to be made no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. During any such extension, all shares previously tendered and not properly withdrawn will remain subject to the offer, subject to the rights of a tendering stockholder to withdraw such stockholder’s shares. “Expiration date” means February 6, 2017, unless and until SPLP has extended the period during which the offer is open, subject to the terms and conditions of the merger agreement or as required by applicable laws, in which event the term “expiration date” means the latest time and date at which the offer, as so extended by SPLP, will expire.

 

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If you cannot deliver everything required to make a valid tender by the scheduled expiration of the offer, you may still participate in the offer by using the guaranteed delivery procedures that are described in “Exchange Offer Procedures — Procedures for Tendering.”

Subject to the provisions of the merger agreement, and unless Steel Excel consents otherwise or the offer or the merger agreement is terminated and subject to SPLP’s right to waiver any condition to the offer (other than the minimum tender condition and the majority of the minority tender condition), SPLP will (a) extend the offer for the minimum period required by any rule, regulation, interpretation or position of the SEC or the staff thereof applicable to the offer, and (b) if, on the initial expiration date or any subsequent date as of which the offer is scheduled to expire, any condition to the offer has not been satisfied or waived, extend the offer on one or more occasions in consecutive increments of up to five (5) business days each (or such longer period as the parties may agree) until such time as each such condition has been satisfied or waived. However, (1) SPLP will not be required to extend the offer beyond May 31, 2017 or the valid termination of the merger agreement, (2) if, at any otherwise scheduled expiration of the offer, all of the conditions to the offer except for the minimum tender condition and/or the majority of the minority tender condition have been satisfied or waived, SPLP will be required to extend the offer in consecutive increments of up to five (5) business days each but in no event more than fifteen (15) business days in the aggregate (or such other period as the parties may agree), (3) SPLP may extend the offer for up to five (5) business days in order to determine whether the appraisal rights condition to the offer has been satisfied, and (4) SPLP will extend the offer if requested by the Company special committee, or may extend the offer at its election, in connection with its right to renegotiate the terms of the merger agreement in the event that the Company receives a superior third-party proposal to the offer and the merger.

If the merger agreement is terminated, SPLP will promptly terminate the offer.

Other than as described above, SPLP may not extend, terminate or withdraw the offer without the prior written consent of Steel Excel.

Any decision to extend, terminate or withdraw the offer will be made public by a press release or otherwise by a public announcement.

See “Exchange Offer Procedures — Extension, Termination and Amendment of Offer.”

How do I tender my shares of Steel Excel common stock?

To validly tender shares of Steel Excel common stock held of record, Steel Excel stockholders must:

 

    if such shares are in certificated form or are held in book entry form directly with Steel Excel via the direct registration system, deliver a properly completed and duly executed letter of transmittal, along with any required signature guarantees and any other required documents, and certificates, if applicable, for tendered Steel Excel shares to American Stock Transfer & Trust Company, LLC, the exchange agent for the offer, at its address set forth elsewhere in this prospectus/offer to exchange and the letter of transmittal, all of which must be received by the exchange agent on or prior to the expiration date;

 

    if such shares are in electronic book-entry form, deliver an agent’s message in connection with a book-entry transfer, and any other required documents, to the exchange agent at its address set forth elsewhere in this prospectus/offer to exchange and the letter of transmittal and follow the other procedures for book-entry tender set forth herein, all of which must be received by the exchange agent on or prior to the expiration date; or

 

    comply with the guaranteed delivery procedures.

 

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If your shares of Steel Excel common stock are held in “street name” (i.e., through a broker, dealer, commercial bank, trust company or other nominee), those shares may be tendered by your nominee by book-entry transfer through The Depository Trust Company. To validly tender such shares held in street name, you should instruct such nominee to do so on or prior to the expiration date.

Tenders received by the exchange agent after the expiration date will be disregarded and of no effect. In all cases, you will receive your transaction consideration for your tendered shares only after timely receipt by the exchange agent of certificates for such shares, if any, or of a confirmation of a book-entry transfer of such shares, and a properly completed and duly executed letter of transmittal and any other required documents.

If you are unable to deliver everything that is required to tender your shares to the exchange agent by the expiration date, you may obtain a limited amount of additional time by having a broker, a bank or another fiduciary that is an eligible institution guarantee that the missing items will be received by the exchange agent within three business days using the enclosed notice of guaranteed delivery. To validly tender shares of Steel Excel common stock in this manner, however, the exchange agent must receive the missing items within the time period specified in the notice.

For a more complete discussion of the procedures for tendering your shares of Steel Excel common stock, see “Exchange Offer Procedures — Procedures for Tendering.”

Until what time can I withdraw tendered shares of Steel Excel common stock?

You may withdraw your previously tendered shares of Steel Excel common stock at any time until the offer has expired and you may withdraw them at any time on or after that date until SPLP accepts shares for exchange. Once SPLP accepts your tendered shares for exchange, however, you will no longer be able to withdraw them. For a more complete discussion of the procedures for withdrawing your Steel Excel shares, see “Exchange Offer Procedures — Withdrawal Rights.”

How do I withdraw previously tendered shares of Steel Excel common stock?

To withdraw previously tendered shares of Steel Excel common stock that are held of record, you must deliver a written notice of withdrawal with the required information to the exchange agent at any time at which you have the right to withdraw shares.

To withdraw previously tendered shares of Steel Excel common stock that are held in “street name,” you must instruct your broker, dealer, commercial bank, trust company or other nominee to arrange for the withdrawal of your shares, and such broker, dealer, commercial bank, trust company or other nominee must effectively withdraw such shares at any time at which you have the right to withdraw shares.

For a more complete discussion of the procedures for withdrawing your Steel Excel shares, including the applicable deadlines for effecting withdrawals, see “Exchange Offer Procedures — Withdrawal Rights.”

When and how will I receive the transaction consideration in exchange for my tendered shares of Steel Excel common stock?

Upon the terms and subject to the satisfaction or waiver of the conditions of the offer (including, if the offer is extended or amended, the terms and conditions of any extension or amendment), promptly

 

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following the expiration date, SPLP will accept for exchange, and will thereafter promptly exchange, all shares of Steel Excel common stock validly tendered and not properly withdrawn on or prior to the expiration date.

SPLP will deliver the transaction consideration for your validly tendered and not properly withdrawn shares through the exchange agent, which will act as your agent for the purpose of receiving the transaction consideration from SPLP and transmitting such transaction consideration to you. In all cases, you will receive your consideration for your tendered shares only after timely receipt by the exchange agent of certificates for such Steel Excel shares, if any, or a confirmation of a book-entry transfer of such shares, and a properly completed and duly executed letter of transmittal and any other required documents for such shares.

What happens if I do not tender my shares of Steel Excel common stock?

If SPLP completes the offer, subject to the terms and conditions of the merger agreement, it will complete the merger as soon as practicable following the completion of the offer. Upon consummation of the merger, each share of Steel Excel common stock that has not been tendered and accepted for exchange in the offer, unless appraisal rights under Delaware law for such shares are properly exercised and other than shares held in treasury by Steel Excel or shares held by SPLP or any subsidiary of SPLP, will be converted in the merger into the right to receive the transaction consideration.

Will I have the right to have my shares of Steel Excel common stock appraised?

Appraisal rights are not available in connection with the offer, and Steel Excel stockholders who tender their shares in the offer will not have appraisal rights in connection with the merger. However, if SPLP accepts shares in the offer and the merger is completed, holders of shares of Steel Excel common stock will be entitled to exercise appraisal rights in connection with the merger if they did not tender their shares in the offer and satisfy the other requirements prescribed by Delaware law.

Steel Excel stockholders who comply with the applicable statutory procedures under the Delaware General Corporation Law (the “DGCL”) will be entitled to receive a judicial determination of the fair value of their shares of Steel Excel common stock (exclusive of any element of value arising from the accomplishment or expectation of the merger) and to receive payment of such fair value in cash. Any such judicial determination of the fair value of shares of Steel Excel common stock could be based upon considerations other than, or in addition to, the price paid in the offer and the merger and the market value of shares of Steel Excel common stock. The value so determined could be higher or lower than the value per Steel Excel share paid by SPLP pursuant to the offer and the merger. You should be aware that opinions of investment banking firms as to the fairness from a financial point of view of the consideration payable in a sale transaction, such as the offer and the merger, are not opinions as to fair value under applicable Delaware law.

The foregoing summary of the rights of dissenting stockholders under Delaware law does not purport to be a complete statement of the procedures to be followed by Steel Excel stockholders desiring to exercise any available appraisal rights under Section 262 of the DGCL and is qualified in its entirety by the full text of Section 262 of the DGCL. See “The Offer and the Merger — Dissenters’ Rights.”

Who should I contact if I have questions about the offer?

You may contact MacKenzie Partners, Inc., the information agent, at (212) 929-5500 (collect) or (800) 322-2885 (toll free) or by email at tenderoffer@mackenziepartners.com.

 

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SUMMARY

This section summarizes material information presented in greater detail elsewhere in this prospectus/offer to exchange. However, this summary does not contain all of the information that may be important to Steel Excel stockholders. You are urged to carefully read the remainder of this prospectus/offer to exchange, the related letter of transmittal, the annexes to this prospectus/offer to exchange and the other information referred to or incorporated by reference in this prospectus/offer to exchange because the information contained in this section and in the “Questions and Answers About the Offer” section is not complete. See “Where To Obtain Additional Information.”

Purpose of the Offer and the Merger (Page 39)

The purpose of the offer and the merger that have been agreed to between SPLP, Merger Sub and Steel Excel is for SPLP to acquire the entire equity interest in Steel Excel it does not already own. The offer is the first step in SPLP’s plan to acquire all of the outstanding shares of Steel Excel common stock it does not already own, and the merger is the second step in such plan. If the offer is completed, tendered shares of Steel Excel common stock will be exchanged for the transaction consideration, and if the merger is completed, any remaining shares of Steel Excel common stock that were not tendered into the offer (other than certain dissenting shares, shares held in the treasury of Steel Excel and shares held by SPLP or any subsidiary of SPLP, as described further in this prospectus/offer to exchange) will be converted into the right to receive the transaction consideration.

Transaction Consideration (Page 39)

The transaction consideration consists of 0.712 SPLP preferred units for each share of Steel Excel common stock, together with cash in lieu of any fractional SPLP preferred units, without interest and less any applicable withholding taxes.

Steel Excel stockholders will not receive any fractional SPLP preferred units in the offer or the merger, and each Steel Excel stockholder who otherwise would be entitled to receive a fraction of an SPLP preferred unit pursuant to the offer or the merger will be paid an amount in cash (rounded to the nearest whole cent) without interest, equal to the product of: (i) such fraction, multiplied by (ii) $25.00, the SPLP preferred unit liquidation preference.

Based on the exchange ratio, receipt of the SPLP preferred units, which have a liquidation preference of $25.00 per unit, will thus provide Steel Excel’s unaffiliated stockholders with $17.80 of value for each share of Steel Excel common stock tendered in the offer. The SPLP preferred units will (1) bear a cumulative distribution at a rate of 6.0% per annum, payable in cash or in kind (or a combination) at the option of SPLP, (2) have a nine-year maturity, and (3) provide the Company’s stockholders with either cash or SPLP common units upon maturity or earlier redemption at the option of SPLP. In addition, SPLP will offer to repurchase or redeem, for cash on a pro rata basis, 20% of the SPLP preferred units to be issued in the transaction within the first three years after completion of the offer. This repurchase right, as well as the cumulative nature of the preferred distribution and the requirement to effect all redemptions on a pro rata basis (rather than permitting redemptions by lot), were provided for in the first amendment to the merger agreement, and resulted from discussions with significant stockholders of Steel Excel following the announcement of the transaction, including funds affiliated with GAMCO Investors, Inc. that own approximately 12.3% of Steel Excel’s outstanding shares. A complete description of the rights, powers and preferences of the SPLP preferred units is set forth in SPLP’s sixth amended and restated agreement of limited partnership, which will be entered into in connection with the completion of the offer and is attached to this prospectus/offer to exchange as Annex C.

 



 

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The Offer (Page 91)

SPLP is offering, upon the terms and subject to the conditions set forth in this prospectus/offer to exchange and in the accompanying letter of transmittal, to exchange the transaction consideration for each outstanding share of Steel Excel common stock that is validly tendered in the offer and not properly withdrawn.

The Merger (Page 92)

The merger will be completed as soon as practicable following SPLP’s acceptance of shares tendered in the offer if the offer is completed, assuming the satisfaction or waiver (except in the case of the minimum tender condition and the majority of the minority tender condition, which are not waivable) of the other conditions at such time.

In the merger, Merger Sub will merge with and into Steel Excel, with Steel Excel surviving the merger. At the effective time of the merger, each outstanding share of Steel Excel common stock that was not acquired by SPLP in the offer (other than shares held by stockholders validly exercising appraisal rights under Delaware law, shares held in treasury by Steel Excel or shares held by SPLP or any subsidiary of SPLP) will be converted into the right to receive the transaction consideration. After the merger, Steel Excel will be an indirect wholly owned subsidiary of SPLP, and the former unaffiliated stockholders of Steel Excel will no longer have any direct ownership interest in the surviving corporation.

The Companies (Page 38)

SPLP

Steel Partners Holdings L.P.

590 Madison Avenue, 32nd Floor

New York, NY 10022

(212) 520-2300

SPLP is a diversified global holding company that engages in multiple businesses through consolidated subsidiaries, associated companies and other interests. It owns and operates businesses and has significant interests in leading companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics, banking and youth sports.

SPLP was formed in Delaware on December 16, 2008 and its common units became listed on the NYSE under the ticker symbol “SPLP” on April 10, 2012.

Merger Sub

SPH Acquisition Co.

c/o Steel Partners Holdings L.P.

590 Madison Avenue, 32nd Floor

New York, NY 10022

(212) 520-2300

Merger Sub is a Delaware corporation and a direct wholly owned subsidiary of SPLP. Merger Sub was incorporated on December 2, 2016 for the purpose of engaging in the offer and the merger. Merger Sub has engaged in no business activities to date and it has no material assets or liabilities of any kind, other than those incident to its formation and those incurred in connection with the merger agreement, the offer and the merger.

 



 

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Steel Excel

Steel Excel Inc.

590 Madison Avenue, 32nd Floor

New York, NY 10022

(212) 520-2300

Steel Excel, through its two business segments, Energy and Sports, is committed to acquiring, strengthening and growing profitable businesses. The Energy segment provides drilling and production services to the oil and gas industry. The Sports segment is a social impact organization that strives to provide a first-class youth sports experience emphasizing positive experiences and instilling the core values of discipline, teamwork, safety, respect, and integrity.

Steel Excel was incorporated in California in 1981 under the name “Adaptec, Inc.”, and reincorporated in Delaware in March 1998. The Company subsequently changed its name to “ADPT Corporation” in June 2010 and to “Steel Excel Inc.” in October 2011. The Steel Excel common stock is quoted on the OTC Market under the symbol “SXCL.”

Conditions to the Offer (Page 106)

Completion of the offer is subject to certain conditions, including, among others:

 

    Minimum Tender Condition — Steel Excel stockholders having validly tendered and not validly withdrawn prior to the expiration of the offer that number of shares of Steel Excel common stock which, when added to the shares of Steel Excel common stock already owned by SPLP and its other subsidiaries, but excluding any shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee, represents at least a majority of all then outstanding shares of Steel Excel common stock;

 

    Majority of the Minority Tender Condition — Steel Excel stockholders having validly tendered and not validly withdrawn prior to the expiration of the offer that number of shares of Steel Excel common stock (but excluding any shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee) which would represent at least a majority of all then outstanding shares of Steel Excel common stock not owned by SPLP or any of its affiliates;

 

    Effectiveness of Form S-4 — the registration statement on Form S-4 of which this prospectus/offer to exchange is a part having been declared effective by the SEC under the Securities Act, and no stop order having been issued or proceeding seeking a stop order having been initiated or threatened in writing by the SEC;

 

    Listing of SPLP Preferred Units — the SPLP preferred units to be issued in the offer and the merger having been approved for listing on the NYSE, subject to official notice of issuance, or, if for any reason they cannot be so listed, on the OTC Bulletin Board or OTC Market;

 

    Dissenting Stockholders — the shares of Steel Excel common stock held by stockholders having properly exercised appraisal rights under Delaware law do not exceed ten percent (10%) of the shares of Steel Excel common stock outstanding immediately prior to the expiration of the offer;

 



 

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    No Legal Prohibition — no governmental entity having jurisdiction over SPLP, Merger Sub or Steel Excel having enacted, issued, promulgated, enforced or entered any law, order, decree or ruling (whether temporary, preliminary or permanent) that is then in effect and has the effect of making the offer or the merger illegal or otherwise prohibiting consummation of the offer or the merger;

 

    No Material Adverse Effect — since the date of the merger agreement, no material adverse effect on the business, financial condition or results of operations of Steel Excel having occurred;

 

    Accuracy of Steel Excel’s Representations — the representations and warranties of Steel Excel contained in the merger agreement being true and correct as of the date of the merger agreement and the expiration date of the offer, subject to specified materiality standards;

 

    Steel Excel’s Compliance with Covenants — Steel Excel having complied with or performed in all material respects its obligations under the merger agreement; and

 

    No Merger Agreement Termination — the merger agreement not having been terminated in accordance with its terms.

Treatment of Steel Excel Equity Awards (Page 75)

Consideration for Options

At the effective time of the merger, each outstanding option to purchase shares of Steel Excel common stock or other right to purchase shares of Steel Excel common stock (each a “Steel Excel stock option”) under any equity-based compensation plans of Steel Excel, to the extent it is outstanding and unexercised immediately prior thereto, will become fully vested as of the effective time of the merger and will by virtue of the merger and without any action on the part of any holder of any Steel Excel stock option be automatically cancelled and the holder thereof will receive, as soon as reasonably practicable following the effective time of the merger, a cash payment (without interest) with respect thereto equal to the product of (i) the excess, if any, of the product of $17.80 (the transaction consideration value), over the exercise price per share of such Steel Excel stock option and (ii) the number of shares of Steel Excel common stock issuable upon exercise of such Steel Excel stock option (collectively, the “option consideration”). As of the effective time of the merger, all Steel Excel stock options, whether or not vested or exercisable, will no longer be outstanding and will automatically cease to exist, and each holder of a Steel Excel stock option will cease to have any rights with respect thereto, except the right to receive the option consideration with respect thereto. If the exercise price of any such Steel Excel stock option is equal to or greater than $17.80, such Steel Excel stock option will be cancelled without any payment being made in respect thereof.

Consideration for Restricted Shares

At the effective time of the merger, each restricted share of common stock of Steel Excel that, as of immediately prior to the effective time of the merger, remains subject to any performance-vest, time-vest or other condition(s) that constitutes a “substantial risk of forfeiture” within the meaning of Section 83 of the United States Internal Revenue Code of 1986, as amended (the “Code”) (each, a “Steel Excel restricted share”), which is outstanding immediately prior thereto will become fully vested as of the effective time of the merger. Each Steel Excel restricted share will, by virtue of the merger and without any further action on part of any holder thereof, be automatically cancelled, and the holder thereof will receive, as soon as reasonably practicable following the effective time of the merger, at the option of SPLP, (i) a cash payment (without interest) with respect thereto equal to $17.80, or (ii) the transaction

 



 

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consideration. As of the effective time, all Steel Excel restricted shares that are outstanding immediately prior thereto, whether or not vested, will no longer be outstanding and will automatically cease to exist, and each holder of a Steel Excel restricted share will cease to have any rights with respect thereto, except the right to receive the consideration (as elected by SPLP) with respect thereto. SPLP has determined to make the cash payment with respect to Steel Excel restricted shares in the merger.

Listing of SPLP Preferred Units (Page 81)

SPLP intends to file an application to list the SPLP preferred units on the NYSE under the symbol “SPLPPRA.”

Comparative Market Price and Dividend Matters (Page 112)

SPLP common units are listed on the NYSE under the symbol “SPLP,” and Steel Excel common stock is quoted on the OTC Market under the symbol “SXCL.” The SPLP preferred units are a new series of units to be issued pursuant to the offer and the merger; we intend to file an application to list the SPLP preferred units on the NYSE under the symbol “SPLPPRA.” The following table sets forth the closing prices of SPLP common units and Steel Excel common stock on the NYSE and the OTC Market, respectively, as reported on December 7, 2016, the last trading day ending prior to the public announcement of the entry into the merger agreement, and on January 20, 2017, the most recent practicable trading date prior to the filing of this prospectus/offer to exchange.

 

     Per-Share
Steel Excel
Closing Price
     Per-Share
SPLP
Closing Price
 

December 7, 2016

   $ 11.50       $ 14.60   

January 20, 2017

   $ 16.61       $ 16.65   

The value of the transaction consideration, which is based on the liquidation preference of the SPLP preferred units, is fixed and will not change due to fluctuations in the market value of any SPLP securities during the offer period. Steel Excel stockholders should obtain current market quotations for shares of Steel Excel common stock before deciding whether to tender their Steel Excel shares in the offer.

Comparison of Securityholders’ Rights (Page 174)

The rights of holders of SPLP preferred units will be different in a number of respects from the rights of Steel Excel stockholders. Therefore, Steel Excel stockholders will have different rights once they become SPLP preferred unitholders.

Material U.S. Federal Income Tax Consequences (Page 147)

It is expected that the exchange of Steel Excel common stock in the offer or pursuant to the merger for SPLP preferred units should not be a taxable exchange to a stockholder under Section 721(a) of the Internal Revenue Code, except to the extent there is cash paid for fractional shares, subject to the assumptions, qualifications and limitations set forth in the section entitled “Material U.S. Federal Income Tax Consequences.” Holders of Steel Excel common stock should read the section entitled “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the U.S. federal income tax consequences of the offer and the merger, and the holding of the SPLP preferred units. Tax matters can be complicated, and the tax consequences of the offer or the merger, and the holding of the SPLP units, to a particular holder will depend on such holder’s particular facts and circumstances. Steel Excel stockholders should consult their own tax advisors to determine the specific consequences to them of exchanging their shares of Steel Excel common stock for the transaction consideration pursuant to the offer or the merger.

 



 

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Accounting Treatment (Page 81)

In accordance with United States generally accepted accounting principles (“GAAP” or “U.S. GAAP”), SPLP will account for the acquisition of shares in the offer and the merger as an equity transaction. Therefore, no gain or loss will be recognized in consolidated net income or comprehensive income. The carrying amount of our noncontrolling interests will be adjusted to reflect the change in SPLP’s ownership interest in Steel Excel. Any difference between the fair value of the consideration and the amount by which the noncontrolling interest is adjusted will be recognized in capital attributable to SPLP.

Questions About the Offer and the Merger

Questions or requests for assistance or additional copies of this prospectus/offer to exchange, the letter of transmittal and notice of guaranteed delivery may be directed to the information agent at the telephone numbers and address set forth below. Stockholders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the offer and the merger.

 

The Information Agent for the Offer is:

 

LOGO

 

105 Madison Avenue

New York, New York 10016

(212) 929-5500 (Call Collect)

or

CALL TOLL FREE: (800) 322-2885

E-mail: tenderoffer@mackenziepartners.com

 

 



 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SPLP

The following table sets forth certain selected financial information for SPLP as of the end of and for the periods indicated. The selected consolidated statements of operations data for the years ended December 31, 2015, 2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2015 and 2014, are derived from, and qualified by reference to, SPLP’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated by reference into this document. The selected consolidated statements of operations data for the nine months ended September 30, 2016 and 2015 and the selected consolidated balance sheet data as of September 30, 2016 are derived from, and qualified by reference to, SPLP’s unaudited consolidated financial statements included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, which is incorporated by reference into this document. The selected consolidated statements of operations data for the years ended December 31, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2013, 2012 and 2011 are derived from, and qualified by reference to, SPLP’s audited consolidated financial statements, which are not incorporated by reference into this document. You should read this summary selected financial data together with SPLP’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and SPLP’s historical consolidated financial statements and the notes thereto. The historical results are not necessarily indicative of results to be expected in the future. See “Where To Obtain Additional Information.”

The table below presents discontinued operations as follows:

 

    The year ended December 31, 2014 includes the operations of Handy & Harman Ltd. (“HNH”)’s, a corporation in which SPLP has a majority ownership interest in, Arlon LLC (“Arlon”) business.

 

    The year ended December 31, 2013 includes the operations of HNH’s businesses: Arlon, Continental Industries Inc., Canfield Metal Coating Corporation and Indiana Tube de Mexico, S. De R.L. de C.V. through their respective sale dates, as well as one of Steel Excel’s sports businesses.

 

    The year ended December 31, 2012 includes the aforementioned HNH operations, as well as DGT Holding Corp.’s RFI Corporation and DGT Holding Corp.’s Villa Sistemi Medicali S.p.A. through their respective sale dates.

 

    The year ended December 31, 2011 includes the aforementioned operations, as well as DGT Holding Corp.’s operations from July 5, 2011.

 

Statements of Operations
Data (a)
   Nine Months Ended
September 30,
    Year Ended December 31,  
(in thousands, except
common unit and per
common unit data)
   2016     2015     2015     2014     2013     2012     2011  

Revenues

   $ 845,835      $ 742,625      $ 998,037      $ 849,530      $ 721,114      $ 630,771      $ 542,902   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

   $ 25,272      $ 13,169      $ 70,311      $ (17,572   $ 38,374      $ 43,736      $ 71,298   

Income from discontinued operations

     —          87,018        86,257        10,304        6,446        20,029        9,979   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     25,272        100,187        156,568        (7,268     44,820        63,765        81,277   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to non-controlling interests:

     (3,269     (23,320     (19,833     (287     (25,360     (22,747     (45,808
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common unitholders

   $ 22,003      $ 76,867      $ 136,735      $ (7,555   $ 19,460      $ 41,018      $ 35,469   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Statements of Operations
Data (a)
   Nine Months Ended
September 30,
     Year Ended December 31,  
(in thousands, except
common unit and per
common unit data)
   2016      2015      2015      2014     2013      2012      2011  

Net income (loss) per common unit - basic:

                   

Net income (loss) from continuing operations

   $ 0.83       $ 0.82       $ 2.97       $ (0.48   $ 0.51       $ 1.01       $ 1.19   

Net income from discontinued operations

     —           1.97         2.03         0.21        0.14         0.37         0.22   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to common unitholders

   $ 0.83       $ 2.79       $ 5.00       $ (0.27   $ 0.65       $ 1.38       $ 1.41   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Basic weighted average common units outstanding

     26,421,116         27,506,890         27,317,974         28,710,220        29,912,993         29,748,746         25,232,985   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss) income per common unit - diluted:

                   

Net income (loss) from continuing operations

   $ 0.83       $ 0.82       $ 2.96       $ (0.48   $ 0.49       $ 1.01       $ 0.81   

Net income from discontinued operations

     —           1.96         2.02         0.21        0.14         0.37         0.18   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to common unitholders

   $ 0.83       $ 2.78       $ 4.98       $ (0.27   $ 0.63       $ 1.38       $ 0.99   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Diluted weighted average common units outstanding

     26,434,636         27,679,474         27,442,308         28,710,220        30,798,113         29,774,527         29,669,582   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(a) Statement of operations data includes the consolidation of the results of acquired entities from their respective acquisition dates: primarily, the acquisition of SWH, Inc. by BNS Holding Inc. on February 2, 2011, the acquisition of DGT Holdings Corp. on July 5, 2011, the acquisition of Steel Excel on May 31, 2012, HNH’s acquisition of Wolverine Joining Technologies, LLC in April 2013, Steel Excel’s acquisition of the assets of Black Hawk Energy Services, Inc. in December 2013, HNH’s acquisition of JPS Industries, Inc. (“JPS”) on July 2, 2015 and SPLP’s acquisitions of CoSine Communications, Inc. and API Group plc on January 20, 2015 and April 17, 2015, respectively, HNH’s acquisition of SL Industries, Inc. (“SLI”) on June 1, 2016 and HNH’s acquisition of the Electromagnetic Enterprise division of Hamilton Sundstrand Corporation on September 30, 2016.

 

Balance Sheet Data    As of
September 30,
     As of December 31,  
(in thousands, except per common
unit data)
   2016      2015      2014      2013      2012      2011  

Cash and cash equivalents

   $ 328,339       $ 185,852       $ 188,983       $ 203,980       $ 198,027       $ 127,027   

Marketable securities

     67,290         80,842         138,457         178,485         199,128         —     

Long-term investments

     114,905         167,214         311,951         295,440         199,865         320,891   

Total assets

     1,933,613         1,684,773         1,490,497         1,522,245         1,378,359         1,129,843   

Long-term debt

     418,105         235,913         295,707         223,355         140,065         130,955   

SPLP Partners’ capital

     585,570         558,034         494,859         616,582         527,344         415,797   

SPLP Partners’ capital per common unit

   $ 22.39       $ 20.95       $ 17.95       $ 19.81       $ 17.13       $ 16.51   

 

Unaudited Ratio of Earnings to Fixed Charges

 

     Nine Months
Ended
                                    
     September 30,      Years Ended December 31,  
     2016      2015      2014      2013      2012      2011  

Income from continuing operations before income taxes and equity method income (loss) and investments held at fair value

   $ 40,980       $ 23,369       $ 25,273       $ 16,525       $ 31,962       $ 43,432   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fixed Charges:

                 

Interest expense

     7,390         8,862         11,073         10,454         14,804         12,424   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed charges

     7,390         8,862         11,073         10,454         14,804         12,424   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes and equity method income (loss), investments held at fair value and fixed charges

   $ 48,370       $ 32,231       $ 36,346       $ 26,979       $ 46,766       $ 55,856   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ratio of earnings to fixed charges

     6.55         3.64         3.28         2.58         3.16         4.50   

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF STEEL EXCEL

The following table sets forth certain selected financial information for Steel Excel as of the end of and for the periods indicated. The selected consolidated statements of operations data for the years ended December 31, 2015, 2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2015, and 2014 are derived from, and qualified by reference to, Steel Excel’s audited consolidated financial statements included in this document. The selected consolidated statements of operations data for the nine months ended September 30, 2016 and 2015 and the selected consolidated balance sheet data as of September 30, 2016 are derived from, and qualified by reference to, Steel Excel’s unaudited consolidated financial statements included in this document. The selected consolidated statements of operations data for the years ended December 31, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2013, 2012 and 2011 are derived from, and qualified by reference to, Steel Excel’s audited consolidated financial statements, which are not included in this document. You should read this summary selected financial data together with Steel Excel’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Steel Excel’s historical consolidated financial statements and the notes thereto included in this document. The historical results are not necessarily indicative of results to be expected in the future.

 

Statements of Operations Data
(in thousands, except per

share data):

   Nine Months Ended
September 30,
    Year Ended December 31,  
   2016(a)     2015(b)     2015(c)     2014(d)     2013(e)      2012(f)      2011  

Net revenues

   $ 68,868      $ 107,975      $ 132,620      $ 210,148      $ 120,028       $ 100,104       $ 2,502   

Income (loss) from continuing operations before income taxes

   $ (14,246   $ (31,788   $ (88,004   $ (19,522   $ 7,911       $ 6,467       $ (158

Net income (loss) from continuing operations

   $ (5,238   $ (32,339   $ (97,783   $ (24,269   $ 12,867       $ 22,179       $ 68   

Net income (loss) from continuing operations attributable to Steel Excel Inc. per share of common stock - basic and diluted

   $ (0.47   $ (2.81   $ (8.50   $ (2.06   $ 1.03       $ 1.83       $ 0.01   

 

Balance Sheet Data

(in thousands)

   As of
September 30,
     As of December 31,  
   2016      2015      2014      2013      2012      2011  

Balance Sheet Data:

                 

Total assets

   $ 321,481       $ 344,822       $ 476,946       $ 538,694       $ 466,495       $ 368,677   

Long-term obligations

   $ 42,752       $ 42,666       $ 79,242       $ 92,400       $ 14,397       $ —     

 

(a) Includes marketable securities impairment charges of $1.5 million.
(b) Includes marketable securities impairment charges of $30.6 million.
(c) Includes marketable securities impairment charges of $59.8 million, goodwill and intangible assets impairment charges of $25.6 million, and a benefit from income taxes of $6.3 million.
(d) Includes goodwill impairment charges of $36.7 million.
(e) Includes a benefit from income taxes of $5.8 million.
(f) Includes a benefit from income taxes of $15.7 million.

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The following table sets forth SPLP’s selected unaudited pro forma condensed combined financial data for the fiscal year ended December 31, 2015 and the nine months ended September 30, 2016. SPLP’s audited consolidated financial statements, which are incorporated by reference in this prospectus/offer to exchange, do not reflect the impact of the offer and the merger. The selected unaudited pro forma condensed combined financial data is based upon the historical financial statements of SPLP after giving effect to (1) the acquisition by HNH, a subsidiary of SPLP, of JPS, which occurred on July 2, 2015, (2) the acquisition by HNH of SLI, which occurred on June 1, 2016 and (3) the proposed acquisition of the remaining minority interest in Steel Excel not already owned by SPLP or any of its affiliated entities.

The unaudited pro forma condensed combined statement of operations for the fiscal year ended December 31, 2015 combines the historical consolidated statements of operations of SPLP, JPS and SLI, and illustrates the effect of the proposed Steel Excel transaction as if the JPS, SLI and proposed Steel Excel transactions had each occurred on January 1, 2015. The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2016 combines the historical consolidated statements of operations of SPLP and SLI, and illustrates the effect of the proposed Steel Excel transaction as if the SLI acquisition and proposed Steel Excel transaction had each occurred on January 1, 2015. The unaudited pro forma condensed combined balance sheet as of September 30, 2016 has been prepared to illustrate the effect of the proposed Steel Excel transaction as if it had occurred on September 30, 2016.

The historical financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the transactions, (2) factually supportable, and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the consolidated results.

The selected unaudited pro forma condensed combined financial information set forth below should be read in conjunction with the information included under the headings “The Offer and the Merger,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Selected Historical Consolidated Financial Data of SPLP” and “Selected Historical Consolidated Financial Data of Steel Excel”, as well as SPLP’s, JPS’ and SLI’s consolidated financial statements and related notes thereto, which are incorporated by reference in this prospectus/offer to exchange, and Steel Excel’s consolidated financial statements and related notes thereto, which are included in this prospectus/offer to exchange.

 

Selected Unaudited Pro Forma Condensed Consolidated Statement of Operations Data

    
    

 

 
     Pro Forma  
     Year Ended
December 31,
2015
    Nine Months
Ended
September 30,
2016
 

Total revenues

   $ 1,276,633      $ 929,456   
  

 

 

   

 

 

 

Net income from continuing operations

   $ 73,138      $ 16,775   

Net income from continuing operations attributable to noncontrolling interests in consolidated entities

     (28,012     (5,038
  

 

 

   

 

 

 

Net income from continuing operations attributable to common unitholders

   $ 45,126      $ 11,737   
  

 

 

   

 

 

 

 

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Selected Unaudited Pro Forma Condensed Consolidated Balance Sheet  Data

  
    

 

 
     Pro Forma  
     As of September 30,
2016
 

Cash and cash equivalents

   $ 326,253   

Marketable securities

     67,290   

Long-term investments

     114,905   

Total assets

     1,931,527   

Long-term debt

     418,105   

Redeemable preferred units

     63,504   

SPLP partners’ capital

     605,319   

SPLP partners’ capital per common unit

     23.15   

 

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UNAUDITED COMPARATIVE PER SHARE DATA

The following tables reflect historical information for Steel Excel and SPLP about basic and diluted earnings per share or common unit and book value or partners’ capital per common unit, as applicable, for the fiscal year ended December 31, 2015 and the nine months ended September 30, 2016. Both Steel Excel and SPLP are shown on a historical basis, and on an unaudited pro forma combined basis after giving effect to (1) the acquisition by HNH of JPS, which occurred on July 2, 2015, (2) the acquisition by HNH of SLI, which occurred on June 1, 2016 and (3) the proposed acquisition of the remaining minority interest in Steel Excel not already owned by SPLP or any of its affiliated entities. The pro forma data assumes the acquisition of 100% of the shares of Steel Excel common stock not already owned by SPLP or any of its affiliated entities and was derived by adjusting the historical consolidated financial information of SPLP as described elsewhere in this prospectus/offer to exchange. For a discussion of the assumptions and adjustments made in preparing the unaudited pro forma combined financial information presented in this prospectus/offer to exchange, see “Selected Unaudited Pro Forma Condensed Combined Financial Data.”

Steel Excel stockholders should read the information presented in the following table together with the historical financial statements of SPLP, JPS and SLI and the related notes, which are incorporated herein by reference, the historical financial statements of Steel Excel and the related notes, which are included herein, and the “Unaudited Pro Forma Condensed Combined Financial Information” appearing elsewhere in this prospectus/offer to exchange. The pro forma data is unaudited and for illustrative purposes only. Steel Excel stockholders should not rely on this information as being indicative of the historical results that would have been achieved during the periods presented had SPLP always owned 100% of Steel Excel or the future results that they will achieve after the consummation of the offer and the merger. This pro forma information is subject to risks and uncertainties, including those discussed in “Risk Factors.”

 

     SPLP  
     Twelve Months Ended
December 31, 2015
     Nine Months Ended
September 30, 2016
 
     Historical      Pro Forma      Historical      Pro Forma  

Net income from continuing operations attributable to common unitholders - basic

   $ 2.97       $ 1.65       $ 0.83       $ 0.44   

Net income from continuing operations attributable to common unitholders - diluted

   $ 2.96       $ 1.64       $ 0.83       $ 0.44   

Weighted average number of common units outstanding - basic

     27,317,974         27,317,974         26,421,116         26,421,116   

Weighted average number of common units outstanding - diluted

     27,442,308         27,442,308         26,434,636         26,434,636   

 

    

 

    

 

               
     Historical      Pro Forma                

SPLP partners’ capital per common unit as of September 30, 2016

   $ 22.39       $ 23.15         

 

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     Steel Excel  
     Twelve
Months
Ended
December 31,
2015
    Nine
Months
Ended
September 30,
2016
 
     Historical     Historical  

Net loss attributable to Steel Excel - basic

   $ (8.50   $ (0.47

Net loss attributable to Steel Excel - diluted

   $ (8.50   $ (0.47

Weighted average number of common shares outstanding - basic

     11,454,000        10,753,000   

Weighted average number of common shares outstanding - diluted

     11,454,000        10,753,000   

 

    

 

        
     Historical         

Steel Excel book value per share as of September 30, 2016

   $ 24.86      

 

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RISK FACTORS

Steel Excel stockholders should carefully read this prospectus/offer to exchange and the other documents referred to or incorporated by reference into this document, including in particular the following risk factors, in deciding whether to tender shares pursuant to the offer.

Risks Related to the Offer and the Merger

The exchange ratio is fixed and will not be adjusted in the event of any change in Steel Excel’s stock price. As a result, Steel Excel’s stockholders cannot be sure at the time they elect to participate in the offer of the value of the Steel Excel common stock they will give up.

In connection with the offer and the merger, Steel Excel stockholders will receive a fixed number of SPLP preferred units for each of their shares of Steel Excel common stock (0.712 SPLP preferred units for each Steel Excel share). This exchange ratio is fixed in the merger agreement and will not be adjusted for changes in the market price of Steel Excel’s common stock. Steel Excel is not permitted to “walk away” from the transaction or terminate the merger agreement solely because of changes in the market price of its common stock. Stock price changes may result from a variety of factors (many of which are beyond Steel Excel’s control), including the following factors:

 

    changes in Steel Excel’s business, operations and prospects;

 

    changes in market assessments of the business, operations and prospects of Steel Excel;

 

    market assessments of the likelihood that the transaction will be completed;

 

    interest rates, general market, industry and economic conditions and other factors generally affecting the price of Steel Excel’s common stock; and

 

    federal, state and local legislation, governmental regulation and legal developments in the businesses in which Steel Excel operates.

The price of Steel Excel’s common stock at the closing of the transaction may vary from its price on the date the merger agreement was executed, on the date of this prospectus/offer to exchange or on the date a Steel Excel stockholder tenders its shares. As a result, Steel Excel’s stockholders cannot be sure at the time they elect to participate in the offer of the value of the Steel Excel common stock they will give up. You are urged to obtain current market quotations for the Steel Excel common stock.

The offer remains subject to conditions that SPLP cannot control.

The offer is subject to a number of conditions, including the non-waivable minimum tender condition and majority of the minority tender condition. In addition, the offer is subject to a number of additional conditions, including that (1) the SPLP preferred units issuable in the offer and the merger have been authorized for listing on the NYSE or, if for any reason they cannot be so listed, on the OTC Bulletin Board or OTC Market, (2) shares held by Steel Excel stockholders that have properly exercised appraisal rights under Delaware law do not exceed ten percent (10%) of the shares outstanding immediately prior to the expiration of the offer, and (3) the registration statement on Form S-4 of which this prospectus/offer to exchange is a part has been declared effective by the SEC, as well as the satisfaction of other customary conditions as described in this prospectus/offer to exchange. There are no assurances that all of the conditions to the offer will be satisfied or that the conditions will be satisfied in the time frame expected. If the conditions to the offer are not met, then SPLP may, subject to the terms and conditions of the merger agreement, allow the offer to expire, or amend or extend the offer. See “Merger Agreement — Conditions to the Offer” and “— Conditions to the Merger.”

 

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If the offer and the merger are completed, Steel Excel stockholders will receive SPLP preferred units. SPLP preferred units will be affected by different factors than Steel Excel common stock, and holders of SPLP preferred units will have different rights than Steel Excel stockholders.

Upon consummation of the offer and the merger, Steel Excel stockholders will receive SPLP preferred units. Although Steel Excel is a consolidated subsidiary of SPLP, SPLP is a diversified global holding company that engages in multiple businesses. Accordingly, SPLP’s results of operations and the trading price of the SPLP preferred units may be adversely affected by a number of factors other than those that would affect Steel Excel’s results of operations and stock price.

In addition, holders of SPLP preferred units will have rights that differ from the rights they had as Steel Excel stockholders before the offer and the merger. For a comparison of the rights of SPLP preferred unitholders to the rights of Steel Excel stockholders, see “Comparison of Securityholders’ Rights.”

SPLP may fail to realize any or all of the anticipated benefits of the offer and the merger or those benefits may take longer to realize than expected.

The benefits of the offer and the merger may not be realized as expected or may not be achieved within the anticipated time frame, or at all. Failure to achieve the anticipated benefits of the offer and the merger could adversely affect SPLP’s results of operations or cash flows and negatively affect the price of the SPLP preferred units.

SPLP and Steel Excel will incur direct and indirect costs as a result of the offer and the merger.

SPLP and Steel Excel will incur substantial expenses in connection with and as a result of completing the offer and the merger and, following the completion of the merger, SPLP expects to incur additional expenses in connection with acquiring the remaining shares of Steel Excel not already owned by SPLP. Factors beyond SPLP’s control could affect the total amount or timing of those expenses, many of which, by their nature, are difficult to estimate accurately. Moreover, diversion of management focus and resources from day-to-day operations to matters relating to the offer and the merger could adversely affect each company’s businesses, regardless of whether the offer and the merger are completed.

SPLP’s actual financial position and results of operations may differ materially from the unaudited pro forma condensed combined financial information included in this prospectus/offer to exchange.

The unaudited pro forma condensed combined financial information contained in this prospectus/offer to exchange is presented for illustrative purposes only and may differ materially from what SPLP’s actual financial position or results of operations would have been had the offer, the merger and SPLP’s recent, significant acquisitions been completed on the dates indicated. The unaudited pro forma condensed combined financial information has been derived from the audited and unaudited historical financial statements of SPLP and Steel Excel, and those of SPLP’s recent, significant acquisitions, and certain adjustments and assumptions have been made regarding the combined company after giving effect to the offer, the merger and SPLP’s recent, significant acquisitions. Differences between preliminary estimates in the unaudited pro forma condensed combined financial information and the final acquisition accounting may occur and are not necessarily indicative of SPLP’s financial position or results of operations in future periods or that would have been realized in historical periods presented.

 

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In addition, the assumptions used in preparing the unaudited pro forma condensed combined financial information may not prove to be accurate, and other factors may affect SPLP’s financial condition or results of operations following the closing. Any potential decline in SPLP’s financial condition or results of operations may cause significant variations in the price of the SPLP preferred units. See “Selected Unaudited Pro Forma Condensed Combined Financial Data.”

The merger agreement limits Steel Excel’s ability to pursue alternative transactions, and in certain instances requires payment of a termination fee and reimbursement of expenses to SPLP, which beneficially owns approximately 64.2% of Steel Excel’s outstanding shares. These factors could deter a third party from proposing an alternative transaction.

The merger agreement contains provisions that, subject to certain exceptions, limit Steel Excel’s ability to solicit, initiate, encourage or facilitate any inquiries regarding or the making of any proposal or offer that constitutes or could reasonably be expected to lead to an alternative takeover proposal. See “Merger Agreement — No Solicitation; Acquisition Proposals.” In addition, under specified circumstances, Steel Excel is required to pay to SPLP a termination fee of $2,000,000 and potential expense reimbursement of up to $1,000,000 if the merger agreement is terminated. See “Merger Agreement — Fees and Expenses.” It is possible that these or other provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Steel Excel from considering or proposing an acquisition or might result in a potential competing acquirer proposing to pay a lower per share price to acquire Steel Excel than it might otherwise have proposed to pay. Furthermore, SPLP’s beneficial ownership of approximately 64.2% of Steel Excel’s outstanding shares may also serve as a deterrent to potential competing acquirers of all or a significant part of Steel Excel.

If the value of SPLP’s business, together with any synergies to be achieved from SPLP’s acquisition of Steel Excel, is less than the value of the transaction consideration, the trading price of the SPLP preferred units could decrease.

If investors believe that the value of the SPLP preferred units to be exchanged for Steel Excel shares in connection with the offer and the merger, together with transaction costs, is greater than the value of Steel Excel’s business, together with any synergies expected to be achieved from SPLP’s acquisition of Steel Excel, the trading price of the SPLP preferred units could be adversely affected, and the offer and the merger could have a dilutive effect on the value of the SPLP preferred units.

The prices of SPLP common units and Steel Excel common stock may be adversely affected if the offer and the merger are not completed.

If the offer and the merger are not completed, the prices of SPLP common units and Steel Excel common stock may decline to the extent that their current market prices reflect a market assumption that the offer and the merger will be completed and have value.

The financial analyses and forecasts considered by SPLP, Steel Excel and Steel Excel’s financial advisor may not be realized.

While the financial projections utilized by SPLP, Steel Excel and Steel Excel’s financial advisor in connection with the offer and the merger and summarized in this prospectus/offer to exchange were prepared in good faith based on information available at the time of preparation, no assurances can be made regarding future events or that the assumptions made in preparing such projections will accurately reflect future conditions. In preparing such projections, the management of Steel Excel made assumptions regarding, among other things, future economic, competitive, regulatory and financial market conditions and future business decisions that may not be realized and that are inherently subject to significant

 

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uncertainties and contingencies, including, among others, risks and uncertainties described or incorporated by reference in this section and the section entitled “— Forward-Looking Statements,” all of which are difficult to predict and many of which are beyond the control of Steel Excel and SPLP and will be beyond the control of the surviving company. There can be no assurance that the underlying assumptions or projected results will be realized, and actual results will likely differ, and may differ materially, from those reflected in the unaudited financial projections, whether or not the offer and the merger are completed. As a result, the unaudited financial projections cannot be considered predictive of actual future operating results, and this information should not be relied on as such. In addition, since such projections cover multiple years, the information by its nature becomes less predictive with each successive year.

Risks Related to the SPLP Preferred Units

The SPLP preferred units are equity securities and are subordinated to our existing and future indebtedness.

The SPLP preferred units are equity interests and do not constitute indebtedness. This means that the SPLP preferred units will rank junior to all of our indebtedness and to other non-equity claims on us (but will rank senior to our common units), including claims in any liquidation.

Further, the SPLP preferred units place no restrictions on our business or operations or on our ability to incur indebtedness or engage in any transactions, subject only to the limited voting rights referred to below under “— Holders of the SPLP preferred units will have limited voting rights.”

We conduct substantially all of our operations through our subsidiaries. As a result, our cash flow and our ability to pay distributions on the SPLP preferred units are dependent upon the earnings of our subsidiaries. In addition, we are dependent on the distribution of earnings or other payments by our subsidiaries to us. Some of our subsidiaries currently are, and in the future may be, restricted in their ability to make distributions to us, including under the terms of their credit facilities.

Failure to generate sufficient cash flows, or the terms of our future indebtedness, may limit our ability to make distributions on the SPLP preferred units or to redeem the SPLP preferred units.

There can be no assurances that our operations will generate sufficient cash flows to enable us to pay distributions on the SPLP preferred units or redeem the SPLP preferred units. Our financial and operating performance is subject to prevailing economic and industry conditions and to financial, business and other factors, some of which are beyond our control.

In addition, distributions will only be paid if the distribution is not restricted or prohibited by law or the terms of any senior equity securities or indebtedness. The instruments governing the terms of future financing or the refinancing of any borrowings may contain covenants that restrict our ability to make distributions on the SPLP preferred units or redeem the SPLP preferred units. The SPLP preferred units place no restrictions on our ability to incur indebtedness with such restrictive covenants.

The market price of the SPLP preferred units could be adversely affected by various factors.

Following the transaction, the market price for the SPLP preferred units may fluctuate based on a number of factors, including:

 

    the trading price of our common units;

 

    additional issuances of other series or classes of preferred units;

 

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    whether we pay or fail to pay distributions on the SPLP preferred units from time to time and our ability to make distributions under the terms of our indebtedness;

 

    our creditworthiness, results of operations and financial condition;

 

    the credit ratings of the SPLP preferred units;

 

    the prevailing interest rates or rates of return being paid by other companies similar to us and the market for similar securities; and

 

    economic, financial, geopolitical, regulatory or judicial events that affect us or the financial markets generally.

Our performance, market conditions and prevailing interest rates have fluctuated in the past and can be expected to fluctuate in the future. Fluctuations in these factors could have an adverse effect on the price and liquidity of the SPLP preferred units. In general, as market interest rates rise, securities with fixed interest rates or fixed distribution rates, such as the SPLP preferred units, decline in value. Consequently, if market interest rates increase, the market price of the SPLP preferred units may decline. We cannot predict the future level of market interest rates.

Our ability to pay quarterly distributions on the SPLP preferred units will be subject to, among other things, general business conditions, our financial results, gains or losses recognized by us on the disposition of assets and our liquidity needs. Any reduction or discontinuation of quarterly distributions could cause the market price of the SPLP preferred units to decline significantly. Accordingly, the SPLP preferred units may trade at a discount.

An active trading market may not develop for the SPLP preferred units, which could adversely affect the price of the SPLP preferred units in the secondary market and your ability to resell the SPLP preferred units.

The SPLP preferred units are a new issue of securities and there is no established trading market for the SPLP preferred units. We intend to file an application to list the SPLP preferred units on the NYSE under the symbol “SPLPPRA.” However, there is no guarantee that we will be able to list the SPLP preferred units. We also cannot make any assurance as to:

 

    the development of an active trading market;

 

    the liquidity of any trading market that may develop;

 

    the ability of holders to sell their SPLP preferred units; or

 

    the price at which holders may be able to sell their SPLP preferred units.

If a trading market were to develop, the future trading prices of the SPLP preferred units will depend on many factors, including prevailing interest rates, our credit ratings published by major rating agencies, the market for similar securities and our operating performance and financial condition. If a trading market does develop, there is no assurance that it will continue. If an active public trading market for the SPLP preferred units does not develop or does not continue, the market price and liquidity of the SPLP preferred units is likely to be adversely affected.

 

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Holders of the SPLP preferred units will have limited voting rights.

Holders of the SPLP preferred units will generally have no voting rights and have none of the voting rights given to holders of the SPLP common units, except that holders of the SPLP preferred units will be entitled to the voting rights described in “Description of the SPLP preferred units — Voting Rights.” In particular, if distributions on the SPLP preferred units have not been declared and paid for the equivalent of six or more quarterly distribution periods, whether or not consecutive (a “Nonpayment”), holders of the SPLP preferred units, together as a class with holders of any other series of parity units (as defined in “Description of the SPLP preferred units — Distributions”) then outstanding, will be entitled to vote for the election of two additional directors to the SPLP GP Board, subject to the terms and to the limited extent described under “Description of the SPLP preferred units — Voting Rights.” When quarterly distributions have been declared and paid on the SPLP preferred units for four consecutive quarters following the Nonpayment, the right of the holders of the SPLP preferred units and such parity units to elect these two additional directors will cease, the terms of office of these two directors will terminate and the number of directors constituting the SPLP GP Board will be reduced accordingly.

Our limited partnership agreement contains provisions that reduce or eliminate duties (including fiduciary duties) of Steel Partners Holdings GP Inc. (our “General Partner” or “Steel Holdings GP”) and limit remedies available to unitholders for actions that might otherwise constitute a breach of duty. It will be difficult for unitholders to successfully challenge a resolution of a conflict of interest by our General Partner or by a majority of the disinterested directors of the SPLP GP Board.

Our limited partnership agreement contains provisions that require holders of our units, including the SPLP preferred units, to waive or consent to conduct by our General Partner and its affiliates that might otherwise raise issues about compliance with fiduciary duties or applicable law. For example, our limited partnership agreement provides that when our General Partner is acting in its individual capacity, as opposed to in its capacity as our General Partner, it may act without any fiduciary obligations to holders of our units, whatsoever. When our General Partner, in its capacity as our general partner, is permitted or required to make a decision in its “sole discretion” or “discretion” or that it deems “necessary or appropriate” or “necessary or advisable,” then, except as otherwise provided in our limited partnership agreement, our General Partner will be entitled to consider only such interests and factors as it desires and will have no duty or obligation (fiduciary or otherwise) to give any consideration to any interest of or factors affecting us or any holder of our units and will not be subject to any different standards imposed by our limited partnership agreement, the Delaware Revised Uniform Limited Partnership Act, which is referred to as the Delaware Limited Partnership Act, or under any other law, rule or regulation or in equity. These standards reduce the obligations to which our General Partner would otherwise be held.

The above modifications of fiduciary duties are expressly permitted by Delaware law. Hence, we and holders of our units will only have recourse and be able to seek remedies against our General Partner if our General Partner breaches its obligations pursuant to our limited partnership agreement. Unless our General Partner breaches its obligations pursuant to our limited partnership agreement, we and holders of our units will not have any recourse against our General Partner even if our General Partner were to act in a manner that was inconsistent with traditional fiduciary duties. Furthermore, even if there has been a breach of the obligations set forth in our limited partnership agreement, our limited partnership agreement provides that our General Partner and its officers and directors will not be liable to us or holders of our units for errors of judgment or for any acts or omissions unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that our General Partner or its officers and directors acted in bad faith or engaged in fraud or willful misconduct. These provisions restrict the remedies available to unitholders for actions that without such limitations might constitute breaches of duty including fiduciary duties.

Whenever a potential conflict of interest exists between us and our General Partner, our General Partner may resolve such conflict of interest. If our General Partner determines that its resolution of the

 

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conflict of interest is on terms no less favorable to us than those generally being provided to or available from unrelated third parties or is fair and reasonable to us, taking into account the totality of the relationships between us and our General Partner, then it will be presumed that, in making this determination, our General Partner acted in good faith. A holder of our units seeking to challenge this resolution of the conflict of interest would bear the burden of overcoming this presumption. This is different from the situation with Delaware corporations, where a conflict resolution by an interested party would be presumed to be unfair and the interested party would have the burden of demonstrating that the resolution was fair.

Also, if our General Partner obtains the approval of the majority of the disinterested directors of the SPLP GP Board, the resolution will be conclusively deemed to be fair and reasonable to us and not a breach by our General Partner of any duties it may owe to us or holders of our units. This is different from the situation with Delaware corporations, where a conflict resolution by a committee consisting solely of independent directors may, in certain circumstances, merely shift the burden of demonstrating unfairness to the plaintiff. If you purchase, receive or otherwise hold a unit, you will be treated as having consented to the provisions set forth in our limited partnership agreement, including provisions regarding conflicts of interest situations that, in the absence of such provisions, might be considered a breach of fiduciary or other duties under applicable state law. As a result, unitholders will, as a practical matter, not be able to successfully challenge an informed decision by the disinterested directors of the SPLP GP Board.

We have also agreed to indemnify our General Partner, our manager, SP General Services LLC (our “Manager”) and any of their affiliates and any member, partner, tax matters partner, officer, director, employee, agent, fiduciary or trustee of SPLP, our General Partner, our Manager or any of our affiliates and certain other specified persons, to the fullest extent permitted by law, against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts incurred by our General Partner or any of these other persons. We have agreed to provide this indemnification unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that these persons acted in bad faith or engaged in fraud or willful misconduct. We have also agreed to provide this indemnification for criminal proceedings.

Redemption may adversely affect your return on the SPLP preferred units.

We will have the right to redeem at any time at a price of $25.00 per SPLP preferred unit, plus accumulated and unpaid distributions, some or all of the SPLP preferred units, as described under “Description of the SPLP preferred units — Optional Redemption.” To the extent that we redeem the SPLP preferred units at times when prevailing interest rates may be relatively low compared to rates at the time of issuance of the SPLP preferred units, you may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the distribution rate of the SPLP preferred units.

There is no limitation on our issuance of debt securities or equity securities that rank equally with the SPLP preferred units and, under certain circumstances, we may issue equity securities that rank senior to the SPLP preferred units.

We do not currently have any outstanding equity securities that rank senior to the SPLP preferred units. We may issue additional equity securities that rank equally with the SPLP preferred units without limitation and, with the approval of the holders of the SPLP preferred units and all other series of voting preferred units, acting as a single class, as described under “Description of the SPLP preferred units — Voting Rights,” any partnership interests senior to the SPLP preferred units. The issuance of securities ranking equally with or senior to the SPLP preferred units may reduce the amount available for distributions and the amount recoverable by holders of the SPLP preferred units in the event of our liquidation, dissolution or winding-up. In addition, we and our subsidiaries may incur indebtedness that will rank senior to the SPLP preferred units.

 

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We may pay the redemption price for the SPLP preferred units in SPLP common units. As a result, holders of the SPLP preferred units may become subject to the risks associated with the SPLP common units.

Except for the requirement that we must offer to repurchase or redeem, for cash on a pro rata basis, 20% of the SPLP preferred units to be issued in the transaction within the first three years after completion of the offer, the terms of the SPLP preferred units enable us to pay the redemption price for the SPLP preferred units in cash, SPLP common units or a combination of both, at the sole discretion of the SPLP GP Board. To the extent we elect to pay the redemption price in SPLP common units, holders of the SPLP preferred units will become subject to the risks associated with the SPLP common units. See “— Risks Related to SPLP’s Business.”

We may need to obtain additional financing in order to repurchase or redeem the SPLP preferred units.

We may not have sufficient funds available to make any required redemptions or repurchases of the SPLP preferred units in cash. In such event, we may need to obtain additional financing, which may not be available on favorable terms or at all.

The SPLP preferred units may not be rated and, if rated, their ratings could be lowered.

Standard & Poor’s Ratings Services and Fitch Ratings Inc. may assign ratings to the SPLP preferred units. Generally, rating agencies base their ratings on such material and information, and such of their own investigative studies and assumptions, as they deem appropriate. A rating is not a recommendation to buy, sell or hold the SPLP preferred units, and there is no assurance that any rating will apply for any given period of time or that a rating may not be adjusted or withdrawn. A downgrade or potential downgrade in these ratings (including as a result in any change in rating methodologies), the assignment of a new rating that is lower than existing ratings, or a downgrade or potential downgrade in ratings assigned to us, our subsidiaries or any of our other securities could adversely affect the trading price and liquidity of the SPLP preferred units. We cannot be sure that rating agencies will rate the units or maintain their ratings once issued. We do not undertake any obligation to obtain a rating, maintain the ratings once issued or to advise holders of SPLP preferred units of any change in ratings. A failure to obtain a rating or a negative change in our ratings once issued could have an adverse effect on the market price or liquidity of the SPLP preferred units.

If the income allocated to the SPLP preferred units for a year is greater than the cash distribution for such year, a holder may have an out-of-pocket tax liability. If the amount of distributions on the SPLP preferred units is greater than our gross ordinary income, the amount that a holder of SPLP preferred units would receive upon liquidation may be less than the Preferred Unit Liquidation Value.

In general, we will specially allocate to the SPLP preferred units items of our gross ordinary income in an amount equal to the distributions paid in cash in respect of the SPLP preferred units during the taxable year. If a distribution is paid in kind, we have the right to allocate gross ordinary income to the SPLP preferred units in excess of the amount of cash distributed, such that a holder may have an out-of-pocket tax liability for the year. Allocations of gross ordinary income will increase the capital account balance of the holders of the SPLP preferred units. Distributions will correspondingly reduce the capital account balance of the holders of the SPLP preferred units. So long as our gross ordinary income equals or exceeds the distributions paid to the holders of the SPLP preferred units, the capital account balance of the holders of SPLP preferred units will equal the preferred unit liquidation value, as defined below in the

 

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section entitled “Description of SPLP Preferred Units – Amount Payable in Liquidation,” at the end of each taxable year. If the distributions paid in respect of the SPLP preferred units in a taxable year exceed the proportionate share of our gross ordinary income allocated in respect of the SPLP preferred units for such year, however, the capital account balance of the holders of the SPLP preferred units with respect to the SPLP preferred units will be reduced below the preferred unit liquidation value by the amount of such excess. In that event, we will allocate additional gross ordinary income in subsequent years until such excess is eliminated. If we were to have insufficient gross ordinary income to eliminate such excess, holders of SPLP preferred units would be entitled, upon our liquidation, dissolution or winding up, to less than the preferred unit liquidation value. In addition, to the extent that we make additional allocations of gross ordinary income in a taxable year to eliminate such excess from prior years, the gross ordinary income allocated to holders of the SPLP preferred units in such taxable year would exceed the distributions paid to the SPLP preferred units during such taxable year. In such taxable year, holders of SPLP preferred units may recognize taxable income in respect of their investment in the SPLP preferred units in excess of our cash distributions, thus giving rise to an out-of-pocket tax liability for such holders.

The IRS Schedules K-1 we will provide holders of SPLP preferred units will be more complicated than the IRS Forms 1099 provided by corporations to their stockholders, and holders of SPLP preferred units may be required to request an extension of time to file their tax returns.

Holders of SPLP preferred units will be required to take into account their allocable share of our items of gross ordinary income for our taxable year ending within or concurrently with their taxable year. We have agreed to furnish holders of SPLP preferred units, as soon as reasonably practicable after the close of each calendar year, with tax information (including IRS Schedules K-1), which describes their allocable share of gross ordinary income for our immediately preceding taxable year. However, it may require longer than 90 days after the end of our calendar year to obtain the requisite information so that IRS Schedules K-1 may be prepared by us. Consequently, holders of SPLP preferred units who are U.S. taxpayers should anticipate the need to file annually with the IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax return for the taxable year. In addition, each holder of SPLP preferred units will be required to report for all tax purposes consistently with the information provided by us for the taxable year. Because holders will be required to report their allocable share of gross ordinary income, tax reporting for holders of the SPLP preferred units will be more complicated than for shareholders of a regular corporation.

Holders of SPLP preferred units may be subject to state, local and foreign taxes and return filing requirements as a result of owning such units.

In addition to U.S. federal income taxes, holders of the SPLP preferred units may be subject to other taxes, including state, local and foreign taxes, and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property now or in the future, even if the holders of the SPLP preferred units do not reside in any of those jurisdictions. Holders of the SPLP preferred units may be required to file state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions in the U.S. and abroad. Further, holders of the SPLP preferred units may be subject to penalties for failure to comply with those requirements. It is the responsibility of each unitholder to file all U.S. federal, state, local and foreign tax returns that may be required of such unitholder. In addition, our investments in real assets, if any, may expose unitholders to additional adverse tax consequences.

Risks Related to SPLP’s Business

You should read and consider the risk factors specific to SPLP’s business that will also affect the combined company after the merger. These risks are described in Part I, Item 1A of SPLP’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as filed with the SEC on March 11,

 

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2016 and Part II, Item 1A of SPLP’s Quarterly Reports on Form 10-Q for the quarterly period ended September 30, 2016, as filed with the SEC on November 7, 2016, and in other documents that are incorporated by reference into this document. See “Where To Obtain Additional Information” for the location of information incorporated by reference in this document.

Risks Related to Steel Excel’s Business

Steel Excel’s Energy business is susceptible to the impact of fluctuations in energy prices, which could have an adverse effect on Steel Excel’s results of operations.

High oil and natural gas prices result in an increase in drilling activity, increasing the demand for oilfield services. Oilfield service companies invest in new equipment in such an environment to expand their capacity to take advantage of this increased activity, which could result in an increasingly competitive environment. Declining oil and natural gas prices can result in Steel Excel’s customers reducing their drilling and work over activities, which can result in a reduced demand for Steel Excel’s services and requests for price concessions. Oilfield service companies may be willing to provide their services at reduced prices in such an environment to be able to cover their equipment and other fixed costs. The increased competition, reduced demand, or competitive pricing pressure could lead to declines in Steel Excel’s prices and utilization, which would have an adverse effect on Steel Excel’s results of operations.

Steel Excel is heavily dependent on the oil and gas industry in North America. Several factors affect Steel Excel’s customers’ willingness to continue to undertake exploration and production activities, the adverse effects of any of which could have a significant adverse effect on Steel Excel’s results of operations.

Steel Excel’s Energy business is dependent on Steel Excel’s customers’ willingness to continue to explore for and produce oil and natural gas in North America, primarily in the Bakken and Permian basins. Factors affecting Steel Excel’s customers’ willingness to continue to undertake exploration and production activities include the following:

 

    the prices for oil and natural gas and Steel Excel’s customers’ perceptions of such prices in the future;

 

    the supply and demand for oil and natural gas;

 

    the cost for Steel Excel’s customers to conduct the necessary exploration and production activities;

 

    the discovery of new oil and gas reserves;

 

    the availability of pipelines and other means of transportation;

 

    increased regulation of the means of transporting oil out of the Bakken basin by rail or road;

 

    the availability and cost of capital;

 

    production levels and geopolitical factors in other oil and gas producing countries;

 

    the price and availability of alternative sources of energy; and

 

    weather conditions.

 

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The adverse effects of any of these factors could result in a reduction in Steel Excel’s customers’ exploration efforts, which could have a significant adverse effect on Steel Excel’s results of operations.

Steel Excel is exposed to potential litigation and unrecoverable losses that could have an adverse effect on Steel Excel’s results of operations and financial condition.

Steel Excel’s Energy business is subject to many hazards inherent in the industry, including blowouts, cratering, explosions, fires, loss of well control, loss of or damage to the wellbore or underground reservoir, damaged or lost drilling equipment, and damage or loss from inclement weather or natural disasters. Any of these hazards could result in personal injury or death, damage to or destruction of equipment and facilities, suspension of operations, environmental and natural resources damage, and damage to the property of others. In addition, Steel Excel may be subject to litigation as a result of any of these hazards or in the normal course of business. Steel Excel may be unable to obtain desired contractual indemnities for such hazards, and Steel Excel’s insurance may not provide adequate coverage in certain instances. The occurrence of an event not fully indemnified or insured, or the failure or inability of a customer or insurer to meet its financial obligations, and resulting claims and litigation could result in substantial losses and have a significant adverse effect on Steel Excel’s results of operations and financial condition.

Increased regulation of hydraulic fracturing could have an adverse impact on Steel Excel’s customers.

Many of Steel Excel’s customers utilize hydraulic fracturing services, which is the process of creating or expanding cracks, or fractures, in formations underground where water, sand, and other additives are pumped under high pressure into the formation. Although Steel Excel is not a provider of hydraulic fracturing services, many of Steel Excel’s services complement the hydraulic fracturing process. Legislation for broader federal regulation of hydraulic fracturing operations and the reporting and public disclosure of chemicals used in the fracturing process could be enacted. The United States Environmental Protection Agency has completed guidance documents and recommendations related to certain hydraulic fracturing activities involving diesel fuel under the Safe Drinking Water Act. Steel Excel’s customers’ operations could be adversely affected if additional regulation or permitting requirements were to be required for hydraulic fracturing activities, which could have an adverse effect on Steel Excel’s results of operations.

Severe weather conditions could have an adverse effect on Steel Excel’s customers and Steel Excel’s ability to provide Steel Excel’s services.

Steel Excel’s Energy business is heavily concentrated in North Dakota and Montana, where severe weather conditions could result in a curtailment of Steel Excel’s customers’ service requirements, damage to Steel Excel’s facilities and equipment resulting in increased repair costs and a suspension of Steel Excel’s operations, Steel Excel’s inability to deliver services, and an overall decline in productivity, all of which could result in an adverse effect on Steel Excel’s results of operations. In addition, inclement weather could result in the cancellation of events and tournaments in Steel Excel’s Sports business during peak seasons, which would have an adverse effect on Steel Excel’s results of operations.

Steel Excel may not be able to attract and retain qualified workers, which could have a significant adverse effect on Steel Excel’s Energy business.

Steel Excel’s Energy business operations require personnel with specialized skills and experience who can perform physically demanding work, and there is intense competition for these workers in the Bakken basin where Steel Excel’s Energy business is concentrated. As a result workers may choose to pursue employment in fields that offer a more desirable work environment or better pay. Steel Excel’s inability to attract and retain such qualified workers could have an adverse effect on Steel Excel’s productivity, the quality of Steel Excel’s service offerings, and Steel Excel’s ability to expand Steel Excel’s operations, all of which could have an adverse effect on Steel Excel’s results of operations.

 

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Steel Excel may sustain losses in Steel Excel’s investment portfolio, which could have an adverse effect on Steel Excel’s results of operations, financial condition, and liquidity.

A substantial portion of Steel Excel’s assets consists of investments in marketable securities that Steel Excel classifies as available-for-sale securities, which are adjusted to fair value each period. An adverse change in global economic conditions may result in a decline in the value of Steel Excel’s marketable securities. Declines in the value of marketable securities may not be recognized if such unrealized losses are deemed to be temporary. However, any such declines in value will be recognized as losses upon the sale of such securities or if such declines are deemed to be other than temporary. For the nine months ended September 30, 2016, and the year ended December 31, 2015, Steel Excel incurred impairment charges related to its marketable securities totaling $1.5 million and $59.8 million, respectively. Any adverse changes in the financial markets and resulting declines in value of Steel Excel’s marketable securities may result in additional impairment charges and could have an adverse effect on Steel Excel’s results of operations, financial condition, and liquidity.

Certain of Steel Excel’s investments may subject Steel Excel to greater risk and be less liquid than other investments in Steel Excel’s portfolio.

Steel Excel’s investments include significant interests in equity-method investees, participation in corporate term loans, and promissory notes. Steel Excel also entered into short sale transactions on certain financial instruments and have sold call and put options. Steel Excel may continue to engage in similar investing activities in the future. Such investments may be subject to greater price fluctuations, may be more difficult to sell, and may be sold at prices that do not reflect their intrinsic value.

Steel Excel may be unable to identify and acquire new businesses, which could have an adverse effect on Steel Excel’s long term growth.

Acquisitions are a key element of Steel Excel’s business strategy. Steel Excel may not be able to identify and acquire acquisition candidates on acceptable terms. Steel Excel’s inability to identify and acquire new businesses on acceptable terms could have an adverse effect on Steel Excel’s long-term growth.

Steel Excel may be unable to integrate new businesses, which could have an adverse effect on Steel Excel’s results of operations, financial condition, and long-term growth.

Steel Excel may not be able to properly integrate acquired businesses, which could result in such businesses not performing as expected when the acquisition was consummated and possibly being dilutive to Steel Excel’s overall operating results. Steel Excel’s inability to properly integrate acquired businesses could result from, among other things, the following:

 

    Steel Excel’s failure to retain and attract key employees;

 

    Steel Excel’s failure to retain and attract new customers;

 

    Steel Excel’s failure to develop effective sales and marketing capabilities; and

 

    Steel Excel’s failure to properly operate new lines of business.

 

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Steel Excel’s inability to integrate new businesses could have an adverse effect on Steel Excel’s results of operations, financial condition, and Steel Excel’s long-term growth.

Steel Excel’s cash balances could be adversely affected by the instability of financial institutions.

Steel Excel maintains the Company’s cash, cash equivalents, and marketable securities with certain financial institutions at which Steel Excel’s balances exceed the limits that are insured by the Federal Deposit Insurance Corporation. There could be an impact on Steel Excel’s cash balances if financial institutions at which the Company maintains Steel Excel’s cash and investments experience financial difficulties, which would have an adverse effect on Steel Excel’s results of operations and financial condition.

Steel Excel may not be able to fully utilize Steel Excel’s tax benefits, which could result in increased cash payments for taxes in future periods.

Net operating losses (“NOLs”) may be carried forward to offset federal and state taxable income in future years and reduce the amount of cash paid for income taxes otherwise payable on such taxable income, subject to certain limits and adjustments. If fully utilized, Steel Excel’s NOLs and other carry-forwards could provide it with significant tax savings in future periods. Our ability to utilize these tax benefits in future years will depend upon our ability to generate sufficient taxable income and to comply with the rules relating to the preservation and use of NOLs. The potential benefit of the NOLs and other carry-forwards may be limited or permanently lost as a result of the following:

 

    Our inability to generate sufficient taxable income in future years to use such benefits before they expire;

 

    a change in control that would trigger limitations on the amount of taxable income in future years that may be offset by NOLs and other carry-forwards that existed prior to the change in control; and

 

    examinations and audits by the Internal Revenue Service and other taxing authorities could reduce the amount of NOLs and other credit carry-forwards that are available for future years.

Steel Excel maintains a full valuation allowance against Steel Excel’s NOLs and other carry-forwards due to uncertainty regarding Steel Excel’s ability to generate sufficient taxable income in future periods. Our inability to utilize the NOLs and other carry-forwards could result in increased cash payments for taxes in future periods.

Steel Excel may be liable for additional income taxes upon examination or audit by the taxing authorities.

Steel Excel is subject to income and other taxes in the United States and certain foreign jurisdictions in which Steel Excel formerly operated. Steel Excel’s tax provision reflects judgments and estimates, including settlements, that are subject to audit and redetermination by the various taxing authorities. Although the Company believes Steel Excel’s estimates are reasonable, the ultimate outcome of these tax matters may differ materially from the amounts recorded in Steel Excel’s consolidated financial statements, which could have an adverse effect on Steel Excel’s results of operations and financial position.

 

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A significant disruption in, or breach in security of, Steel Excel’s information technology systems could adversely affect Steel Excel’s business.

Steel Excel relies on information technology systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of critical business processes and activities. Steel Excel also collects and stores sensitive data, including confidential business information and personal data. These systems may be susceptible to damage, disruptions, or shutdowns due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes, or other unforeseen events. In addition, security breaches of Steel Excel’s systems could result in the misappropriation or unauthorized disclosure of confidential information or personal data belonging to Steel Excel or to Steel Excel’s employees, partners, customers, or suppliers. Any such events could disrupt Steel Excel’s operations, inhibit Steel Excel’s ability to produce financial information, damage customer relationships and Steel Excel’s reputation, and result in legal claims or proceedings, liability, or penalties under privacy laws, each of which could adversely affect Steel Excel’s business and Steel Excel’s financial statements.

Steel Excel may incur impairments charges related to Steel Excel’s long-lived assets.

Steel Excel periodically evaluates the carrying value of Steel Excel’s long-lived assets, including Steel Excel’s property and equipment, identified intangible assets, and goodwill for impairment. In performing these assessments Steel Excel relies on cash flow projections based on Steel Excel’s current operating plans, estimates, and judgments. The Company could incur impairment charges if Steel Excel’s actual results are materially different from such cash flow projections, which could have a material adverse effect on Steel Excel’s financial position and results of operations. For the years ended December 31, 2015 and 2014, the Company incurred goodwill and intangible asset impairment charges of $25.6 million and $36.7 million, respectively.

Steel Excel could incur significant costs in the future to maintain regulatory compliance.

Steel Excel’s Energy and Sports businesses are currently subject to federal, state, and local laws and regulations pertaining to worker safety, the handling of hazardous materials, transportation standards, and the environment, and may be subject to additional regulations in the future, including any regarding the emission of greenhouse gases. Steel Excel may be required to obtain and maintain permits, approvals, and certificates from various authorities and incur other capital and operational costs in order to comply with such laws and regulations. Failure to comply with such laws and regulations could result in the assessment of penalties, imposition of cleanup and site restoration costs and liens, revocation of permits, or orders to limit or cease certain operations. In addition, certain such laws impose joint and several liability that could cause Steel Excel to become liable for the conduct of others or for consequences of Steel Excel’s own actions that were in compliance with all applicable laws at the time of those actions. While the cost of such compliance has not been significant in the past, new laws, regulations, and enforcement policies could become more stringent and significantly increase Steel Excel’s compliance costs or limit Steel Excel’s future business opportunities, which could have a material adverse effect on Steel Excel’s results of operations and financial condition.

Steel Excel is subject to certain banking regulatory requirements that could impact Steel Excel’s investing decisions.

Under Section 619 (the “Volcker Rule”) of The Dodd-Frank Wall Street Reform and Consumer Protection Act, Steel Excel is a banking entity by virtue of being an affiliate of WebBank, an industrial bank owned by SPLP. The Volcker Rule generally restricts certain banking entities from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The restrictions on proprietary trading activities went into effect on July 21, 2015. Under these restrictions and subject to certain exclusions, Steel Excel is prohibited from engaging in certain trading activities, including trading for short-term resale and benefiting from short-term price movements. Steel Excel generally has a long-term investment strategy, and the Company does not believe that Steel Excel’s recent investing activities would have been prohibited by restrictions under the Volcker Rule, although such restrictions could prohibit the Company from making certain investment decisions in the future.

 

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Steel Excel may not be able to implement commercially competitive services and products, which could have an adverse effect on Steel Excel’s results of operations.

The market for Steel Excel’s Energy business is characterized by continual technological developments to provide better and more reliable performance and services. Steel Excel’s inability to implement commercially competitive services and access commercially competitive products in a timely manner in response to changes in technology or Steel Excel’s existing technologies and work processes becoming obsolete could have an adverse effect on Steel Excel’s results of operations.

Steel Excel’s businesses do not have long-term contracts with their customers, which could result in customer turnover and other adverse effects to Steel Excel’s business.

Neither Steel Excel’s Energy business nor Steel Excel’s Sports business has long-term contracts with its customers. Both businesses rely on the quality of the service provided and established long-term relationships to retain customers. Absent such long-term contracts, customers can cease using Steel Excel’s services for any reason with minimal notice. This can lead to the Company losing customers or making price concessions in order to retain customers, which could have an adverse effect on Steel Excel’s business and results of operations.

Loss of a significant customer could have a material adverse effect on Steel Excel’s results of operations and financial condition.

The customer base of Steel Excel’s Energy business is concentrated. For the year ended December 31, 2015, revenues from Oasis Petroleum, XTO Energy, Continental Resources, and Whiting Petroleum represented 16.3%, 12.1%, 11.5%, and 10.5%, respectively, of Steel Excel’s consolidated revenues, and the fifteen largest customers in the Energy business represented approximately 75.9% of Steel Excel’s consolidated revenues. The loss of a significant customer could have a material adverse effect on Steel Excel’s results of operations and financial condition.

 

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FORWARD-LOOKING STATEMENTS

Information both included and incorporated by reference in this document may contain forward-looking statements, which may be identified by their use of terms such as “intend,” “plan,” “may,” “should,” “will,” “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “continue,” “potential,” “opportunity,” “project” and similar terms. These statements are based on certain assumptions and analyses that SPLP’s management or Steel Excel’s management believe are appropriate under the circumstances. However, these statements are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may differ materially from those expected, estimated or projected. Forward-looking statements speak only as of the date they are made, and neither SPLP nor Steel Excel undertakes any obligation to publicly update or revise any of them in light of new information, future events or otherwise.

All subsequent written and oral forward-looking statements attributable to SPLP, Steel Excel or any person acting on SPLP’s or Steel Excel’s behalf are qualified by the cautionary statements in this section.

Factors that could have a material adverse effect on SPLP’s or Steel Excel’s operations and future prospects or the consummation of the offer and the merger, many of which are difficult to predict and beyond the control of SPLP or Steel Excel, include, but are not limited to:

 

    failure to satisfy the required conditions to consummate the offer and the merger;

 

    the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement;

 

    the failure of the offer and the merger to close in a timely manner or at all for any other reason;

 

    the ability of SPLP to successfully integrate Steel Excel following completion of the acquisition;

 

    realization of the expected benefits of the acquisition in a timely manner or at all;

 

    the amount of the costs, fees, expenses and charges related to the offer and the merger;

 

    effects of the pendency of the acquisition on relationships with employees, suppliers, customers and other business partners;

 

    SPLP acquiring, managing and integrating new operations, businesses or assets, and the associated diversion of management attention or other related costs or difficulties;

 

    intense competition in areas within which SPLP operates; the effect of events such as natural disasters and related disruptions on SPLP’s and Steel Excel’s operations;

 

    dependence on third parties for key functions;

 

    changes to laws or regulations;

 

    unanticipated changes in SPLP’s or Steel Excel’s tax obligations or NOLs, results of tax examinations or exposure to additional income tax liabilities; interpretations of complex provisions of U.S. federal income tax law;

 

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    changes in generally accepted accounting principles;

 

    principal, liquidity and counterparty risks related to SPLP’s or Steel Excel’s holdings in securities;

 

    inability to develop new products to satisfy changes in customer demand or the development by competitors of products that decrease the demand for SPLP’s or Steel Excel’s products;

 

    regulatory matters or litigation, or any matters involving contingent liabilities or other claims;

 

    the uncertainty of litigation, the costs and expenses of litigation, the potential material adverse effect litigation could have on SPLP’s or Steel Excel’s respective businesses and results of operations if an adverse determination in litigation is made, and the time and attention required of management to attend to litigation;

 

    difficulties in determining the scope of, and procuring and maintaining, adequate insurance coverage;

 

    failure of information technology systems;

 

    difficulties and costs of protecting intellectual property and other proprietary rights;

 

    the hiring and retention of qualified personnel in a competitive labor market;

 

    general political, economic and business conditions and industry conditions;

 

    the inherent uncertainty associated with financial or other projections; and

 

    the ability to implement and achieve business strategies successfully.

These risks and uncertainties, along with the risk factors discussed under “Risk Factors” in this prospectus/offer to exchange, should be considered in evaluating any forward-looking statements contained in this prospectus/offer to exchange.

 

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THE COMPANIES

SPLP

SPLP is a diversified global holding company that engages in multiple businesses through consolidated subsidiaries, associated companies and other interests. It owns and operates businesses and has significant interests in leading companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics, banking and youth sports.

SPLP was formed in Delaware on December 16, 2008 and its common units became listed on the NYSE on April 10, 2012, under the ticker symbol “SPLP.”

The address and telephone number of SPLP’s principal executive offices is 590 Madison Avenue, 32nd Floor, New York, New York 10022, (212) 520-2300.

SPLP also maintains a website at http://www.steelpartners.com. SPLP’s website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.

Merger Sub

Merger Sub is a Delaware corporation and a direct wholly owned subsidiary of SPLP. Merger Sub was incorporated on December 2, 2016 for the purpose of engaging in the offer and the merger. Merger Sub has engaged in no business activities to date and it has no material assets or liabilities of any kind, other than those incident to its formation and those incurred in connection with the merger agreement, the offer and the merger.

The address and telephone number of Merger Sub’s principal executive offices is c/o Steel Partners Holdings L.P., 590 Madison Avenue, 32nd Floor, New York, New York 10022, (212) 520-2300.

Steel Excel

Steel Excel, through its two business segments, Energy and Sports, is committed to acquiring, strengthening and growing profitable businesses. The Energy segment provides drilling and production services to the oil and gas industry. The Sports segment is a social impact organization that strives to provide a first-class youth sports experience emphasizing positive experiences and instilling the core values of discipline, teamwork, safety, respect, and integrity. The Company also makes significant non-controlling investments in entities in industries related to its business segments as well as entities in other unrelated industries.

Steel Excel was incorporated in California in 1981 under the name “Adaptec, Inc.”, and reincorporated in Delaware in March 1998. The Company subsequently changed its name to “ADPT Corporation” in June 2010 and to “Steel Excel Inc.” in October 2011. On July 7, 2015, Steel Excel’s common stock commenced trading on the Nasdaq Capital Market under the ticker symbol “SXCL,” and on March 31, 2016, Steel Excel’s common stock was delisted from the Nasdaq Capital Market. Steel Excel’s common stock is currently quoted on the OTC Market under the symbol “SXCL.”

The address and telephone number of Steel Excel’s principal executive offices is 590 Madison Avenue, 32nd Floor, New York, New York 10022, (212) 520-2300.

Steel Excel also maintains a website at http://www.steelexcel.com. Steel Excel’s website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.

 

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THE OFFER AND THE MERGER

General

SPLP is offering to exchange the transaction consideration for each outstanding share of Steel Excel common stock not already owned by SPLP or any of its affiliated entities and which is validly tendered in the offer and not properly withdrawn. The offer is for all of the outstanding shares of common stock, par value $0.001 per share, of Steel Excel not already owned by SPLP or any of its affiliated entities.

The transaction consideration consists of 0.712 SPLP preferred units, together with cash in lieu of any fractional SPLP preferred units, without interest and less any applicable withholding taxes, for each share of Steel Excel common stock.

Steel Excel stockholders will not receive any fractional SPLP preferred units in the offer or the merger, and each Steel Excel stockholder who otherwise would be entitled to receive a fraction of an SPLP preferred unit pursuant to the offer or the merger will be paid an amount in cash (rounded to the nearest whole cent) without interest, equal to the product of: (i) such fraction, multiplied by (ii) $25.00, the SPLP preferred unit liquidation preference. See “Merger Agreement — Treatment of Stock Options, Restricted Stock Units, and Restricted Shares in the Merger.”

The purpose of the offer and the merger is for SPLP to acquire the entire equity interest in Steel Excel that it does not already own. The offer is the first step in SPLP’s plan to acquire all of the outstanding shares of Steel Excel common stock that it does not already own, and the merger is the second step in such plan. If the offer is completed, tendered shares of Steel Excel common stock will be exchanged for the transaction consideration, and if the merger is completed, any remaining shares of Steel Excel common stock that were not tendered into the offer (other than certain dissenting shares, shares held in the treasury of Steel Excel and shares held by SPLP or any subsidiary of SPLP, as described further in this prospectus/offer to exchange) will be converted into the right to receive the transaction consideration.

Background of the Offer; Past Contacts or Negotiations with the Company

The following is a description of contacts between representatives of Parent and representatives of the Company that resulted in the execution of the merger agreement. The chronology below covers only key events leading up to the execution of the merger agreement and does not purport to catalogue every conversation between representatives of Parent, the Company and other parties.

Affiliates of SPLP have been stockholders of the Company for almost 10 years (currently, SPH Group Holdings LLC, a wholly owned subsidiary of SPLP, directly owns 6,611,799 shares of SXCL common stock, representing approximately 64.2% of the outstanding shares). For a description of the relationships between Parent, the Company and their respective affiliates, see “The Offer and the Merger – Certain Relationships with Steel Excel.”

The SPLP GP Board and senior management of SPLP regularly discuss the business and strategic direction of Steel Excel, including possible ways to reduce expenses and simplify its organizational structure. In November 2015, management of SPLP initiated discussions with Steel Excel to explore a potential transaction whereby SPLP would acquire the balance of the shares of Steel Excel that it did not own. On November 16, 2015, the Steel Excel board of directors unanimously determined that it was in the best interests of Steel Excel and its stockholders unaffiliated with SPLP for Steel Excel to engage in discussions with SPLP with respect to such a transaction and to establish a special committee of the board consisting of independent directors John Mutch and Robert Valentine, with John Mutch to serve as Chairman of the special committee, for that purpose and to consider any potential alternatives.

 

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In late December 2015 and early January 2016, representatives of SPLP had preliminary conversations with representatives of the Steel Excel special committee regarding a possible proposal by SPLP to acquire the remaining shares of Steel Excel common stock not owned by SPLP or any of its affiliated entities. However, SPLP determined not to submit any such proposal at that time.

At a meeting of the Steel Excel board of directors on March 9, 2016, the directors reviewed the events of November 2015, during which SPLP had advised the board that it was considering whether to submit to the Company an offer to purchase all of the outstanding common stock of the Company not owned by SPLP or any of its affiliated entities, and the board, in response, had established a special committee of independent directors to consider on behalf of the unaffiliated stockholders of Steel Excel any proposal for a possible transaction that may be submitted by SPLP and/or any alternatives thereto. The Steel Excel board of directors noted that SPLP had not made any such proposal at that time, and Warren Lichtenstein, Executive Chairman of SPLP and Chairman of Steel Excel, indicated that it had no present plans to do so. Accordingly, the Steel Excel board unanimously resolved to dissolve the special committee.

On July 26, 2016, SPLP delivered a letter to the board of directors of Steel Excel proposing to acquire all of the outstanding shares of common stock of Steel Excel not owned by SPLP or its subsidiaries for a price of $12.50 per share (the “July 2016 Proposal”). The July 2016 Proposal contemplated that the Company’s stockholders (other than SPLP and its subsidiaries) would receive in total 2.0 million common units of SPLP (which had a closing price on July 25, 2016 of $14.72 per unit) and 2.96 million contingent value rights (“CVRs”) having an intrinsic value (as determined by SPLP) of approximately $5.63 per CVR. The July 2016 Proposal stated that the CVRs would (1) be listed on the NYSE, to the extent permitted by NYSE rules, (2) have a five-year maturity (subject to earlier expiration in the event the market value of the SPLP common units exceeds $20.00 per unit for a specified measurement period), and (3) provide the Company’s stockholders with either cash or additional units to the extent the trading price of the SPLP common units at maturity is less than $20.00 per unit. The July 2016 Proposal was not subject to obtaining financing or due diligence.

In the July 2016 Proposal, SPLP stated that the proposed transaction would be subject to the approval of the board of directors of the Company and the negotiation and execution of mutually acceptable definitive transaction documents. The July 2016 Proposal also included SPLP’s expectation that the board of directors of the Company would appoint a special committee of independent directors to consider the proposal and make a recommendation to the full board. SPLP expressly stated that it would not move forward with the transaction unless the transaction resulted from such a process and was approved by such a special committee. SPLP also stated that the transaction would be subject to a non-waivable condition requiring the approval of a majority of the outstanding shares of the Company not owned by SPLP or its affiliates. Further, SPLP acknowledged that the special committee would have the sole discretion to make a determination not to pursue the proposed transaction. SPLP further advised that if the special committee ultimately did not recommend or the public stockholders of the Company did not approve the proposed transaction, this determination would not adversely affect SPLP’s future relationship with the Company and its current intention would be to remain as a long-term stockholder in the absence of the proposed transaction. SPLP concluded the July 2016 Proposal by encouraging the special committee to retain its own independent legal and financial advisors to assist it in its review of the proposed transaction.

On August 5, 2016 the Steel Excel board of directors formally reconstituted the special committee, consisting of Messrs. Mutch and Valentine, with authority to consider whether to engage in discussions with SPLP regarding any potential transaction, negotiate and evaluate the terms of any such

 

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potential transaction, consider, evaluate and negotiate the terms of potential strategic alternative transactions thereto and make recommendations to the full board of directors with respect to any such transaction with SPLP and such strategic alternative transactions.

During the month of August 2016, the special committee interviewed potential investment bankers and attorneys to represent the special committee in connection with the proposed transaction and potential alternatives thereto.

On August 15, 2016, representatives of SPLP delivered a proposed term sheet for the CVRs, at the request of the special committee, to assist in its evaluation of the July 2016 Proposal. Also on August 15, 2016, representatives of SPLP and the special committee participated in a due diligence call regarding Steel Excel.

On August 22, 2016, by telephonic meeting, the special committee resolved to retain Duff & Phelps, LLC (“Duff & Phelps”) as its independent financial advisor and Littman Krooks LLP (“Littman”) as its independent legal counsel. The selection by the special committee of these independent advisors was based on a number of factors, including their experience and reputation, proposed fee structures and confirmation of the absence of material engagements involving SPLP and its affiliated entities. On the same date, Mr. Mutch advised a representative of SPLP that the special committee had determined to engage Duff & Phelps and Littman. In addition, at the direction of the special committee, Littman proceeded to negotiate Duff & Phelps’ formal engagement letter.

On August 23, 2016, the special committee held a meeting by telephone conference with Duff & Phelps to discuss due diligence materials that Duff & Phelps required in connection with its review of the proposed transaction, following which representatives of SPLP, the Company, Duff & Phelps and Littman participated in a preliminary due diligence meeting to discuss Steel Excel’s business, financial condition and prospects. Also on that same day, Olshan sent a draft of the proposed merger agreement and CVR agreement to Littman.

On August 24, 2016, representatives of Olshan and Littman had a phone conversation to discuss generally matters relating to the proposed transaction.

On September 12, 2016, the special committee held a telephonic meeting at which it discussed the status of the engagement letter with Duff & Phelps. At this meeting, Duff & Phelps also provided the special committee with an update on its review of the proposed transaction. On September 16, 2016, the special committee formally engaged Duff & Phelps as its independent financial advisor.

On September 21, 2016, the special committee held a telephonic meeting to review Duff & Phelps’ preliminary financial perspectives regarding the Company and the proposed transaction. Based in part on Duff & Phelps’s preliminary financial perspectives, the special committee concluded that the July 2016 Proposal materially undervalued the Company. The special committee requested that Duff & Phelps conduct a further review to determine potential modifications to the July 2016 Proposal (including potential adjustments to the terms of the CVRs) that could be made to provide full and fair value to Steel Excel’s unaffiliated stockholders and that Duff & Phelps contact Corporate Fuel Securities LLC (“Corporate Fuel”), SPLP’s financial advisor, to discuss their respective financial perspectives on the Company and the proposed transaction.

On September 22, 2016, Littman delivered its comments on the draft merger agreement to Olshan. Later that day, representatives of Olshan and Littman spoke by telephone. The Littman representatives advised Olshan that, based on their discussions with the special committee members and representatives of Duff & Phelps, SPLP’s July 2016 Proposal, including the CVR in the form proposed by SPLP, significantly undervalued the Company. The representatives of Olshan and Littman concurred that it would be advisable for representatives of Duff & Phelps to speak with representatives of Corporate Fuel to discuss their respective financial perspectives on the Company and the proposed transaction.

 

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On September 23, 2016, representatives of Duff & Phelps and Corporate Fuel had a telephone conference in which they discussed the special committee’s view that SPLP’s July 2016 Proposal, including the CVR in the form proposed by SPLP, did not provide adequate consideration to the unaffiliated stockholders of Steel Excel.

On September 30, 2016, the special committee met again by telephone, along with Duff & Phelps and Littman, to discuss certain updates to Duff & Phelps’ preliminary financial perspectives and potential modifications to the terms of the CVRs, including to provide a fixed rate of return to Steel Excel’s unaffiliated stockholders.

On October 1, 2016, Mr. Mutch, on behalf of the special committee, conveyed to representatives of SPLP the special committee’s view that the inclusion of the CVR as part of the transaction consideration would require that significant adjustment be made to its terms in order to provide full and fair value to the Company’s unaffiliated stockholders.

On October 4, 2016, representatives of SPLP, the special committee and Littman had a telephone call in which they discussed the terms of the proposed CVR and their respective views on its valuation.

On October 17, 2016, the members of the special committee and representatives of SPLP and Duff & Phelps met telephonically to discuss the terms of the proposed CVR (including its valuation) and their respective financial perspectives on the Company. On this call, representatives of SPLP indicated that SPLP might be willing to increase its offer to $15.00 - $16.00 per share, and raised the possibility of providing an alternative form of consideration to the Company’s unaffiliated stockholders as part of a proposed transaction. Following these discussions, representatives of SPLP and its counsel reviewed potential alternative forms of consideration to the CVR in order to provide enhanced value to the Company’s unaffiliated stockholders.

On October 20, 2016, representatives of SPLP and the special committee met in person and had a further discussion on the proposed terms of the transaction, including the composition and value of the proposed consideration. On October 26, 2016, a representative of SPLP had a follow up conversation with Mr. Mutch on these matters.

On November 9, 2016, SPLP delivered a letter and related term sheet to the special committee proposing to acquire all of the outstanding shares of common stock of Steel Excel not owned by SPLP or its subsidiaries for a price of $16.00 per share (the “November 9, 2016 Proposal”). The November 9, 2016 Proposal contemplated that the Company’s stockholders (other than SPLP and its subsidiaries) would receive newly created preferred units of SPLP. The November 9, 2016 Proposal stated that such preferred units would (1) be issued at a liquidation preference of $25.00 per unit, (2) be registered with the SEC and listed on the NYSE, to the extent permitted by NYSE rules, (3) bear a distribution at a rate of 3.0% per annum, payable in cash or in kind (or a combination) at the option of SPLP, (4) have a ten-year maturity, and (5) provide the Company’s stockholders with either cash or SPLP common units upon maturity or earlier redemption at the option of SPLP. The November 9, 2016 Proposal was not subject to obtaining financing or due diligence.

In the November 9, 2016 Proposal, SPLP stated that the proposed transaction would be subject to the approval of the board of directors of the Company and the negotiation and execution of mutually acceptable definitive transaction documents. The November 9, 2016 Proposal also included SPLP’s expectation that the special committee would consider the proposal and make a recommendation to the full board of the Company. SPLP expressly stated that it would not move forward with the transaction

 

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unless the transaction resulted from such a process and was approved by the special committee, and that the transaction would be subject to a non-waivable condition requiring the approval of a majority of the outstanding shares of the Company not owned by SPLP or its affiliates. Further, SPLP acknowledged that the special committee would have the sole discretion to make a determination on behalf of the Company not to pursue the proposed transaction. SPLP further advised that if the special committee ultimately did not recommend or the public stockholders of the Company did not approve the proposed transaction, this determination would not adversely affect SPLP’s future relationship with the Company and its current intention would be to remain as a long-term stockholder in the absence of the proposed transaction.

Also on November 9, 2016, Mr. Mutch spoke by telephone with Mr. Lichtenstein to advise him that the special committee, with the assistance of its independent financial and legal advisors, would evaluate the November 9, 2016 Proposal. Mr. Mutch subsequently had a follow-up conversation with representatives of SPLP to discuss the terms of the preferred units proposed to be issued by SPLP as part of the November 9, 2016 Proposal.

On November 21, 2016, the special committee held a telephonic meeting, together with representatives of Duff & Phelps and Littman, to discuss Duff & Phelps’ financial perspectives on the November 9, 2016 Proposal. Subsequent to this meeting, Duff & Phelps had telephonic conversations with Corporate Fuel in which Duff & Phelps relayed its financial perspectives on the November 9, 2016 Proposal to Corporate Fuel, and Corporate Fuel indicated that SPLP might be willing to increase its proposal to $17.00 per share of Company common stock and increase the proposed distribution on the SPLP preferred units to 6.0% per annum.

On November 23, 2016, SPLP delivered a letter to the special committee proposing to acquire all of the outstanding shares of common stock of Steel Excel not owned by SPLP or its subsidiaries for a price of $17.00 per share (the “November 23, 2016 Proposal”). The November 23, 2016 Proposal contemplated that the Company’s stockholders (other than SPLP and its subsidiaries) would receive newly created preferred units of SPLP. The November 23, 2016 Proposal stated that such preferred units would (1) be issued at a liquidation preference of $25.00 per unit, (2) be registered with the SEC and listed on the NYSE, to the extent permitted by NYSE rules, (3) bear a distribution at a rate of 6.0% per annum, payable in cash or in kind (or a combination) at the option of SPLP, (4) have a ten-year maturity, and (5) provide the Company’s stockholders with either cash or SPLP common units upon maturity or earlier redemption at the option of SPLP. The November 23, 2016 Proposal was not subject to obtaining financing or due diligence.

In the November 23, 2016 Proposal, SPLP expressed its disagreement with the special committee on the valuation of the Company and set forth a list of factors that SPLP believed weighed heavily in favor of the fairness of the transaction to the Company’s unaffiliated stockholders, including the following: (a) the fact that SPLP’s $17.00 offer price represented a 70% premium over the closing price of the Company’s common stock on the day before the July 2016 Proposal; (b) the limited trading volume of the Company’s stock and the likelihood that, absent a transaction, large stockholders who attempted to sell their shares might need to do so at a lower price in order to obtain liquidity; (c) that the Company’s stockholders would receive a more liquid security that would provide them the opportunity to receive a yield of 6.0% on their investment from a financially stronger enterprise; (d) SPLP’s belief that the senior ranking of the SPLP preferred units in relation to SPLP’s common units would provide significant protection that the preferred units would maintain their face value; and (e) SPLP’s expectation that the receipt of the SPLP preferred units in the proposed transaction would be tax-free to the Company’s stockholders. SPLP proposed to have a meeting the following week with the special committee and its advisors to review the November 23, 2016 Proposal, the Company’s valuation and the premium offered by SPLP to see if there was a way to reach agreement on a transaction.

 

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In the November 23, 2016 Proposal, SPLP stated that the proposed transaction would be subject to the approval of the board of directors of the Company and the execution of definitive transaction documents in substantially their current form (with such modifications as necessary to reflect the revised transaction terms). The November 23, 2016 Proposal also included SPLP’s expectation that the special committee would consider the proposal and make a recommendation to the full board. SPLP stated, however, that, if the special committee was not in a position to pursue this transaction at a reasonable valuation, SPLP would consider moving forward with the transaction without the recommendation of the special committee and proceeding directly to the Company’s stockholders while maintaining a non-waivable condition requiring acceptance by a majority of the outstanding shares of the Company not owned by SPLP or its affiliates.

On November 28, 2016, the special committee members and its financial and legal advisors met with representatives of SPLP and its counsel to discuss their respective views on the Company, its businesses and assets as well as the terms of the November 23, 2016 Proposal, including the factors described in such proposal that SPLP believed supported the fairness of the proposed transaction to the Company’s unaffiliated stockholders. Based on these discussions, the special committee members directed Duff & Phelps to update its review of the Company’s businesses and assets and advise the committee as to any impact of this review on Duff & Phelps’ financial perspectives regarding the Company and the proposed transaction.

On December 1, 2016, Olshan sent to Littman a revised draft of the merger agreement reflecting the revised transaction terms, as contained in the November 23, 2016 Proposal, and comments that had been previously communicated by Littman.

On December 2, 2016, representatives of SPLP had separate conversations with Mr. Mutch and representatives of Duff & Phelps regarding their respective financial perspectives of the Company and the terms of the SPLP preferred units contemplated to be issued in the proposed transaction.

Later that day, SPLP delivered a letter to the special committee proposing to acquire all of the outstanding shares of common stock of Steel Excel not owned by SPLP or its subsidiaries for a price of $17.80 per share (the “December 2016 Proposal”). The December 2016 Proposal contemplated that the Company’s stockholders (other than SPLP and its subsidiaries) would receive newly created preferred units of SPLP. The December 2016 Proposal stated that such preferred units would (1) be issued at a liquidation preference of $25.00 per unit, (2) be registered with the SEC and listed on the NYSE, to the extent permitted by NYSE rules, (3) bear a distribution at a rate of 6.0% per annum, payable in cash or in kind (or a combination) at the option of SPLP, (4) have a nine-year maturity, and (5) provide the Company’s stockholders with either cash or SPLP common units upon maturity or earlier redemption at the option of SPLP. The December 2016 Proposal was not subject to obtaining financing or due diligence.

In the December 2016 Proposal, SPLP stated that the proposed transaction would be subject to the approval of the board of directors of the Company and the execution of definitive transaction documents in substantially their current form (with such modifications as necessary to reflect the revised transaction terms). The December 2016 Proposal also included SPLP’s expectation that the special committee would consider the proposal and make a recommendation to the full board. SPLP affirmed that, ideally, it preferred not to move forward with the proposed transaction unless the transaction resulted from such a process and was approved by the special committee, but reiterated that it would consider moving forward with the transaction without the recommendation of the special committee and proceeding directly to a tender offer to the Company’s stockholders. In any case, SPLP emphasized that any such transaction would be subject to a non-waivable condition requiring the acceptance of a majority of the outstanding shares of the Company not owned by SPLP or its affiliates. Concurrent with the delivery of the December 2016 Proposal, Olshan delivered a draft of the sixth amended and restated limited partnership agreement of SPLP, which contained the proposed terms of the SPLP preferred units.

 

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The special committee members held several telephone conversations with Duff & Phelps and Littman on December 2 and 5, 2016 regarding the December 2016 Proposal and the results of Duff & Phelps’ additional review of the Company’s business and assets. Based on these discussions, the special committee directed its advisors to finalize the negotiation of the transaction documentation on the terms contained in the December 2016 Proposal.

On December 5, 2016, Littman provided to Olshan additional comments on the merger agreement, as well as comments on the terms of the SPLP preferred units. Between December 5, 2016 and December 6, 2016, Mr. Mutch had several conversations with representatives of SPLP, and representatives of Olshan and Littman engaged in multiple telephone calls, as a result of which they negotiated the terms of the merger agreement and the SPLP preferred units and finalized the transaction documentation.

On December 6, 2016, the special committee held a meeting at which, with the assistance of its independent legal and financial advisors, it engaged in further review and discussion regarding the proposed transaction with SPLP. Littman then summarized the material terms of the proposed form of merger agreement and the material terms of the SPLP preferred units. At the request of the special committee, Duff & Phelps then reviewed and discussed its financial analyses with respect to the Company and the proposed transaction. Following discussion of Duff & Phelps’ financial analyses and at the request of the special committee, Duff & Phelps verbally rendered its opinion to the special committee as to, as of such date, the fairness, from a financial point of view, to the stockholders of the Company (other than SPLP or its affiliates and associates) of the consideration to be received by such holders in the offer and the merger pursuant to the merger agreement (without giving effect to any impact of the transaction on any particular stockholder other than in its capacity as a stockholder). Duff & Phelps subsequently confirmed this opinion by delivery of its written opinion addressed to the special committee dated December 6, 2016. After further discussion, the special committee unanimously determined that the merger agreement and the transactions contemplated by the merger agreement (including the offer and the merger) were advisable and fair to and in the best interests of the Company and its unaffiliated stockholders. The special committee unanimously resolved to recommend the proposed transaction to the board and recommend that the board adopt resolutions approving and declaring the advisability and fairness of the merger agreement and the transactions contemplated by the merger agreement (including the offer and the merger) and recommending that the unaffiliated stockholders of the Company accept the offer and tender their shares pursuant to the offer.

On December 6, 2016, the board of directors of the Company met to receive the recommendation and report of the special committee with respect to the transaction. At this meeting, the board (acting on the unanimous recommendation of the special committee) unanimously (a) determined and declared that the merger agreement and the transactions contemplated by the merger agreement (including the offer and the merger) are, on the terms and subject to the conditions set forth in the merger agreement, advisable and in the best interests of and are fair to the Company and its unaffiliated stockholders, (b) approved, adopted and authorized in all respects the merger agreement and the transactions contemplated by the merger agreement (including the offer and the merger), and (c) recommended that the unaffiliated stockholders of the Company accept the offer and tender their shares pursuant to the offer. In addition, the board of directors of the Company approved an amendment to the Company’s bylaws to add a forum selection provision, which provides that, unless the Company consents in writing to an alternative forum, to the fullest extent permitted by law, the courts of the State of Delaware shall be the sole and exclusive forum for internal corporate claims (as defined in Section 115 of the Delaware General Corporation Law) brought by a stockholder (including any beneficial owner) of the Company, including without limitation: (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim

 

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of breach of a fiduciary duty owed by any director, officer, stockholder, employee or agent of the Company to the Company or some or all of the Company’s stockholders, or a claim for aiding and abetting any such breach, (iii) any action asserting a claim against the Company (or any director, officer, stockholder, employee or agent) arising pursuant to or under any provision of the Delaware General Corporation Law or the Company’s certificate of incorporation or bylaws, (iv) any action to interpret, apply, enforce or determine the validity of the Company’s certificate of incorporation or bylaws, or (v) any action asserting a claim against the Company or any director, officer, stockholder, employee or agent of the Company governed by the internal affairs doctrine of the State of Delaware.

On December 7, 2016, the SPLP GP Board held a meeting whereby it unanimously authorized SPLP to enter into the merger agreement and consummate the transactions contemplated by the merger agreement, including the offer and the merger.

Later that same day, the parties executed the merger agreement, and SPLP issued a press release announcing that SPLP and Steel Excel had entered into the merger agreement.

Following the announcement of the merger agreement, representatives of SPLP had conversations with certain significant stockholders of Steel Excel regarding the transaction, including a conversation between Mr. Lichtenstein and Mario J. Gabelli, Chairman and Chief Executive Officer of GAMCO Investors, Inc. (“GAMCO”), regarding the terms of the SPLP preferred units.

On December 12, 2016, SPLP received a letter from Mr. Gabelli (which was also included as an exhibit to a Schedule 13D/A filed by GAMCO with the SEC on that day) regarding proposed modifications sought by GAMCO to the terms of the SPLP preferred units, including that distributions on the SPLP preferred units be cumulative and that up to 25% of the SPLP preferred units be “puttable” on the third anniversary of their issuance. The letter concluded that, in the absence of clarification on these issues, it would be difficult for GAMCO’s affiliated funds to tender their shares and not seek appraisal rights under Delaware law.

On December 13, 2016, Messrs. Lichtenstein and Gabelli discussed GAMCO’s proposed modifications to the terms of the SPLP preferred units. Mr. Lichtenstein indicated that SPLP would be amenable to having the distributions on the SPLP preferred units be cumulative and providing for SPLP to offer to repurchase or redeem, for cash, 20% of the SPLP preferred units to be issued in the transaction within the first three years after completion of the offer.

Following this conversation, representatives of SPLP contacted Mr. Mutch and representatives of Duff & Phelps, and representatives of Olshan reached out to their counterparts at Littman, to advise them that SPLP was considering certain modifications to the terms of the SPLP preferred units in response to discussions with significant stockholders of Steel Excel.

On December 14, 2016, a telephonic meeting was held among Mr. Mutch, Duff & Phelps and Littman to discuss the potential modifications to the terms of the SPLP preferred units and the fact that these modifications were favorable to the Company’s unaffiliated stockholders.

On December 15, 2016, Olshan sent to Littman drafts of amended transaction documentation reflecting the proposed modified terms of the SPLP preferred units. Olshan and Littman negotiated the proposed revisions on December 19, 2016, and later that day Olshan sent to Littman a further revised draft of the first amendment to the merger agreement reflecting certain limited modifications to clarify the tax treatment of the transaction and for administrative reasons.

On December 20, 2016, Olshan sent the drafts of the first amendment to the merger agreement and the proposed modified terms of the SPLP preferred units to a representative of GAMCO. On

 

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December 20 and 21, representatives of SPLP and Olshan communicated with representatives of GAMCO regarding the proposed modified terms of the SPLP preferred units, and certain adjustments were made to clarify that all redemptions of preferred units by SPLP would be made on a pro rata basis (and not by lot).

On December 22, 2016, SPLP received a letter from Mr. Gabelli (which was also included as an exhibit to a Schedule 13D/A filed by GAMCO with the SEC on that day) reflecting Mr. Gabelli’s understanding of the discussions between representatives of SPLP and GAMCO regarding the proposed modified terms of the SPLP preferred units. Mr. Gabelli wrote that if “these conditions are built in to your proposal and other conditions are standard, it is likely that our proxy voting committee would examine the final documents sent to shareholders in a more favorable light.” Following receipt of this letter, representatives of SPLP had a follow-up telephone conversation with Mr. Gabelli confirming the proposed modified terms of the SPLP preferred units.

On December 22, 2016, the members of the special committee, with the assistance of its independent legal and financial advisors, engaged in further review and discussion regarding the transaction with SPLP, as proposed to be amended. At the request of the special committee, Duff & Phelps verbally confirmed its opinion to the special committee as to the fairness, from a financial point of view, to the stockholders of the Company (other than SPLP or its affiliates and associates) of the consideration to be received by such holders in the offer and the merger pursuant to the merger agreement (without giving effect to any impact of the transaction on any particular stockholder other than in its capacity as a stockholder) in light of the proposed amendments to the merger agreement and the terms of the SPLP preferred units. The special committee then unanimously determined that the amended merger agreement and the transactions contemplated by the amended merger agreement (including the offer and the merger) were advisable and fair to and in the best interests of the Company and its unaffiliated stockholders. The special committee unanimously resolved to recommend the proposed transaction to the board and recommend that the board adopt resolutions approving and declaring the advisability and fairness of the amended merger agreement and the transactions contemplated by the amended merger agreement (including the offer and the merger) and recommending that the unaffiliated stockholders of the Company accept the offer and tender their shares pursuant to the offer.

On December 23, 2016, the board of directors of the Company met to receive the recommendation and report of the special committee with respect to the transaction, as amended. At this meeting, the board (acting on the unanimous recommendation of the special committee) unanimously (a) determined and declared that the amended merger agreement and the transactions contemplated by the amended merger agreement (including the offer and the merger) are, on the terms and subject to the conditions set forth in the amended merger agreement, advisable and in the best interests of and are fair to the Company and its unaffiliated stockholders, (b) approved, adopted and authorized in all respects the amended merger agreement and the transactions contemplated by the amended merger agreement (including the offer and the merger), and (c) recommended that the unaffiliated stockholders of the Company accept the offer and tender their shares pursuant to the offer.

Also on December 23, 2016, the SPLP GP Board held a meeting whereby it unanimously authorized SPLP to enter into the amended merger agreement and consummate the transactions contemplated by the amended merger agreement, including the offer and the merger.

Later that same day, the parties executed the first amendment to the merger agreement, and SPLP issued a press release announcing that SPLP and Steel Excel had entered into the amendment.

 

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SPLP’s Reasons for the Offer and the Merger; Recommendation of the SPLP GP Board

The SPLP GP Board approved the merger agreement and determined that the merger agreement and the transactions contemplated by the merger agreement, including the offer, the merger and the issuance of the SPLP preferred units as the transaction consideration, are advisable and in the best interests of and are fair to SPLP and its securityholders.

SPLP determined to enter into the merger agreement and pursue the offer in light of its belief that Steel Excel’s operations and business represent an important strategic fit within SPLP’s overall holdings group and a logical next step in SPLP’s business simplification plan aimed at streamlining its corporate structure. In reaching its determination, the SPLP GP Board considered a variety of potential benefits and factors weighing favorably towards the offer and the merger, including the factors described below (not in any relative order of importance):

Strategic and Financial Considerations

 

    If Steel Excel becomes a wholly owned subsidiary of SPLP, the companies together should be able to realize cost savings and enhance operational efficiencies by eliminating duplication, reducing complexity and improving economies of scale;

 

    The tangible synergies expected to be generated with SPLP’s existing businesses across certain corporate and executive functions should help to position Steel Excel for future growth and success as part of SPLP; and

 

    SPLP’s belief that the exchange of Steel Excel common stock for SPLP preferred units should not impair the Company’s net operating loss carryforward, which may be offset against future federal taxable income of SPLP and its other subsidiaries under current income tax law.

Market Conditions

 

    The SPLP GP Board also took into account current financial market conditions and the market prices, liquidity and volatility of shares of Steel Excel common stock.

Due Diligence

 

    The SPLP GP Board further considered its due diligence review and investigations of the business operations, products, strategy, financial condition, contingent liabilities, earnings and future prospects of Steel Excel.

Financial Terms of the Transaction

 

    The SPLP GP Board reviewed the amount and form of consideration to be issued in the transaction, the fact that the exchange ratio is fixed, the terms of the SPLP preferred units and other financial terms of the offer and the merger.

Provisions of the Merger Agreement

 

   

The SPLP GP Board considered the structure of the offer and the merger and the terms and conditions of the merger agreement, which was negotiated on an arm’s length basis, including the financial terms, the anticipated short time period from announcement to completion achievable through the exchange offer structure, the conditions to completion, the termination

 

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rights of the parties, and the obligation of Steel Excel to pay a $2.0 million termination fee and reimburse SPLP up to $1.0 million in expenses in certain circumstances upon termination; and

 

    The expectation that the conditions to consummation of the offer and the merger will be satisfied on a timely basis.

The SPLP GP Board also identified and considered certain risks and potentially negative factors in its deliberations to be balanced against the benefits and positive factors, including:

 

    the risk that the anticipated benefits of the offer and the merger will not be realized in full or in part, including the risks that expected synergies or cost savings will not be achieved or not achieved on the expected timeframe;

 

    the risk that the transaction may not be consummated despite the parties’ efforts or that the closing of the transaction may be unduly delayed;

 

    the challenges in absorbing the effect of any failure to complete the transaction, including potential stockholder and market reactions;

 

    the costs and expenses associated with the offer and the merger;

 

    the risks associated with the occurrence of events which may materially adversely affect the business, operations or financial condition of Steel Excel but which may not entitle SPLP to terminate the merger agreement;

 

    the risk of diverting SPLP management’s focus and resources from other strategic opportunities and from operational matters while working to implement the transaction with Steel Excel, and other potential disruption associated with combining the companies;

 

    the potential impact on SPLP’s capital structure of the issuance in the transaction of the SPLP preferred units, which rank senior to the common units with respect to distributions and upon liquidation;

 

    the risks associated with the offer and the merger, the combined company following the offer and the merger, the SPLP preferred units, SPLP’s business and Steel Excel’s business described under the sections entitled “Forward-Looking Statements” and “Risk Factors.”

After consideration of these factors, the SPLP GP Board determined that, overall, the potential benefits of the offer and the merger outweighed the potential risks.

This discussion of the information and factors considered by the SPLP GP Board includes the material positive and negative factors considered by the SPLP GP Board, but it is not intended to be exhaustive and may not include all the factors considered by the SPLP GP Board. In view of the variety of factors considered in connection with its evaluation of the offer and the merger and the complexity of these matters, the SPLP GP Board did not consider it practicable to, and did not attempt to, quantify or assign any relative or specific weights to the various factors that it considered in reaching its determination to approve the merger agreement and the offer and the merger. Rather, the SPLP GP Board viewed its position and recommendation as being based on the totality of the information presented to and factors considered by it. In addition, individual members of the SPLP GP Board may have given differing weights to different factors. It should be noted that this explanation of the reasoning of the SPLP GP Board and certain information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed in the section entitled “Forward-Looking Statements.”

 

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Steel Excel’s Reasons for the Offer and the Merger; Recommendation of the Board of Directors of Steel Excel

The Special Committee; Reasons for its Determinations

Following receipt of the July 2016 Proposal, the Company board determined that it was advisable and in the best interests of the Company and its stockholders to reconstitute the Company special committee consisting only of independent directors for the purpose of evaluating any proposal from SPLP and alternative transactions. The Company board appointed John Mutch and Robert Valentine as members of the Company special committee.

The Company board delegated full power and authority to the Company special committee in connection with its evaluation of any SPLP proposal and third party alternatives, including the full power and authority to: (1) establish, approve, modify, monitor and direct the process and procedures related to the review and evaluation of a possible transaction with SPLP and/or any alternatives thereto, including the authority to determine not to proceed with any such process, procedures, review or evaluation and to reject a possible transaction with SPLP and/or any alternatives thereto; (2) respond on behalf of the Company to any communications, inquiries or proposals regarding a possible transaction with SPLP and/or any alternatives thereto; (3) review, evaluate, investigate, pursue and negotiate the terms and conditions of a possible transaction with SPLP and/or any alternatives thereto; (4) solicit expressions of interest or other proposals for a possible transaction with SPLP and/or any alternatives thereto, to the extent the Company special committee deems appropriate; (5) negotiate the terms of and documentations for any possible transaction with SPLP and/or any alternatives thereto; (6) determine whether a possible transaction with SPLP and/or any alternatives thereto is advisable and is fair to, and in the best interests of, the Company’s unaffiliated stockholders; and (7) effectuate or recommend to the Company board the effectuation of a possible transaction with SPLP and/or any alternatives thereto. The Company board also resolved that it would not authorize a possible transaction with SPLP and/or any alternatives thereto or recommend a possible transaction with SPLP and/or any alternatives thereto for acceptance or approval by the Company’s stockholders, without the prior favorable recommendation by the Company special committee.

The Company special committee unanimously:

i. approved and declared advisable the merger agreement, the offer, the merger and the other transactions contemplated by the merger agreement (for the purposes of this section, all references to the “Merger Agreement Transactions” refer to the transactions contemplated by the merger agreement, including the offer and the merger);

ii. determined that the merger agreement (in substantially the form presented to the Company special committee) and the Merger Agreement Transactions are fair to and in the best interests of the Company and the Company’s unaffiliated stockholders; and

iii. resolved that the Company special committee recommend the merger agreement and the Merger Agreement Transactions to the Company board and recommend that the Company board adopt resolutions:

A. approving the merger agreement and the Merger Agreement Transactions;

 

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B. determining that the merger agreement and the Merger Agreement Transactions are advisable and in the best interests of and fair to the Company and its unaffiliated stockholders and that the Company enter into the merger agreement and consummate the Merger Agreement Transactions on the terms and subject to the conditions set forth in the merger agreement; and

C. recommending to the unaffiliated stockholders of the Company that they accept the offer and tender their shares of Steel Excel common stock pursuant to the offer.

In reaching its determinations, the Company special committee consulted with and received the advice of its independent financial and legal advisors and considered a number of factors that the Company special committee believed supported the decision to recommend the merger agreement and the Merger Agreement Transactions, including, but not limited to, the following material factors:

 

    the Company special committee’s belief that the offer and the merger will provide the Company’s unaffiliated stockholders with the opportunity to receive securities (as to which SPLP intends to file an application to list on the New York Stock Exchange) that provide a greater opportunity for liquidity at a price that is likely to be higher than what may be available in the open market for the Steel Excel common stock (which is currently traded over the counter and has an extremely thin trading volume) at this time and for the foreseeable future;

 

    the recent trading activity of the Steel Excel common stock, including the fact that the value of the transaction consideration represented a premium of approximately 54.8% over the closing price of the Steel Excel common stock on December 7, 2016 (the last trading day prior to the public announcement of the entry into the merger agreement);

 

    it could take a considerable period of time before the present value of the trading price of the Steel Excel common stock in the future would reach and sustain at least the per share value of the transaction consideration of $17.80;

 

    the Company special committee’s belief that, based upon the arms-length negotiation process led by the Company special committee, the transaction consideration was the highest price per share that was reasonably attainable;

 

    the availability and likelihood of success of possible alternatives to the offer and the merger, including pursuing alternative transactions or continuing to operate the Company, which alternatives the Company special committee evaluated and were determined by the Company special committee to be less favorable to the Company’s unaffiliated stockholders than the offer and the merger given the potential risks and uncertainties associated with those alternatives;

 

    the financial analysis reviewed by Duff & Phelps with the Company special committee as well as the oral opinion of Duff & Phelps rendered to the Company special committee on December 6, 2016 (which was subsequently confirmed in writing by delivery of Duff and Phelps’ written opinion addressed to the Company special committee dated December 6, 2016), as to, as of such date, the fairness, from a financial point of view, to the Company’s stockholders (other than SPLP or its affiliates and associates) of the consideration to be received by such stockholders in the offer and merger pursuant to the merger agreement (without giving effect to any impact of the Merger Agreement Transactions on any particular stockholder other than in its capacity as a stockholder), which opinion was confirmed orally on December 22, 2016 in connection with the Company special committee’s consideration of the first amendment to the merger agreement;

 

    the Company special committee’s belief that the terms of the SPLP preferred units are favorable to the Company’s unaffiliated stockholders, including as a result of the modifications to such terms stemming from discussions with significant stockholders of the Company and which were reflected in the first amendment to the merger agreement;

 

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    the SPLP preferred units provide the Company’s unaffiliated stockholders with a senior equity interest in a larger and financially stronger enterprise and allow them to participate in SPLP’s future earnings and growth;

 

    it is expected that the exchange of Steel Excel common stock for SPLP preferred units in the offer and the merger should not be a taxable exchange to the Company’s stockholders, except to the extent there is cash paid for fractional shares. See “Material U.S. Federal Income Tax Consequences;”

 

    the majority of the minority tender condition, which requires that unaffiliated stockholders holding in excess of 50% of the shares held by all unaffiliated stockholders tender their shares in the offer in order for the offer to close and the merger to proceed, which condition cannot be waived and - if satisfied - would demonstrate clear unaffiliated stockholder support for the offer;

 

    because of the longstanding role of Messrs. Lichtenstein and Howard on the Company board, SPLP is intimately familiar with risks associated with the Company’s business, including business risks and environmental risks, while third parties - in order to provide a firm proposal on price and assurances to the Company with respect to the likelihood of execution of a definitive agreement and a subsequent closing thereunder - would require extensive due diligence and a significant commitment of Company time and resources;

 

    the likelihood that the transaction with SPLP would be completed based on, among other things:

 

    since the consideration consists solely of securities of SPLP, the offer is not conditioned on receipt of financing;

 

    the likelihood and anticipated timing of completing the offer in light of the scope of the conditions, including the absence of any significant required regulatory approvals and the fact that the offer conditions are otherwise limited to customary contractual conditions for a transaction of this type (and, based on the information provided by senior management and independent legal counsel, the Company special committee’s belief that such conditions are expected to be satisfied);

 

    the Company’s ability, under certain circumstances pursuant to the merger agreement, to seek specific performance of the obligations of SPLP under the merger agreement;

 

    SPLP’s and its affiliates’ overall familiarity with the business and the limited risk of any “negative surprises” for them between signing and closing; and

 

    SPLP’s and Mr. Lichtenstein’s reputation and significant experience and track record in completing acquisition transactions;

 

    the other terms of the merger agreement, including:

 

    the Company’s ability to consider and respond to an unsolicited written acquisition proposal, to furnish confidential information to any person making such a proposal and to engage in discussions or negotiations with the person making such a proposal, if the Company special committee, prior to taking any such actions, determines in good faith that such acquisition proposal either constitutes a superior proposal or could reasonably be expected to lead to a superior proposal;

 

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    the ability of the Company board and the Company special committee, under certain circumstances, to withhold, withdraw, qualify or modify its recommendation that the unaffiliated stockholders tender their shares of Steel Excel common stock pursuant to the offer;

 

    the Company’s ability, under certain circumstances, to terminate the merger agreement in order to enter into an agreement providing for a superior proposal, provided that the Company complies with its obligations relating to the entering into of any such agreement and concurrently with the termination of the merger agreement pays to SPLP a termination fee of $2 million plus up to $1 million to reimburse SPLP’s expenses;

 

    the termination fee and expenses payable to SPLP under certain circumstances, including as described above, in connection with a termination of the merger agreement, which the Company special committee concluded are reasonable in the context of termination fees and expenses payable in comparable transactions and in light of the overall terms of the merger agreement, including the per share consideration;

 

    the Company being permitted under the terms of the merger agreement to continue to conduct its business in the ordinary course during the period between the execution of the merger agreement and the effective time of the merger, subject only to limitations and restrictions on the taking of certain prescribed actions, which management of the Company has advised the Company special committee are reasonable and should not adversely affect the Company’s operations to any significant extent; and

 

    if the merger is consummated, the ability of the stockholders to exercise appraisal rights, which provide properly exercising stockholders with the opportunity to have the Delaware Court of Chancery determine the “fair value” of their Steel Excel common stock and to receive payment based on that valuation in lieu of receiving the transaction consideration.

In the course of reaching the determinations and decisions, and making the recommendation, described above, the Company special committee also considered the following factors relating to the procedural safeguards that the Company special committee believed were present to ensure fairness of the offer and the merger, each of which the Company special committee believes supported its decision and provided assurance of the fairness of the offer and the merger to the unaffiliated stockholders:

 

    the Company special committee is comprised of two independent directors who are not affiliated with SPLP and its affiliates (including Warren G. Lichtenstein and Jack L. Howard) and are not employees of the Company or any of its subsidiaries;

 

   

other than their receipt of Company board and Company special committee fees (which are not contingent upon the consummation of the offer or the merger or the recommendation for the offer and the merger by the Company special committee or Company board) and their interests described under “The Offer and the Merger — Interests of Certain Persons in the Offer and the Merger,” members of the Company special committee do not have any interest in the offer and the merger different from, or in addition to, those of the unaffiliated stockholders;

 

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    the determination to engage in discussions related to the transaction with SPLP and the consideration and negotiation of the transaction consideration and other terms of the SPLP transaction were conducted entirely under the oversight of the members of the Company special committee without the involvement in the Company’s decision making process of any director who is affiliated with SPLP or is a member of the Company’s management and without any limitation on the authority of the Company special committee to act with respect to any alternative transaction or any related matters;

 

    the Company special committee was given the express authority to reject any SPLP proposal and had the authority not to recommend the approval of the SPLP transaction or any other alternative transaction;

 

    the Company special committee’s extensive arms-length negotiations with SPLP, which, among other things, resulted in an increase in the value of the transaction consideration from approximately $12.50 to $17.80 per share, and also provided unaffiliated stockholders of the Company with a form of consideration that the Company special committee believed was significantly more favorable than the consideration initially proposed by SPLP;

 

    the fact that a tender offer structure involves a direct offer to stockholders who voluntarily determine whether to sell their shares and also provides that the decision regarding the proposed transaction is made by the stockholders who actually own the shares at the time of tendering and, accordingly, have a true economic interest in the decision. This is in contrast to a one-step merger, where a vote of stockholders is required and voting rights are limited to those who held shares on a record date typically several weeks prior to the date of the vote and who therefore may or may not be stockholders as of the date of the vote;

 

    the fact that the Company special committee had engaged its own financial and legal advisors to provide advice to the Company special committee with respect to a possible transaction with SPLP or a potential alternative transaction;

 

    the Company special committee requested and received from Duff & Phelps a written opinion addressed to the Company special committee dated December 6, 2016, as to, as of such date, the fairness, from a financial point of view, to the Company’s stockholders (other than SPLP or its affiliates and associates) of the consideration to be received by such stockholders in the offer and merger pursuant to the merger agreement (without giving effect to any impact of the Merger Agreement Transactions on any particular stockholder other than in its capacity as a stockholder), which opinion was confirmed orally on December 22, 2016 in connection with the Company special committee’s consideration of the first amendment to the merger agreement;

 

    the terms and conditions of the merger agreement are designed to enable a superior proposal to be accepted by the Company special committee, including:

 

    the Company’s ability to consider and respond to an unsolicited written acquisition proposal, to furnish confidential information to any person making such a proposal and to engage in discussions or negotiations with the person making such a proposal, if the Company special committee, prior to taking any such actions, determines in good faith that such acquisition proposal either constitutes a superior proposal or could reasonably be expected to lead to a superior proposal;

 

   

following the Company board’s or Company special committee’s determination that a third party proposal is superior to the SPLP transaction, the Company special committee’s right to request an extension of the offer period following

 

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commencement of a required matching period for SPLP, which right enables the Company special committee to preserve the ability to pursue and accept a superior proposal, either from SPLP or such third party;

 

    the Company’s ability, under certain circumstances, to terminate the merger agreement in order to enter into an agreement providing for a superior proposal, provided that the Company complies with its obligations relating to entering any such agreement and concurrently with the termination of the merger agreement pays to SPLP a termination fee of $2 million, plus up to $1 million to reimburse SPLP’s expenses; and

 

    a termination fee and expenses payable to SPLP under certain circumstances, including as described above, in connection with a termination of the merger agreement, which the Company special committee concluded were reasonable in the context of termination fees and expenses payable in comparable transactions and in light of the overall terms of the merger agreement, including the per share consideration.

In the course of its deliberations, the Company special committee also considered a variety of risks and other countervailing factors related to entering into the merger agreement, including:

 

    the offer and the merger might not be completed in a timely manner or at all by virtue of limitations or actions of SPLP;

 

    if the offer and the merger are not completed by virtue of a breach of the merger agreement by SPLP, the Company might have to pursue legal remedies against its largest stockholder and its affiliates, including long-time Company board members;

 

    the Company would be proceeding with a transaction that is subject to an acceptance threshold by unaffiliated stockholders (the majority of the minority tender condition), which acceptance rate may not be achieved and cause the SPLP transaction not to close;

 

    the SPLP transaction’s tender offer structure may permit the SPLP transaction to close faster than a traditional one step merger, thereby shortening the possible window of time available to third party bidders to make superior proposals;

 

    the possible perception that, given the longstanding ties of SPLP and Mr. Lichtenstein to the Company, the SPLP transaction resulted from an “inside” arrangement;

 

    third parties may be reluctant to commit time and resources to making an alternative acquisition proposal, because of a perception that competing successfully against SPLP will be difficult due to SPLP’s approximately 64.2% beneficial ownership position;

 

    the restrictions in the merger agreement on the conduct of the Company’s business prior to the completion of the offer and the merger, which may delay or prevent the Company from undertaking business opportunities or taking other action with respect to its operations pending completion of the offer and the merger;

 

    the risks and costs to the Company if the SPLP transaction does not close, including the diversion of management and employee time and attention from on-going operations;

 

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    the possible adverse effect on the Company’s share price if the offer and the merger were publicly announced but not consummated.

In analyzing the offer and the merger and reaching its determination as to the fairness of the Merger Agreement Transactions to the unaffiliated stockholders, the Company special committee considered, among other factors, the financial analyses reviewed and discussed with the Company special committee by Duff & Phelps as described above. The Company special committee considers the Company to be a viable going concern business but that the trading history of the Steel Excel common stock may not be an indication of its going concern value, due to the fact that the shares are traded over the counter and have an extremely thin trading volume. In addition, the Company special committee did not consider the liquidation value of the Company relevant to a determination as to whether the offer and the merger are fair to the unaffiliated stockholders as the Company special committee believes the value of the Company’s assets that might be realized in a liquidation would be significantly less than its going concern value. Further, the Company special committee did not consider net book value a material indicator of the value of the Company because it believes that net book value is not a material indicator of the value of the Company as a going concern but rather is reflective of historical costs and because net book value does not take into account the prospects of the Company, market conditions, trends in the industry in which the Company operates or the business risks inherent in the industry. Except as set forth above, the Company is not aware of any firm offers by any person other than SPLP during the past two years with respect to a business combination or change in control transaction and the Company special committee concluded that, given SPLP’s approximately 64.2% beneficial ownership of the issued and outstanding shares of Steel Excel common stock, such offers may be unlikely.

The foregoing discussion of the factors considered by the Company special committee is not intended to be exhaustive, but rather includes the principal factors considered by the Company special committee. The Company special committee reached the conclusion to approve the Merger Agreement Transactions in light of the various factors described above and other factors that the Company special committee believes were appropriate. In view of the wide variety of factors (both favorable and unfavorable) considered by the Company special committee in connection with its evaluation of the offer and the merger and the complexity of these matters, as well as the advice of its financial and legal advisors, the Company special committee did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the Company special committee. Rather, the Company special committee made its recommendation based on the totality of information considered, and the investigation conducted, by it. In considering the factors discussed above, individual members of the Company special committee may have given different weights to different factors.

Reasons for the Company Board Determinations

In reaching its determinations, the Company board considered a number of factors, including the following material factors:

 

    the Company special committee’s analysis, conclusions and unanimous determination, which the Company board adopted, that the merger agreement and the Merger Agreement Transactions are advisable and fair to and in the best interests of the Company and the unaffiliated stockholders, and the Company special committee’s unanimous recommendation that the Company board adopt a resolution to, among other things, approve and declare the advisability and fairness of the merger agreement and the Merger Agreement Transactions and recommend that the unaffiliated stockholders of the Company accept the offer and tender their shares of Steel Excel common stock pursuant to the offer;

 

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    the Company special committee is comprised of two independent directors who are not affiliated with SPLP and its affiliates (including Warren G. Lichtenstein and Jack L. Howard) and are not employees of the Company or any of its subsidiaries, and that, other than their receipt of board and Company special committee fees (which are not contingent upon the consummation of the offer and the merger or the Company special committee’s or Company board’s recommendation of the offer) and their interests described under “The Offer and the Merger — Interests of Certain Persons in the Offer and the Merger,” members of the Company special committee do not have an interest in the offer and the merger different from, or in addition to, that of the unaffiliated stockholders;

 

    the fact that the Company special committee had engaged its own independent financial and legal advisors to provide advice to the Company special committee with respect to a possible transaction with SPLP or alternatives thereto;

 

    the nature of the arms-length negotiations with SPLP (including the Company special committee’s ability to improve the value and composition of the transaction consideration and other terms of the merger agreement for the benefit of the unaffiliated stockholders);

 

    the fact that, although the Company board was not entitled to rely upon Duff & Phelps’ opinion, the Company special committee had received the written opinion of Duff & Phelps addressed to the Company special committee dated December 6, 2016, as to, as of such date, the fairness, from a financial point of view, to the Company’s stockholders (other than SPLP or its affiliates and associates) of the consideration to be received by such stockholders in the offer and merger pursuant to the merger agreement (without giving effect to any impact of the Merger Agreement Transactions on any particular stockholder other than in its capacity as a stockholder), which opinion was confirmed orally on December 22, 2016 in connection with the Company special committee’s consideration of the first amendment to the merger agreement; and

 

    the analysis and recommendation of the Company special committee and the other factors considered by the Company special committee as described above under this section, which analysis and recommendation were adopted by the Company board.

The foregoing discussion of the factors considered by the Company board is not intended to be exhaustive, but rather includes the principal factors considered by the Company board. The Company board collectively reached the conclusion to approve the merger agreement and the Merger Agreement Transactions in light of the various factors described above and other factors that the members of the Company board believed were appropriate. In view of the wide variety of factors (both favorable and unfavorable) considered by the Company board in connection with its evaluation of the SPLP transaction and the complexity of these matters, the Company board did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the Company board. Rather, the Company board made its recommendation based on the totality of information presented to it and the investigation conducted by it. In considering the factors discussed above, individual directors may have given different weights to different factors.

In connection with the consummation of the merger, certain of the Company’s directors will receive benefits and compensation that may differ from the transaction consideration payable to unaffiliated stockholders. See “The Offer and the Merger — Interests of Certain Persons in the Offer and the Merger.”

 

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Opinion of the Financial Advisor to the Company Special Committee

Opinion of Duff & Phelps, LLC

On September 16, 2016, the Company special committee engaged Duff & Phelps to serve as an independent financial advisor to the Company special committee (solely in their capacity as members of the Company special committee) to, among other things, provide an opinion as to the fairness, from a financial point of view, to the stockholders of Steel Excel (other than SPLP or its affiliates and associates (collectively, the “SPLP Stockholders”), the majority stockholder of Steel Excel) of the Consideration (as defined below) to be received by such stockholders in the offer and the merger (collectively, the “Transaction”) (without giving effect to any impact of the Transaction on any particular stockholder other than in its capacity as a stockholder).

Steel Excel, SPLP and Merger Sub entered into the merger agreement, which provides, among other things, that the Transaction will be effected pursuant to the terms and subject to the conditions set forth therein: (i) SPLP shall make a tender offer to purchase any and all of the outstanding shares of common stock of Steel Excel not already owned by SPLP or any of its affiliated entities (the “Tendered Stock”), and (ii) as consideration for a stockholder’s tender of its Tendered Stock, such stockholder shall receive $17.80 per share in newly created SPLP preferred units. Assuming a tender by all of Steel Excel’s stockholders (other than SPLP and its affiliated entities), who collectively hold approximately 3.69 million shares, the total consideration is approximately $65.7 million in SPLP preferred units (the “Consideration”). The SPLP preferred units would (1) be issued at a liquidation preference of $25.00 per unit, (2) be registered with the SEC, (3) bear a cumulative distribution at a rate of 6.0% per annum, payable in cash or in kind (or a combination) at the option of SPLP, (4) have a nine-year maturity and (5) provide holders of the SPLP preferred units with either cash or common units of SPLP upon maturity or earlier redemption at the option of SPLP. In addition, SPLP will offer to repurchase or redeem, for cash on a pro rata basis, 20% of the SPLP preferred units to be issued in the Transaction within the first three years after completion of the offer. SPLP intends to file an application to list to SPLP preferred units on the NYSE under the symbol “SPLPPRA.”

Duff & Phelps rendered its written opinion to the Company special committee on December 6, 2016 (the “Opinion”), that, based upon and subject to the assumptions, qualifications and limiting conditions set forth in the Opinion, as of such date, the Consideration to be received by the stockholders of the Company (other than the SPLP Stockholders) in the Transaction was fair, from a financial point of view, to such stockholders (without giving effect to any impact of the Transaction on any particular stockholder other than in its capacity as a stockholder).

The full text of the Opinion of Duff & Phelps is attached as Annex D to this prospectus/offer to exchange and is incorporated herein by reference. The full text of the Opinion should be read carefully in its entirety for a description of the assumptions made, procedures followed, matters considered and qualifications and limitations of the review undertaken in rendering the Opinion.

The Opinion (i) does not address the merits of the underlying business decision to enter into the Transaction versus any alternative strategy or transaction; (ii) does not address any transaction related to the Transaction; (iii) is not a recommendation as to how the Company special committee or any stockholder should vote or act with respect to any matters relating to the Transaction, or whether to proceed with the Transaction or any related transaction; and (iv) does not indicate that the Consideration received is the best possibly attainable under any circumstances. Instead, the Opinion merely states whether the Consideration in the Transaction is within a range suggested by certain financial analyses. The decision as to whether to proceed with the Transaction or any related transaction may depend on an assessment of factors unrelated to the financial analysis on which the Opinion is based.

 

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In connection with the Opinion, Duff & Phelps made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Duff & Phelps also took into account its assessment of general economic, market and financial conditions, as well as its experience in securities and business valuation, in general, and with respect to similar transactions, in particular. Duff & Phelps’ procedures, investigations, and financial analysis with respect to the preparation of the Opinion included, but were not limited to, the items summarized below:

 

    Reviewed the following documents:

 

    Steel Excel’s annual reports and audited financial statements on Form 10-K filed with the SEC for the years ended December 31, 2013 through December 31, 2015, and Steel Excel’s unaudited interim financial statements for the six months ended June 30, 2016;

 

    Unaudited segment financial information for Steel Excel for the nine months ended September 30, 2016, which Steel Excel’s management identified as being the most current financial statements available;

 

    Other internal documents relating to the history, operations, and probable future outlook of Steel Excel, including financial projections, provided to Duff & Phelps by management of Steel Excel; and

 

    Documents related to the Transaction, including the December 2016 Proposal and the merger agreement;

 

    Discussed the information referred to above and the background and other elements of the Transaction with management of Steel Excel;

 

    Reviewed the historical trading price and trading volume of Steel Excel’s common stock and the publicly traded securities of certain other companies that Duff & Phelps deemed relevant;

 

    Performed certain valuation and comparative analyses using generally accepted valuation and analytical techniques, including a discounted cash flow analysis, an analysis of selected public companies that Duff & Phelps deemed relevant, and an analysis of selected transactions that Duff & Phelps deemed relevant, in each case as described in more detail below; and

 

    Conducted such other analyses and considered such other factors as Duff & Phelps deemed appropriate.

In performing its analyses and rendering the Opinion with respect to the Transaction, Duff & Phelps, with Steel Excel’s consent:

 

    Relied upon the accuracy, completeness, and fair presentation of all information, data, advice, opinions and representations obtained from public sources or provided to it from private sources, including Steel Excel’s management, and did not independently verify such information;

 

    Relied upon the fact that the Company special committee was advised by counsel as to all legal matters with respect to the Transaction, including whether all procedures required by law to be taken in connection with the Transaction had been duly, validly and timely taken;

 

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    Assumed that any estimates, evaluations, forecasts and projections furnished to Duff & Phelps were reasonably prepared and based upon the best available information at such time and good faith judgment of the person furnishing the same, and Duff & Phelps expressed no opinion with respect to such projections or the underlying assumptions;

 

    Assumed that information supplied and representations made by Steel Excel’s management on or prior to the delivery of the Opinion were substantially accurate regarding Steel Excel and the Transaction;

 

    Assumed that the representations and warranties made in the merger agreement were substantially accurate;

 

    Assumed that the final versions of all documents reviewed by Duff & Phelps in draft form conformed in all material respects to the drafts reviewed;

 

    Assumed that there was no material change in the assets, liabilities, financial condition, results of operations, business, or prospects of Steel Excel since the date of the most recent financial statements and other information made available to Duff & Phelps at or prior to the delivery of the Opinion, and that there was no information or facts that would have made the information reviewed by Duff & Phelps incomplete or misleading as of such time;

 

    Assumed that all of the conditions required to implement the Transaction would be satisfied and that the Transaction would be completed in accordance with the merger agreement without any amendments thereto or any waivers of any terms or conditions thereof; and

 

    Assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the Transaction would be obtained without any adverse effect on Steel Excel or the contemplated benefits expected to be derived in the Transaction.

To the extent that any of the foregoing assumptions or any of the facts on which the Opinion was based prove to be untrue in any material respect, the Opinion cannot and should not be relied upon. Furthermore, in Duff & Phelps’ analysis and in connection with the preparation of the Opinion, Duff & Phelps made numerous assumptions with respect to industry performance, general business, market and economic conditions and other matters, many of which are beyond the control of any party involved in the Transaction.

Although developments following the date the Opinion was delivered may affect the Opinion, Duff & Phelps assumes no obligation to update, revise or reaffirm the Opinion. The Opinion was necessarily based upon market, economic, financial and other conditions as they existed and could be evaluated on the date of the Opinion. Developments subsequent to December 6, 2016 may affect the conclusion expressed in the Opinion. Duff & Phelps disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting the Opinion which may come or be brought to the attention of Duff & Phelps after the date of the Opinion.

Duff & Phelps did not evaluate Steel Excel’s solvency or conduct an independent appraisal or physical inspection of any specific assets or liabilities (contingent or otherwise). Duff & Phelps was not requested to, and did not, (i) initiate any discussions with, or solicit any indications of interest from, third parties with respect to the Transaction, the assets, businesses or operations of Steel Excel, or any alternatives to the Transaction, (ii) negotiate the terms of the Transaction, and therefore, Duff & Phelps assumed that such terms were the most beneficial terms, from Steel Excel’s perspective, that could, under the circumstances, be negotiated among the parties to the merger agreement and the Transaction, or (iii) advise the Committee or any other party with respect to alternatives to the Transaction.

 

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Duff & Phelps did not express any opinion as to the market price or value of Steel Excel’s common stock (or anything else) after the announcement or the consummation of the Transaction. The Opinion should not be construed as a valuation opinion, credit rating, solvency opinion, an analysis of Steel Excel’s credit worthiness, as tax advice, or as accounting advice. Duff & Phelps did not make, and assumed no responsibility to make, any representation, or render any opinion, as to any legal matter.

In rendering the Opinion, Duff & Phelps did not express any opinion with respect to the amount or nature of any compensation to any of Steel Excel’s officers, directors, or employees, or any class of such persons, relative to the Consideration to be received by the public stockholders of Steel Excel in the Transaction, or with respect to the fairness of any such compensation.

Summary of Financial Analyses by Duff & Phelps

Set forth below is a summary of the material analyses performed by Duff & Phelps in connection with providing the Opinion to the Company special committee. This summary is qualified in its entirety by reference to the full text of the Opinion, attached hereto as Annex D. While this summary describes the analyses and factors that Duff & Phelps deemed material in its presentation to the Company special committee, it is not a comprehensive description of all analyses and factors considered by Duff & Phelps. The preparation of a fairness opinion is a complex process that involves various determinations as to appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances. Therefore, neither the Opinion nor Duff & Phelps’ underlying analysis is susceptible to partial analysis or summary description. In arriving at its opinion, Duff & Phelps did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Duff & Phelps’ analyses must be considered as a whole and selecting portions of its analyses and of the factors considered by it in rendering the Opinion, without considering all analyses and factors, could create a misleading or incomplete view of the evaluation process underlying the Opinion. The conclusion reached by Duff & Phelps was based on all analyses and factors taken as a whole, and also on the application of Duff & Phelps’ own experience and judgment.

The financial analyses summarized below include information presented in tabular format. In order for Duff & Phelps’ financial analyses to be fully understood, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses undertaken by Duff and Phelps. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Duff & Phelps’ financial analyses.

Discounted Cash Flow Analysis

Duff & Phelps performed a sum-of-the-parts analysis for Steel Excel by utilizing a discounted cash flow analysis of the projected unlevered free cash flows of Steel Excel’s energy services business (“Steel Energy”) and each of (i) the Baseball Heaven, LLC (“Baseball Heaven”) and National Youth Baseball Championships (“NYBC”) segment; (ii) the UK Elite Soccer, Inc. (“UK Elite”) segment; (iii) Crossfit segment; and (iv) the L.A. corporate operations segment, of Steel Excel’s sports business (“Steel Sports”) for the fiscal years ending December 31, 2016 through December 31, 2020. Duff & Phelps defines “free cash flow” as the cash generated by each segment of Steel Excel that is available either to reinvest or to distribute to stockholders. The discounted cash flow analysis was used to determine the net present value of projected unlevered free cash flows utilizing an appropriate cost of capital for the

 

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discount rate, which reflects the relative risk associated with these cash flows as well as the rates of return that stockholders could expect to realize on alternative investment opportunities with similar risk profiles to each segment of Steel Excel. Steel Excel’s management provided Duff & Phelps financial projections for the fiscal years ending December 31, 2016 through December 31, 2020 for each of the Steel Energy and Steel Sports segments.

Duff & Phelps used a discount rate of 15.75% to 17.75% for Steel Energy to discount the projected unlevered free cash flows and terminal value. Duff & Phelps calculated Steel Energy’s projected unlevered free cash flows by taking its earnings before interest and taxes (“EBIT”), subtracting taxes, adding back depreciation, subtracting capital expenditures and the change in working capital. Duff & Phelps calculated Steel Energy’s terminal value in 2020 using a perpetuity growth formula assuming a 2.0% terminal growth rate and the discount rate. Duff & Phelps believed at the time it gave the Opinion that this range of discount rates is consistent with the rate of return that stockholders could expect to realize on alternative investment opportunities with similar risk profiles to Steel Energy.

Based on these assumptions, Duff & Phelps’ discounted cash flow analysis indicated an estimated enterprise value for Steel Energy of $92.8 million to $106.2 million.

Duff & Phelps used a discount rate of 10.25% to 11.25% for Steel Sports’ Baseball Heaven and NYBC segment to discount the projected unlevered free cash flows and terminal value. Duff & Phelps calculated the Baseball Heaven and NYBC segment’s projected unlevered free cash flows by taking their EBIT, subtracting taxes, adding back depreciation, subtracting the purchase of the NYBC license agreement, subtracting capital expenditures and the change in working capital. Duff & Phelps calculated the Baseball Heaven and NYBC segment’s terminal value in 2020 using a perpetuity growth formula assuming a 3.0% terminal growth rate and the normalized-growth stage discount rate. Duff & Phelps believed at the time it gave the Opinion that this range of discount rates is consistent with the rate of return that stockholders could expect to realize on alternative investment opportunities with similar risk profiles to the Baseball Heaven and NYBC segment.

Based on these assumptions, Duff & Phelps’ discounted cash flow analysis indicated an estimated enterprise value for the Baseball Heaven and NYBC segment of $7.1 million to $8.1 million.

Duff & Phelps used a discount rate of 10.25% to 11.25% for Steel Sports’ UK Elite segment to discount the projected unlevered free cash flows and terminal value. Duff & Phelps calculated the UK Elite segment’s projected unlevered free cash flows by taking its EBIT, subtracting taxes, adding back depreciation, subtracting capital expenditures and the change in working capital. Duff & Phelps calculated the UK Elite segment’s terminal value in 2020 using a perpetuity growth formula assuming a 3.0% terminal growth rate and the discount rate. Duff & Phelps believed at the time it gave the Opinion that this range of discount rates is consistent with the rate of return that stockholders could expect to realize on alternative investment opportunities with similar risk profiles to the UK Elite segment.

Based on these assumptions, Duff & Phelps’ discounted cash flow analysis indicated an estimated enterprise value for the UK Elite segment of $5.8 million to $6.8 million.

Duff & Phelps used a discount rate of 10.25% to 11.25% for Steel Sports’ Crossfit segment to discount the projected unlevered free cash flows and terminal value. Duff & Phelps calculated the Crossfit segment’s projected unlevered free cash flows by taking their EBIT, subtracting taxes, adding back depreciation, subtracting capital expenditures and the change in working capital. Duff & Phelps calculated the Crossfit segment’s terminal value in 2020 using a terminal year earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiple of 8.0x to 10.0x. Duff & Phelps believed at the time it gave the Opinion that this range of discount rates is consistent with the rate of return that stockholders could expect to realize on alternative investment opportunities with similar risk profiles to the Crossfit segment.

 

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Based on these assumptions, Duff & Phelps’ discounted cash flow analysis indicated an estimated enterprise value for the Crossfit segment of $0.5 million to $0.7 million.

Duff & Phelps used a discount rate of 10.25% to 11.25% for Steel Sports’ L.A. corporate operations segment to discount the projected unlevered free cash flows and terminal value. Duff & Phelps calculated the L.A. corporate operations segment’s projected unlevered free cash flows by taking its EBIT, subtracting taxes, adding back depreciation, subtracting capital expenditures and the change in working capital. Duff & Phelps calculated the L.A. corporate operations segment’s terminal value in 2020 using a perpetuity growth formula assuming a 3.0% terminal growth rate and the discount rate. Duff & Phelps believed at the time it gave the Opinion that this range of discount rates is consistent with the risk profile of the L.A. corporate operations segment.

Based on these assumptions, Duff & Phelps’ discounted cash flow analysis indicated an estimated enterprise value for the L.A. operations segment of negative $15.4 million to negative $17.4 million.

Selected Public Companies Reviewed

Duff & Phelps compared certain financial performance metrics of Steel Energy and Steel Sports to corresponding data and ratios from publicly traded companies in the oilfield services industry and leisure and fitness facilities industries, respectively, that Duff & Phelps deemed relevant to its analysis.

The companies reviewed in the oilfield services industry were:

 

    Calfrac Well Services Ltd.

 

    Patterson-UTI Energy, Inc.

 

    Pioneer Energy Services Corp.

 

    Precision Drilling Corporation

 

    RPC, Inc.

 

    Superior Energy Services, Inc.

 

    Total Energy Services Inc.

The companies reviewed in the leisure and fitness facilities industries were:

 

    Canlan Ice Sports Corp.

 

    ClubCorp Holdings, Inc.

 

    Peak Resorts, Inc.

 

    TWC Enterprises Limited

 

    Vail Resorts Inc.

 

    The Gym Group plc

 

    Planet Fitness, Inc.

 

    Town Sports International Holdings Inc.

 

    Tosho Co., Ltd.

For purposes of its analysis, Duff & Phelps used certain publicly available historical financial data and consensus equity analyst estimates for the selected public companies.

As the segments within Steel Sports each, at the time the Opinion was delivered, had profits below normalized levels, Duff & Phelps determined it was not possible to develop a meaningful valuation indication of the business segments within Steel Sports using selected public companies or precedent M&A transactions.

 

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Due to a steep decline in commodity prices in 2015 and into 2016, and the resulting depressed levels of profitability industry-wide, Duff & Phelps determined it was not possible to develop a meaningful valuation indication of Steel Energy using selected public companies or precedent M&A transactions. However, the selected public company analysis was primarily used to assess the reasonableness of Steel Energy’s implied projected 2018 EBITDA multiple derived from the discounted cash flow analysis.

The tables below summarize certain observed trading multiples and historical and projected financial performance, on an aggregate basis, of the selected public companies as of December 5, 2016 for companies in the oilfield services industry and leisure and fitness facilities industries. The revenue and EBITDA estimates for 2016, 2017 and 2018 in the tables below for the selected public companies were derived based on information for the 12-month periods ending closest to Steel Excel’s 2016, 2017 and 2018 fiscal years for which information was available.

 

     Revenue Growth     EBITDA Growth     EBITDA Margin  
     LTM     2016E     2017E     2018E     LTM     2016E     2017E     2018E     LTM     2016E     2017E     2018E  

Steel Energy

                        

Mean

     -44.2     -37.6     30.3     32.1     -72.1     -68.3     140.0     131.0     11.9     7.8     14.3     21.3

Median

     -51.9     -43.7     32.0     34.6     -71.8     -69.5     106.0     115.4     7.4     5.7     12.0     20.7

Leisure and Recretional Facilities

  

Mean

     3.0     16.1     1.2     5.7     1.0     42.1     1.9     9.4     18.1     18.6     18.7     19.7

Median

     2.5     17.7     0.0     2.6     2.9     29.6     0.1     8.2     18.5     24.6     25.3     26.7

Fitness Facilities

                        

Mean

     6.9     4.8     6.3     9.7     22.1     26.1     10.9     10.0     20.5     21.3     22.1     26.1

Median

     7.5     5.7     4.5     10.7     27.5     25.8     13.8     11.8     22.6     22.9     23.5     33.9
                         

Steel Energy

     -47.6     -34.4     27.2     30.5     -59.7     -44.2     45.4     33.1     18.4     18.6     21.3     21.7

Baseball Heaven &
NYBC

     12.6     9.9     6.9     8.4     NM        16.2     25.4     6.8     15.5     17.0     20.0     19.7

UK Elite

     -14.2     -13.6     18.7     9.9     NM        NM        NM        NM        -11.3     -8.5     0.7     3.9

Crossfit

     18.3     20.1     27.1     3.9     NM        NM        NM        85.7     -45.9     -24.3     3.9     7.0

 

     Enterprise Value as Multiple of  
     LTM      2016E      2017E      2018E      LTM      2016E      2017E      2018E      LTM  
     EBITDA      EBITDA      EBITDA      EBITDA      EBIT      EBIT      EBIT      EBIT      Revenue  

Steel Energy

                          

Mean

     23.2x         39.6x         18.1x         7.9x         NA         NA         54.0x         19.6x         3.06x   

Median

     18.3x         25.1x         16.3x         7.8x         NA         NA         54.0x         22.5x         2.39x   

Leisure and Recretional Facilities

                          

Mean

     11.2x         9.0x         8.8x         7.8x         19.6x         16.9x         15.3x         12.7x         2.44x   

Median

     9.9x         7.9x         7.5x         7.1x         18.9x         19.7x         16.7x         14.6x         2.11x   

Fitness Facilities

                          

Mean

     11.6x         9.9x         8.4x         8.2x         16.9x         17.7x         13.2x         11.4x         3.35x   

Median

     13.1x         10.5x         8.6x         8.3x         16.9x         17.7x         13.2x         11.4x         3.94x   

LTM = Latest twelve months for which financial information was available

Enterprise Value = (Market Capitalization + Management Equity + Debt + Preferred Stock + Non-Controlling Interest) – (Cash & Equivalents + Net Non-Operating Assets)

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

Source: S&P Capital IQ, SEC Filings, Annual and Interim Reports

 

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Selected M&A Transactions Reviewed

Duff & Phelps reviewed the target companies involved in the selected merger and acquisition transactions in the oilfield services industry listed in the below table. The selection of these transactions was based, among other things, on the target company’s industry, the relative size of the transaction compared to the Transaction, and the availability of public information related to the selected transaction. The selected transactions indicated (i) enterprise value to last twelve months’ EBITDA multiples ranging from 2.8x to 10.9x, with a median and mean of 6.0x, and (ii) enterprise value to last twelve months’ revenue multiples ranging from 0.41x to 3.46x, with a median of 1.40x and a mean of 1.48x.

 

Date
Announced
  

Acquirer Name

  

Target Name

8/25/2015    Schlumberger Limited    Cameroon International Corporation
5/22/2015    Trinidad Drilling Ltd.    CanElson Drilling Inc.
11/1/2014    Apollo    Express Energy Services
9/24/2014    Maxim Partners; Falcon Investment Advisors    Integrity Directional Services Inc.
9/3/2014    US Shale Solutions, Inc.    J4 Fluid Services; WPW Ltd; Culberson Construction, Inc.
8/11/2014    Maxim Partners; Falcon Investment Advisors    Laney Directional Drilling Company
7/19/2014    Silverfleet Capital Partners    AGR Petroleum Services Holdings AS
6/25/2014    C&J Energy Services, Inc. (nka: C&J Energy Services, Ltd.)    Nabors Red Lion Limited (Completion & Production Services Business)
5/6/2014    Great Prairie Energy Services Inc.    Oilfield Services Business and Related Operations
5/1/2014    Ferrellgas Partners (FGP)    Sabre Environmental
3/31/2014    B/E Aerospace Inc.    Vision Oil Tools, LLC
3/26/2014    Certain members of Integra management team    Integra Group
3/15/2014    Cardno Limited    PPI Technology Services, LLC
3/3/2014    General Finance Corporation    Lone Star Tank Rental LP and KHM Rentals, LLC
2/11/2014    Offshore Cleaning Systems L.L.C. (Lariat Partners; RedCloud Capital, LLC)    Newpark Environmental Services, L.P. (nka: ecoserv, LLC)
2/7/2014    B/E Aerospace Inc.    Wildcat Wirelines LLC
1/30/2014    B/E Aerospace Inc.    LT Energy Services, LLC
12/24/2013    Rodan Transport (U.S.A.) Ltd.    M&K Hotshot & Trucking, Inc. and M&K Rig Service, Inc.
12/20/2013    B/E Aerospace Inc.    Bulldog Frac Rentals, LLC
12/9/2013    DXP Enterprises, Inc.    B27, LLC
12/3/2013    Enterprise Group, Inc.    Hart Oilfield Rentals Ltd.
11/11/2013    John Wood Group plc    Elkhorn Holdings, Inc.
10/21/2013    First Reserve Corporation    TNT Crane & Rigging, Inc.
9/27/2013    Hawk Manufacturing, Inc.    Trump Equipment Company, Inc.
9/24/2013    Mill City Capital, L.P.    Bonnett’s Energy Corp.
8/2/2013    NGL Energy Partners (High Sierra)    Oilfield Water Lines
7/12/2013    Bain Private Equity    Blackhawk Specialty Tools, LLC
6/17/2013    EMCOR Group Inc.    RepconStrickland, Inc.
6/4/2013    Secure Energy Services Inc.    Target Rentals Ltd.

 

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5/22/2013    Clearlake Capital Group, LLC    Archer Limited, North American Rental and Tubular Division
5/17/2013    Trinity Environmental Services    CJ Energy
5/13/2013    Basin Tools, LP    Wenzel Downhole Tools Ltd.
4/1/2013    Secure Energy Services Inc.    Frontline Integrated Services Ltd.
2/22/2013    Western Energy Services Corp.    IROC Energy Services Corp.
1/15/2013    Frontier Oilfield Services, Inc.    Stark & Stark Equipment and L&R Tank Trucks, Inc.

Duff & Phelps also reviewed the target companies involved in the selected merger and acquisition transactions in the leisure and fitness facilities industries listed in the below table. The selection of these transactions was based, among other things, on the target company’s industry, the relative size of the transaction compared to the Transaction, and the availability of public information related to the selected transaction. The selected transactions indicated (i) enterprise value to last twelve months’ EBITDA multiples ranging from 5.6x to 10.9x, with a median of 8.6x and a mean of 8.3x, and (ii) enterprise value to last twelve months’ revenue multiples ranging from 0.35x to 3.92x, with a median of 1.15x and a mean of 1.84x.

 

Date
Announced
  

Acquirer Name

  

Target Name

11/30/2015    Peak Resorts, Inc.    Hunter Mountain Ski Resorts
8/14/2015    Townsquare Live Events, LLC    North American Midway Entertainment LLC
6/26/2015    Harwood Private Equity; Trident Private Equity Fund III L.P.    Essenden PLC
3/30/2015    Vail Resorts Inc.    Perisher Blue Pty Limited
9/5/2014    Electra Private Equity Plc; Electra Partners LLP    Hollywood Bowl Group Plc
8/13/2014    ClubCorp USA, Inc.    Sequoia Golf LLC
12/3/2012    KSL Advisors, LLC    Whistler Blackcomb Holdings Inc.
11/15/2012    PGM Holdings K.K.    Acccordia Golf Co., Ltd.
7/20/2012    Teachers’ Private Capital    Goals Soccer Centres plc

Summary of Analyses

Based on the concluded enterprise value of Steel Energy, Duff & Phelps estimated the range of equity value of Steel Energy to be $56.4 million to $74.0 million by adjusting the enterprise value as follows:

 

    Subtracting the present value of after-tax Steel Excel corporate overhead allocated to Steel Energy of approximately $29.1 million to $25.7 million;

 

    Adding cash and equivalents of $29.2 million as of September 30, 2016;

 

    Adding the present value of Steel Energy’s tax benefits of amortization of approximately $5.9 million to $6.7 million;

 

    Adding the estimated value of Steel Energy’s state net operating loss carryforwards of approximately $0.5 million; and

 

    Subtracting debt of $42.8 million as of September 30, 2016.

 

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The combined range of estimated enterprise values for the Baseball Heaven and NYBC segment, the UK Elite segment, the Crossfit segment, and the L.A. operations segment that Duff & Phelps derived from its discounted cash flow analyses was negative $3.9 million to $0.2 million. Based on the concluded enterprise value of Steel Sports, Duff & Phelps estimated the range of equity value of Steel Sports to be negative $4.9 million to negative $1.0 million by adjusting the enterprise value as follows:

 

    Adding the present value of Steel Sports’ tax benefits of amortization of approximately $0.3 million; and

 

    Subtracting the estimated value of the UK Elite minority interest of approximately $1.3 million to $1.5 million.

Duff & Phelps estimated the range of aggregate common equity value of Steel Excel to be $182.1 million to $206.2 million by adjusting the combined range of estimated equity values for Steel Energy and Steel Sports as follows:

 

    Adding total cash and the value of marketable securities of $142.3 million as of November 10, 2016;

 

    Adding the estimated value of Steel Excel’s federal net operating loss carryforwards and R&D credits of approximately $6.8 million to $7.2 million;

 

    Subtracting the present value of after-tax Steel Excel corporate overhead of approximately $16.2 million to $18.4 million; and

 

    Subtracting the value of options of approximately $0.1 million.

Based on the foregoing analysis, Duff & Phelps estimated the value of each common share to range from $17.68 to $20.02. Subsequently, given the approximately 3.69 million shares of Steel Excel held by stockholders other than the SPLP and its affiliated entities, the value of the Tendered Stock was estimated to be $65.21 million to $73.84 million. Duff & Phelps noted that the Consideration to be received by the stockholders of Steel Excel (other than SPLP and its affiliated entities) pursuant to the merger agreement was within the range of the per share value indicated by its analyses.

SPLP Preferred Yield Analysis

Duff & Phelps determined that the value, within a range, of the SPLP preferred units approximated its face value by comparing its dividend yield of 6.0% to an estimated market yield based on the credit profile of the issuer, SPLP, and the terms of the SPLP preferred units. The market yield analysis involved (i) selecting a credit spread for the SPLP preferred units based on an analysis of SPLP’s credit profile and benchmarking credit spreads of industrial bond indices, as well as indicative pricing for a senior secured revolving credit facility which may be obtained by SPLP through a comprehensive refinancing, (ii) adjusting this credit spread for appropriate differences between the SPLP preferred units and the benchmark indices and securities including seniority, PIK dividends, and a lack of call protection, and (iii) adding the adjusted selected credit spread of 3.5% to 6.0% to the 9-year U.S. Treasury yield of 2.1%. Duff & Phelps noted that the dividend yield of the SPLP preferred units of 6.0% was within the range of Duff & Phelps’ estimated market yield of 5.6% to 8.1%.

The Opinion and financial analyses were only one of the many factors considered by the Company special committee in its evaluation of the Transaction and should not be viewed as determinative of the views of the Company special committee.

 

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Miscellaneous

Duff & Phelps is a premier global valuation and corporate finance advisor with expertise in complex valuation, dispute and legal management consulting, M&A, restructuring, and compliance and regulatory consulting. Since 2005, Duff & Phelps has rendered over 655 fairness opinions in transactions aggregating more than $188 billion and is regularly engaged in the valuation of businesses and securities in the preparation of fairness opinions in connection with mergers, acquisitions and other strategic transactions.

Fees and Expenses

The aggregate amount of the fees that Steel Excel has agreed to pay Duff & Phelps for its services in connection with the rendering of the Opinion to the Company special committee is $350,000 due and payable as follows: $175,000 upon execution of the engagement letter for Duff & Phelps to serve as financial advisor to the Company special committee and the remaining $175,000 upon Duff & Phelps informing the Company special committee that it is prepared to render and deliver the Opinion. No portion of Duff & Phelps’ fee is contingent upon the consummation of the Transaction or the conclusion reached in the Opinion. Furthermore, subject to certain exceptions, Duff & Phelps is entitled to be paid additional fees at Duff & Phelps’ standard hourly rates for any time incurred should Duff & Phelps be called upon to support its findings (to parties other than the Company special committee) subsequent to the delivery of the Opinion. Steel Excel has also agreed to reimburse Duff & Phelps for its reasonable out-of-pocket expenses and reasonable fees and expenses of counsel retained by Duff & Phelps, in each case in connection with the engagement and not to exceed $25,000 in the aggregate. Steel Excel has also agreed to indemnify Duff & Phelps for certain liabilities arising out of its engagement.

The terms of the fee arrangements with Duff & Phelps, which Steel Excel believes are customary in transactions of this nature, were negotiated at arm’s length, and the Company special committee has approved these fee arrangements.

Other than this engagement, during the two years preceding the date of the Opinion, Duff & Phelps has been engaged to provide corporate finance consulting services to affiliates of SPLP. For these prior engagements, Duff & Phelps received customary fees, expense reimbursement, and indemnification.

Certain Unaudited Prospective Financial Information of Steel Excel

Steel Excel does not, as a matter of course, publicly disclose forecasts or internal projections as to future performance, revenues, earnings or financial condition. For internal planning purposes and in connection with the potential acquisition of the Company, management of the Company prepared and provided the projections to the Company board, the Company special committee and to Duff & Phelps to use and rely upon the projections for purposes of Duff & Phelps’ analyses and advice to the Company special committee.

The projections were not prepared with a view toward public disclosure or toward complying with GAAP, the published guidelines of the SEC regarding projections or pro forma financial information or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective or pro forma financial information. Neither the Company’s independent registered public accounting firm, nor any independent accountants, have compiled, examined or performed any procedures with respect to the projections, nor have they expressed any opinion or any other form of assurance on such financial information or its achievability.

 

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The projections are included solely to give the Company’s stockholders access to certain financial projections that were made available to the Company board, the Company special committee, Duff & Phelps and SPLP, and are not being included in this prospectus/offer to exchange to influence a Steel Excel stockholder’s decision as to whether to tender Steel Excel shares in the offer or for any other purpose.

The inclusion of the projections should not be regarded as an indication that the Company’s management, the Company board, the Company special committee, Duff & Phelps or SPLP considered, or now considers, any of the projections to be predictive of actual future results. The projections were based upon expectations of the Company’s management at the time the projected financial information was prepared. In addition, the projections did not reflect the effects of the announcement of the merger agreement. Although the projections are presented with numerical specificity, the projections necessarily were based on numerous variables and assumptions that are inherently uncertain and many of which are beyond the control of the Company’s management. Because the projections cover multiple years, by their nature, they become subject to greater uncertainty with each successive year. Important factors that may affect actual results and result in the projections not being achieved include, but are not limited to, general economic conditions, changes in demand for the Company’s products, product mix, the timing of work requested by customers, the impact of competitive products and pricing, the price of oil, the Company’s ability to achieve strategic goals, and other risk factors described herein.

Accordingly, there can be no assurance that the projections will be realized, and actual results may vary materially from those shown. Neither the Company, nor any of its affiliates, advisors, officers, directors or representatives, can give any assurance that actual results will not differ from the projections, and none of them undertakes any obligation to update or otherwise revise or reconcile the projections to reflect circumstances existing after the date the projections were generated or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the projections are shown to be in error. The Company does not intend to make publicly available any update or other revision to the projections, except as otherwise required by law. Neither the Company nor any of its affiliates, advisors, officers, directors or representatives has made or makes any representation to any of the Company’s stockholders or other persons regarding the ultimate performance of the Company compared to the information contained in the projections or that the projections will be achieved. The Company has made no representations or warranties to SPLP or Merger Sub, in the merger agreement or otherwise, concerning the projections.

In addition, the projections do not take into account any circumstances or events occurring after the date they were prepared, including the announcement and pendency of the merger agreement. Further, the projections do not take into account any changes in the Company’s operations, business, financial condition or results of operations which may result from the offer and the merger, including, without limitation, any cost savings or other benefits, nor do the projections take into account the effect of any failure to complete the offer and the merger. The inclusion of the projections herein should not be deemed an admission or representation by the Company or any other person that they were viewed as material information with respect the Company, and the Company and its management do not view the projections as material because of the inherent risks and uncertainties associated with the projections.

Certain of the projected financial information set forth herein may be considered non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by the Company may not be comparable to similarly titled amounts used by other companies.

IN LIGHT OF THE FOREGOING AND THE UNCERTAINTIES INHERENT IN THE PROJECTIONS, THE COMPANY’S STOCKHOLDERS ARE CAUTIONED NOT TO PLACE UNDUE, IF ANY, RELIANCE ON THE PROJECTIONS.

 

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The projections are set forth below:

Steel Excel Consolidated Projections

(dollars in thousands)

 

     Projected
2016 ($)
    Projected
2017 ($)
    Projected
2018 ($)
    Projected
2019 ($)
     Projected
2020 ($)
 

Revenue

     92,524        115,453        145,899        166,327         177,274   

Gross Profit

     15,697        24,093        32,621        41,790         48,798   

Operating Income (Loss)

     (20,589     (14,156     (6,374     3,417         8,460   

Net Income (Loss)

     (12,938     (15,750     (7,046     3,479         8,522   

Net Income (Loss) Attributable to Steel Excel

     (12,610     (15,960     (7,158     3,303         8,319   

Adjusted EBITDA

     (1,601     7,055        14,048        20,444         23,491   

Capital Expenditures

     5,320        5,550        6,850        10,350         10,350   

Steel Energy Projections

(dollars in thousands)

 

     Projected
2016 ($)
    Projected
2017 ($)
    Projected
2018 ($)
     Projected
2019 ($)
     Projected
2020 ($)
 

Revenue

     73,127        93,039        121,401         139,794         149,549   

Gross Profit

     7,506        13,887        21,347         29,478         35,593   

Operating Income (Loss)

     (2,185     1,443        8,485         18,081         23,112   

Net Income (Loss)

     (3,638     (213     7,751         18,081         23,112   

Net Income (Loss) Attributable to Steel Excel

     (3,638     (213     7,751         18,081         23,112   

Adjusted EBITDA

     13,116        19,770        26,321         32,596         35,631   

Capital Expenditures

     4,970        5,200        6,500         10,000         10,000   

Steel Sports Projections

(dollars in thousands)

 

     Projected
2016 ($)
    Projected
2017 ($)
    Projected
2018 ($)
    Projected
2019 ($)
    Projected
2020 ($)
 

Revenue

     19,397        22,414        24,498        26,533        27,725   

Gross Profit

     8,191        10,206        11,274        12,312        13,205   

Operating Income (Loss)

     (3,648     (2,111     (1,230     (887     (719

Net Income (Loss)

     (3,649     (2,111     (1,230     (887     (719

Net Income (Loss) Attributable to Steel Excel

     (3,321     (2,051     (1,342     (1,063     (922

Adjusted EBITDA

     (1,939     (544     39        308        476   

Capital Expenditures

     350        350        350        350        350   

Steel Excel - Corporate Projections

(dollars in thousands)

 

     Projected
2016 ($)
    Projected
2017 ($)
    Projected
2018 ($)
    Projected
2019 ($)
    Projected
2020 ($)
 

Revenue

     —          —          —          —          —     

Gross Profit

     —          —          —          —          —     

Operating Income (Loss)

     (14,756     (13,488     (13,629     (13,777     (13,933

Net Income (Loss)

     (5,651     (13,426     (13,567     (13,715     (13,871

Net Income (Loss) Attributable to Steel Excel

     (5,651     (13,426     (13,567     (13,715     (13,871

Adjusted EBITDA

     (12,778     (12,171     (12,312     (12,460     (12,616

Capital Expenditures

     —          —          —          —          —     

 

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The Company defines Adjusted EBITDA as net income (loss) from continuing operations before the effects of realized and unrealized gains or losses, interest income or expense, income taxes, and depreciation and amortization, and excludes certain non-recurring and non-cash items including stock-based compensation. The Company believes Adjusted EBITDA is useful to investors because it is one of the measures used by the Company board and management to evaluate its business, including in internal management reporting, budgeting, and forecasting processes, in comparing operating results across the business, as an internal profitability measure, as a component in evaluating the ability and the desirability of making capital expenditures and significant acquisitions, and as an element in determining executive compensation.

However, Adjusted EBITDA is not a measure of financial performance under U.S. GAAP, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for net income (loss) or cash flows from operating, investing, or financing activities. Because Adjusted EBITDA is calculated before recurring cash charges, including realized and unrealized gains or losses, interest income or expense, and income taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a measure of discretionary cash available to invest in the growth of the business. There are a number of material limitations to the use of Adjusted EBITDA as an analytical tool, including the following:

 

    Adjusted EBITDA does not reflect the Company’s realized and unrealized gains and losses;

 

    Adjusted EBITDA does not reflect the Company’s interest income or expense;

 

    Adjusted EBITDA does not reflect the Company’s income tax provision or benefit or the cash requirements to pay its income taxes;

 

    Although depreciation and amortization are non-cash expenses in the period recorded, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect the cash requirements for such replacement;

 

    Adjusted EBITDA does not include stock-based compensation;

 

    Adjusted EBITDA does not include goodwill and other asset impairments;

 

    Adjusted EBITDA does not include the income or losses of equity-method investees;

 

    Adjusted EBITDA does not include the attribution of income or loss to non-controlling interests;

 

    Adjusted EBITDA does not include discontinued operations; and

 

    Adjusted EBITDA does not include certain other non-recurring and non-cash items.

The Company compensates for these limitations by relying primarily on its U.S. GAAP financial measures and by using Adjusted EBITDA only as supplemental information. The Company believes that consideration of Adjusted EBITDA, together with a careful review of its U.S. GAAP financial measures, is the most informed method of analyzing the Company.

Because Adjusted EBITDA is not a measurement determined in accordance with U.S. GAAP and is susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.

 

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Ownership of SPLP After the Offer and the Merger

Based on 3,567,631 shares of Steel Excel common stock owned by stockholders other than SPLP and its affiliated entities as of January 5, 2017 (other than unvested restricted shares) and the exchange ratio of 0.712 SPLP preferred units for each share of Steel Excel common stock, Steel Excel’s former unaffiliated stockholders will own in the aggregate approximately 2,540,154 SPLP preferred units immediately following the consummation of the offer and the merger, representing 100% of the outstanding SPLP preferred units.

Dissenters’ Rights

No appraisal rights are available to holders of shares of Steel Excel common stock in connection with the offer. However, if the merger is consummated, holders of Steel Excel common stock at the effective time of the merger who have not tendered their Steel Excel common stock pursuant to the offer and who otherwise comply in all respects with Section 262 of the DGCL will be entitled to receive a determination by the Delaware Court of Chancery of the fair value of such holder’s shares of Steel Excel common stock (the “appraisal shares”) (exclusive of any element of value arising from the accomplishment or expectation of the merger) and to receive payment of that fair value in cash, together with interest, if any, to be paid upon the amount determined to be fair value. Unless the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective time of the merger will be compounded quarterly and will accrue at 5% over the federal discount rate (including any surcharge) as established from time to time between the effective time of the merger and the date of payment. At any time before the entry of judgment in the proceedings, the surviving corporation may pay to each stockholder entitled to appraisal an amount in cash, in which case interest shall accrue thereafter as provided in Section 262 of the DGCL only upon the sum of (a) the difference, if any, between the amount so paid and the fair value of the shares as determined by the Delaware Court of Chancery, and (b) interest theretofore accrued, unless paid at that time.

In determining the fair value of the appraisal shares, the Delaware Court of Chancery will take into account all relevant factors. As such, any determination by the Delaware Court of Chancery of the fair value of the appraisal shares could be based upon considerations other than or in addition to the amount paid in the offer and the merger and the market value of the shares of Steel Excel common stock. Steel Excel stockholders should recognize that the value so determined could be higher or lower than or the same as the transaction consideration. Moreover, Steel Excel may argue in an appraisal proceeding that, for purposes of such a proceeding, the fair value of the appraisal shares is less than the transaction consideration. Steel Excel stockholders also should note that investment banking opinions as to the fairness, from a financial point of view, of the consideration payable in a sale transaction, such as the offer and the merger, are not opinions as to fair value under Section 262 of the DGCL.

Under Section 262 of the DGCL, if a merger is approved under Section 228 or Section 253 of the DGCL, either a constituent corporation before the effective date of the merger, or the surviving corporation within 10 days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who is entitled to appraisal rights of the approval of the merger and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and will include in such notice a copy of Section 262 of the DGCL. The Solicitation/Recommendation Statement that is being mailed to you together with this document constitutes the formal notice of appraisal rights under Section 262 of the DGCL.

As described more fully in the Solicitation/Recommendation Statement, if a Steel Excel stockholder elects to exercise appraisal rights under Section 262 of the DGCL, such stockholder must do all of the following, among other things:

 

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    within the later of the consummation of the offer and 20 days after the mailing of the Solicitation/Recommendation Statement, deliver to Steel Excel a written demand for appraisal of shares of Steel Excel common stock held, which demand must reasonably inform Steel Excel of the identity of the stockholder and that the stockholder is demanding appraisal;

 

    not tender such holder’s Steel Excel shares in the offer; and

 

    continuously hold of record the shares from the date on which the written demand for appraisal is made through the effective time of the merger.

The foregoing discussion is not a complete statement of law pertaining to appraisal rights under Delaware law or a statement of the procedures to be followed by Steel Excel stockholders desiring to exercise such appraisal rights and is qualified in its entirety by reference to Section 262 of the DGCL, the full text of which is included as Annex B to the Solicitation/Recommendation Statement, which stockholders are encouraged to read in its entirety. Any Steel Excel stockholder who considers demanding appraisal is advised to consult legal counsel. The preservation and exercise of appraisal rights require strict and timely adherence to the applicable provisions of Delaware law. Failure to comply with the procedures set forth in Section 262 of the DGCL will result in the loss of appraisal rights.

Stockholders who tender shares of Steel Excel common stock pursuant to the offer (or otherwise sell their shares prior to the merger) will not be entitled to exercise appraisal rights with respect thereto but, rather, will receive the transaction consideration in the offer or other consideration in such transaction.

Plans for Steel Excel

In connection with the offer, SPLP has reviewed and will continue to review various possible business strategies that it might consider in the event that SPLP acquires all outstanding shares of common stock of Steel Excel it does not already own, whether pursuant to the offer and/or the merger or otherwise. These changes could include, among other things, changes in Steel Excel’s business, operations, personnel, employee benefit plans, corporate structure and capitalization. See also “The Offer and the Merger — SPLP’s Reasons for the Offer and the Merger; Recommendation of the SPLP GP Board.”

Delisting and Termination of Registration

Following the consummation of the offer and the merger, shares of Steel Excel common stock will cease to be quoted on the OTC Market. Steel Excel terminated the registration of the Steel Excel common stock under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on May 3, 2016.

Board of Directors, Management and Organizational Documents

Upon consummation of the merger, the directors of Merger Sub immediately prior to the effective time of the merger will become the initial directors of the surviving corporation, and the officers of Merger Sub immediately prior to the effective time of the merger will become the initial officers of the surviving corporation, each to hold office in accordance with the certificate of incorporation and bylaws of the surviving corporation until their respective successors have been duly elected or appointed and qualified or until the earlier of their death, resignation or removal.

 

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At the effective time of the merger, (i) the certificate of incorporation of Steel Excel, as in effect immediately prior to the effective time, will be amended as set forth in the merger agreement to become the certificate of incorporation of the surviving corporation until thereafter amended in accordance with the provisions thereof and applicable law, and (ii) the bylaws of Steel Excel, as in effect immediately prior to the effective time, will be amended in their entirety to conform to the bylaws of Merger Sub in effect immediately prior to the effective time and, as so amended, will become the bylaws of the surviving corporation until thereafter amended in accordance with the provisions thereof, the certificate of incorporation of the surviving corporation and applicable law.

The merger agreement provides that the certificate of incorporation and bylaws of the surviving corporation will contain provisions no less favorable with respect to indemnification than are set forth in the certificate of incorporation and bylaws, respectively, of the Company, unless any modification is required by law (and then only to the minimum extent required by law), and that these provisions may not be amended, repealed or otherwise modified for a period of six years from the effective time of the merger in any manner that would affect adversely the rights of individuals who, at or prior to the effective time, were directors or officers of the Company or any of its subsidiaries.

Regulatory Approvals

SPLP is not aware of any governmental license or regulatory permit that appears to be material to Steel Excel’s business that might be adversely affected by SPLP’s acquisition of Steel Excel shares pursuant to the offer or the merger or of any approval or other action by any government or governmental administrative or regulatory authority or agency, domestic or foreign, that would be required for SPLP’s acquisition or ownership of Steel Excel shares pursuant to the offer or the merger. Should any of these approvals or other actions be required, SPLP and Merger Sub currently contemplate that these approvals or other actions will be sought. There can be no assurance that (a) any of these approvals or other actions, if needed, will be obtained (with or without substantial conditions), or (b) if these approvals were not obtained or these other actions were not taken adverse consequences would not result to SPLP’s or Steel Excel’s business.

SPLP and Steel Excel agreed to use their reasonable best efforts to obtain any required governmental or third party consents and approvals required in connection with the offer and the merger and use their reasonable best efforts to take, or cause to be taken, all actions, and do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective the offer and the merger as promptly as practicable.

It is a condition to completion of the offer and the merger that no governmental entity having jurisdiction over SPLP, Merger Sub or Steel Excel has enacted, issued, promulgated, enforced or entered any law, order, decree or ruling (whether temporary, preliminary or permanent) that is then in effect which has the effect of making the offer or the merger illegal or otherwise prohibiting consummation of the offer or the merger.

Interests of Certain Persons in the Offer and the Merger

Certain of Steel Excel’s executive officers and directors have financial interests in the transaction that are different from, or in addition to, the interests of Steel Excel’s stockholders generally. The Company special committee and the Company board were aware of these potentially differing interests and considered them, among other matters, in evaluating and negotiating the merger agreement and in reaching its decision to approve the merger agreement and the transactions contemplated therein.

 

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Treatment of Equity Awards

Certain Steel Excel directors and executive officers hold Steel Excel stock options and/or Steel Excel restricted shares, which awards will be treated as follows in connection with the merger:

Steel Excel Stock Options

At the effective time of the merger, each outstanding Steel Excel stock option under any equity-based compensation plans of Steel Excel, to the extent it is outstanding and unexercised immediately prior thereto, will become fully vested as of the effective time of the merger and will by virtue of the merger and without any action on the part of any holder of any Steel Excel stock option be automatically cancelled and the holder thereof will receive, as soon as reasonably practicable following the effective time of the merger, a cash payment (without interest) with respect thereto equal to the product of (i) the excess, if any, of $17.80 (the transaction consideration value) over the exercise price per share of such Steel Excel stock option and (ii) the number of shares of Steel Excel common stock issuable upon exercise of such Steel Excel stock option. As of the effective time of the merger, all Steel Excel stock options, whether or not vested or exercisable, will no longer be outstanding and will automatically cease to exist, and each holder of a Steel Excel stock option will cease to have any rights with respect thereto, except the right to receive the option consideration with respect thereto. If the exercise price of any such Steel Excel stock option is equal to or greater than $17.80, such Steel Excel stock option will be cancelled without any payment being made in respect thereof.

Steel Excel Restricted Shares

At the effective time of the merger, each Steel Excel restricted share that, as of immediately prior to the effective time of the merger, remains subject to any performance-vest, time-vest or other condition(s) that constitutes a “substantial risk of forfeiture” within the meaning of Section 83 of the Code and which is outstanding immediately prior thereto will become fully vested as of the effective time of the merger. Each Steel Excel restricted share will, by virtue of the merger and without any further action on part of any holder thereof, be automatically cancelled, and the holder thereof will receive, as soon as reasonably practicable following the effective time of the merger, at the option of SPLP, (i) a cash payment (without interest) with respect thereto equal to $17.80, or (ii) the transaction consideration. As of the effective time, all Steel Excel restricted shares that are outstanding immediately prior thereto, whether or not vested, will no longer be outstanding and will automatically cease to exist, and each holder of a Steel Excel restricted share will cease to have any rights with respect thereto, except the right to receive the consideration (as elected by SPLP) with respect thereto. SPLP has determined to make the cash payment with respect to Steel Excel restricted shares in the merger.

Steel Excel Stock Options and Restricted Shares to Be Cancelled in Exchange for Consideration Pursuant to the Merger Agreement

The following table sets forth Steel Excel stock option and Steel Excel restricted share information related to the payments expected to be made to the non-employee directors and named executive officers of Steel Excel in exchange for cancellation of these awards. The amounts listed below are estimates based on an assumed closing date of the merger of February 7, 2017. However, the actual amounts, if any, to be received by a non-employee director or executive officer will depend on the outstanding Steel Excel stock options and Steel Excel restricted shares held by such individuals as of the actual closing date of the merger, which may differ from the amounts set forth below.

 

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     Total Payment With
Respect to Options(1)
     Total Payment With Respect
to Unvested Restricted Shares
 
     Steel Excel
Stock
Options
     Total
Payment ($)
     Steel
Excel
Unvested
Restricted
Shares (#)
     SPLP Total
Payment ($)(2)
 

Non-Employee Directors

           

Warren G. Lichtenstein

     28,250         —           25,000       $ 445,000   

John Mutch

     7,000         —           8,820       $ 156,996   

Robert J. Valentine

     3,250         —           8,820       $ 156,996   

Named Executive Officers

           

Jack L. Howard

     7,000         —           20,000       $ 356,000   

Douglas B. Woodworth

     —           —           —           —     

 

(1) Since the exercise price of each Steel Excel stock option held by the non-employee directors and named executive officers of Steel Excel is greater than $17.80, the Steel Excel stock options held by these individuals will be cancelled without any payment being made in respect thereof.
(2) The merger agreement provides that holders of unvested restricted shares will receive, as a result of the merger and at the option of SPLP, either $17.80 in cash or the transaction consideration with respect to each unvested restricted share owned immediately prior to the effective time of the merger. SPLP has determined to make the cash payment with respect to Steel Excel restricted shares in the merger.

Change of Control / Golden Parachute Compensation

None of the non-employee directors or executive officers of Steel Excel is a party to any change of control, employment, severance or other agreement that would entitle any such individual to receive any compensation based on or otherwise relating to the offer or the merger, other than as described under “—Treatment of Equity Awards” above, which is incorporated by reference herein.

Indemnification of Directors and Officers

The merger agreement provides that from and after the effective time, the surviving corporation will indemnify and hold harmless, to the fullest extent permitted under applicable law (and the surviving corporation will also advance expenses as incurred to the fullest extent permitted under applicable law; provided, that the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification), each present and former director and officer of Steel Excel and its subsidiaries (collectively, the “Indemnified Parties”) against any and all costs, expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages and liabilities incurred in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative, arising out of or pertaining to any action or omission or matters existing or occurring at or prior to the effective time, including the transactions contemplated by the merger agreement, to the same extent as provided in the certificate of incorporation or bylaws of Steel Excel in effect on the date of the merger agreement.

For six years from the effective time, the merger agreement provides that the surviving corporation and any of its subsidiaries, as applicable will maintain in effect for the benefit of the directors and officers of Steel Excel or such subsidiary currently covered by the officers’ and directors’ liability insurance policies of Steel Excel or such subsidiary, an insurance and indemnification policy with an insurer with a Standard & Poor’s rating of at least A that provides coverage for acts or omissions occurring at or prior to the effective time (the “D&O Insurance”) covering each such person on terms

 

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with respect to coverage and in amounts no less favorable in the aggregate than those of Steel Excel’s or such subsidiary’s directors’ and officers’ insurance policy in effect on the date of the merger agreement. However, the surviving corporation or such subsidiary will not be required to pay an annual premium for the D&O Insurance in excess of 200% of the annual premium currently paid by Steel Excel or such subsidiary for such coverage, but if the annual premiums for such insurance coverage exceed 200% of such annual premium, the surviving corporation or such subsidiary will obtain a policy with the greatest coverage available for a cost not exceeding such amount. Each of the surviving corporation and its subsidiaries may satisfy its obligations under the merger agreement by purchasing a “tail” policy from an insurer with a Standard & Poor’s rating of at least A under Steel Excel’s or the applicable subsidiary’s existing directors’ and officers’ insurance policy, that (i) has an effective term of six years from the effective time, (ii) covers each director and officer currently covered by Steel Excel’s or the applicable subsidiary’s directors’ and officers’ insurance policy in effect on the date of the merger agreement for actions and omissions occurring at or prior to the effective time, and (iii) contains terms that are no less favorable in the aggregate than those of Steel Excel’s or the applicable subsidiary’s directors’ and officers’ insurance policy in effect on the date of the merger agreement.

Pursuant to the merger agreement, the certificate of incorporation and bylaws of the surviving corporation will contain provisions no less favorable with respect to indemnification than are set forth in the certificate of incorporation and bylaws, respectively, of Steel Excel, unless any modification thereof is required by law and then such modification will be made only to the minimum extent required by such law, which provisions may not be amended, repealed or otherwise modified, except as provided in the merger agreement, for a period of six years from the effective time in any manner that would affect adversely the rights thereunder of individuals who, at or prior to the effective time, were directors or officers of Steel Excel or any of its subsidiaries.

Nothing in the merger agreement is intended to, will be construed to or will release, waive or impair any rights to directors’ and officers’ insurance claims under any policy that is or has been in existence with respect to Steel Excel or any of its subsidiaries or their respective officers, directors and employees. The indemnification provided for in the merger agreement is not prior to, or in substitution for, any such claims under any such policies. From and after the effective time, the surviving corporation will honor, in accordance with their terms, all indemnification agreements with Steel Excel in effect immediately prior to the effective time that are applicable to Indemnified Parties.

Notwithstanding anything to the contrary in the merger agreement, if any claim, action, suit, proceeding or investigation (whether arising before, at or after the effective time) is made against any Indemnified Party or any other party covered by directors’ and officers’ liability insurance, on or prior to the sixth anniversary of the effective time, the foregoing indemnification provisions will continue in effect until the final disposition of such claim, action, suit, proceeding or investigation.

If the surviving corporation or any of its successors or assigns (i) consolidates with or merges into any other person and will not be the continuing or surviving entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then, and in each such case, proper provision will be made so that the successors and assigns of the surviving corporation will assume the obligations set forth in the merger agreement relating to directors’ and officers’ indemnification.

Treatment of Employee Benefits

The merger agreement provides that for a period of at least 12 months following the closing date of the merger, each employee of Steel Excel who continues employment with SPLP, the surviving corporation or any of their respective subsidiaries after the closing date (each, a “continuing employee”) will be provided, at SPLP’s election, with benefits on substantially the same terms as those provided to (i) similarly situated employees of SPLP or (ii) such continuing employee by Steel Excel immediately prior to the effective time of the merger.

 

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SPLP and the surviving corporation will ensure that, as of the closing date, each continuing employee receives full credit (for all purposes, including eligibility to participate, vesting, vacation entitlement and severance benefits) for service with Steel Excel or any of its subsidiaries under each of the comparable employee benefit plans, programs and policies of SPLP, the surviving corporation or the relevant subsidiary, as applicable, in which such continuing employee becomes a participant, although no such service recognition will result in any duplication of benefits. As of the closing date, SPLP will, or will cause the surviving corporation or relevant subsidiary to, credit to each continuing employee the amount of vacation time that such employee had accrued under any applicable benefit plan of Steel Excel as of the closing date. With respect to each health or welfare benefit plan maintained by SPLP, the surviving corporation or the relevant subsidiary for the benefit of any continuing employee, SPLP will (i) cause to be waived any eligibility waiting periods, any evidence of insurability requirements and the application of any pre-existing condition limitations under such plan, and (ii) cause each continuing employee to be given credit under such plan for all amounts paid by such continuing employee under any similar benefit plan of Steel Excel for the plan year that includes the closing date for purposes of applying deductibles, co-payments and out-of-pocket maximums as though such amounts had been paid in accordance with the terms and conditions of the applicable plan maintained by SPLP, the surviving corporation or the relevant subsidiary, as applicable, for the plan year in which the closing date occurs.

Certain Relationships With Steel Excel

Neither SPLP nor Merger Sub has effected any transaction in the securities of Steel Excel in the past 60 days. Except as otherwise set forth in this prospectus/offer to exchange, to the best of SPLP’s and Merger Sub’s knowledge, after reasonable inquiry, none of the persons listed on Annex E, nor any of their respective associates or majority-owned subsidiaries, beneficially owns or has the right to acquire any securities of Steel Excel or has effected any transaction in the securities of Steel Excel during the past 60 days. Except in connection with the offer and the merger as described in this document and for the other transactions described below, there have been no transactions in the past two years between SPLP, Merger Sub or the individuals listed on Annex E, on the one hand, and Steel Excel or its directors, executive officers or affiliates, on the other hand.

Management by Affiliates of SPLP

As of January 5, 2017, SPLP, through its indirect, wholly owned subsidiary SPH Group Holdings LLC, beneficially owned 6,611,799 shares of Steel Excel’s common stock, representing approximately 64.2% of Steel Excel’s outstanding shares of common stock. The power to vote and dispose of the securities beneficially owned by SPLP is controlled by Steel Holdings GP. Warren G. Lichtenstein, Chairman of Steel Excel’s board of directors, is also the Executive Chairman of Steel Holdings GP. Certain other affiliates of Steel Holdings GP hold positions with the Company, including Jack L. Howard as principal executive officer and Vice Chairman and Douglas B. Woodworth as Chief Financial Officer.

Management Services Agreement

On August 1, 2012, Steel Excel entered into a management services agreement with SP Corporate Services LLC (“SP Corporate”), as amended on April 5, 2013, January 1, 2014, and October 3, 2014. The management services agreement was amended effective March 9, 2016 to have SPH Services Ltd. (“SPH Services”), a wholly-owned subsidiary of SPLP, furnish the services to the Company. Following the assignment of the management services agreement to SPH Services, SP Corporate merged with and into its parent company, SPH Services. SPH Services is an affiliate of SPLP. Warren Lichtenstein, Steel Excel’s Chairman of the Board, was the Chief Executive Officer of SP Corporate and is the Chief

 

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Executive Officer of SPH Services, Jack Howard, Steel Excel’s principal executive officer and Vice Chairman of the board of directors, was Senior Vice President of SP Corporate and is President of SPH Services, and Douglas B. Woodworth, Steel Excel’s Chief Financial Officer, is Chief Financial Officer of SPH Services. Under the management services agreement, as amended, SPH Services furnishes the services of Jack L. Howard as Steel Excel’s principal executive officer, and Douglas B. Woodworth as Steel Excel’s Chief Financial Officer. Additionally, SPH Services agreed to furnish to Steel Excel personnel to perform additional services, which include, without limitation:

 

    legal, tax, accounting, treasury, environmental health and safety, human resources, marketing and investor relations services;

 

    additional executive services;

 

    international business services;

 

    information technology services; and

 

    preparation of reports for filing with the SEC, to the extent required.

Messrs. Howard and Woodworth, as well as the persons that will render the above functions to the Company are made available to Steel Excel on a non-exclusive basis. However, pursuant to the terms of the management services agreement, all such persons are required to devote such time and effort as is reasonably necessary to fulfill the statutory and fiduciary duties applicable to them in performing such services.

Under the management services agreement, the annual fee payable to SP Corporate was adjusted to $8,150,000 effective October 3, 2014, and in 2015 Steel Excel paid $8,150,000 to SP Corporate. During the nine months ended September 30, 2016, Steel Excel paid a total of $6,100,000 to SP Corporate and SPH Services. This amount is subject to review and adjustment by agreement between Steel Excel and SPH Services for periods commencing in 2016 and beyond. Additionally, Steel Excel reimburses SPH Services and its affiliates for all reasonable and necessary business expenses incurred on its behalf in connection with the performance of the services under the management services agreement. During the nine months ended September 30, 2016 and the year ended December 31, 2015, Steel Excel reimbursed SP Corporate and its affiliates an aggregate of approximately $1,700,000 and $833,000, respectively, for business expenses incurred on its behalf pursuant to the management services agreement.

The management services agreement provides that Steel Excel is to indemnify and hold harmless SPH Services and its affiliates and employees (other than the person serving as Steel Excel’s principal executive officer, chief financial officer and other persons that may be furnished as officers to Steel Excel by SPH Services to perform the above services (the “designated persons”)) from any claims or liabilities by a third party in connection with activities or the rendering of services under the management services agreement. Pursuant to the management services agreement, Steel Excel will enter into its customary indemnification agreement with the designated persons.

The management services agreement has a term of one year, which shall renew for successive one year periods, unless and until terminated in accordance with the terms set forth therein, which include, under certain circumstances, the payment by the Company of termination fees to SPH Services.

Steel Excel’s audit committee approved the entry into the management services agreement. The audit committee concluded that the engagement of SPH Services provides a cost effective solution to the Company for obtaining executive and other necessary services. The services provided under the management services agreement were formerly provided by employees of the Company who were

 

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terminated following the sale or wind down of Steel Excel’s historical businesses or who became employees of SPH Services. In negotiating and approving the management services agreement, Steel Excel’s audit committee, consisting of its “independent” directors as defined by the rules of the NASDAQ Market, considered such issues as the scope of the services to be provided by SPH Services to the Company, the pricing of any arrangement with SPH Services and the limits of authority for the outsourced personnel.

Equity Grants to SP Corporate Employees

During 2016 and 2015, Steel Excel awarded shares of restricted stock to personnel of SP Corporate and its affiliates providing services to Steel Excel, including awards of 25,000 and 36,301 shares to Warren Lichtenstein, 20,000 and 29,041 shares to Jack Howard, and 8,820 and 10,890 shares to John Quicke, the Company’s former President and Chief Executive Officer of Steel Energy Services Ltd., a subsidiary of the Company, respectively. Steel Excel’s compensation committee approved these awards after taking into account the recommendation of SP Corporate. In addition, each of Messrs. Lichtenstein, Howard and Quicke received a restricted stock unit for 2,500 shares of common stock in their capacity as directors pursuant to the policy of restricted stock unit grants to all board members following each annual meeting of stockholders. All restricted stock units have vested.

Deposits at WebBank

During 2015, Steel Excel closed an account in which it previously held short-term deposits at WebBank, an affiliate of SPLP. During 2015 Steel Excel recorded interest income of approximately $39,000 from such deposits.

Securities Transactions Through Mutual Securities

Steel Excel uses several firms to execute trades of its marketable securities and certain of its other investments. Steel Excel uses Mutual Securities, Inc. (“Mutual Securities”) to execute certain trades, including repurchases of Steel Excel’s common stock. Jack Howard, Steel Excel’s principal executive officer, is a registered principal of Mutual Securities and receives commission payments from Mutual Securities after deductions for fees and expenses. In 2015, Steel Excel paid approximately $107,000 in commissions to Mutual Securities. During the three months ended September 30, 2016 and 2015, Steel Excel paid commissions to Mutual Securities totaling $3,000 and $77,000, respectively. During the nine months ended September 30, 2016 and 2015, Steel Excel paid commissions to Mutual Securities totaling $77,000 and $106,000, respectively.

Fees and Expenses

SPLP has retained MacKenzie Partners, Inc. as information agent in connection with the offer and the merger. The information agent may contact holders of shares by mail, email, telephone, facsimile or personal interview and may request brokers, dealers, commercial banks and trust companies and other nominees to forward material relating to the offer and the merger to beneficial owners of shares. SPLP will pay the information agent approximately $15,000 for its services in connection with the offer, will reimburse the information agent for its reasonable out-of-pocket expenses and will indemnify the information agent against certain liabilities and expenses, including certain liabilities under the U.S. federal securities laws.

In addition, SPLP has retained American Stock Transfer & Trust Company, LLC as exchange agent in connection with the offer and the merger. SPLP will pay the exchange agent approximately $21,500 for its services in connection with the offer, will reimburse the exchange agent for its reasonable out-of-pocket expenses and will indemnify the exchange agent against certain liabilities and expenses, including certain liabilities under the U.S. federal securities laws.

 

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SPLP will reimburse brokers, dealers, commercial banks and trust companies and other nominees, upon request, for customary clerical and mailing expenses incurred by them in forwarding materials related to the offer and the merger to their customers. Except as set forth above, neither SPLP nor Merger Sub will pay any fees or commissions to any broker, dealer or other person for soliciting tenders of shares pursuant to the offer.

Accounting Treatment

In accordance with GAAP, SPLP will account for the acquisition of shares in the offer and the merger as an equity transaction. Therefore, no gain or loss will be recognized in consolidated net income or comprehensive income. The carrying amount of SPLP’s noncontrolling interests will be adjusted to reflect the change in SPLP’s ownership interest in Steel Excel. Any difference between the fair value of the consideration and the amount by which the noncontrolling interest is adjusted will be recognized in capital attributable to SPLP.

Stock Exchange Listing

The SPLP preferred units are a new series of units and are not currently listed on any national securities exchange. SPLP intends to file an application to list the SPLP preferred units that SPLP will issue in the offer and the merger on the NYSE under the symbol “SPLPPRA.”

Resale of SPLP Preferred Units

All SPLP preferred units received by Steel Excel stockholders as consideration in the offer and the merger will be freely tradable for purposes of the Securities Act, except for SPLP preferred units received by any person who is deemed an “affiliate” of SPLP at the time of the closing of the merger. SPLP preferred units held by an affiliate of SPLP may be resold or otherwise transferred without registration in compliance with the volume limitations, manner of sale requirements, notice requirements and other requirements under Rule 144 or as otherwise permitted under the Securities Act. This prospectus/offer to exchange does not cover resales of SPLP preferred units received upon completion of the offer or the merger by any person, and no person is authorized to make any use of this prospectus/offer to exchange in connection with any resale.

 

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EXCHANGE OFFER PROCEDURES

Distribution of Offering Materials

This document, the related letter of transmittal, the related notice of guaranteed delivery and other relevant materials will be delivered to record holders of shares of Steel Excel common stock and to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on Steel Excel’s stockholder list or, if applicable, who are listed as participants in a clearing agency’s security position listing, so that they can in turn send these materials to beneficial owners of shares.

Expiration of the Offer

The offer is scheduled to expire at 12:00 midnight, New York City time, at the end of February 6, 2017, which is the “expiration date,” unless terminated or extended. “Expiration date” means February 6, 2017, unless and until SPLP has extended the period during which the offer is open, subject to the terms and conditions of the merger agreement, in which event the term “expiration date” means the latest time and date at which the offer, as so extended by SPLP, will expire.

Extension, Termination and Amendment of Offer

The merger agreement provides that SPLP will:

 

    extend the offer for the minimum period required by any rule, regulation, interpretation or position of the SEC or the staff thereof applicable to the offer; and

 

    if, on the expiration date or any subsequent date as of which the offer is scheduled to expire, any condition to the offer has not been satisfied or waived, extend the offer on one or more occasions in consecutive increments of up to five (5) business days each (or such longer period as the parties may agree) until such time as each such condition has been satisfied or waived.

However, (1) in no event will SPLP be required to extend the offer beyond May 31, 2017 or the valid termination of the merger agreement, (2) if, at any otherwise scheduled expiration of the offer, all of the conditions to the offer, except for the minimum tender condition and/or the majority of the minority tender condition, has been satisfied or waived, SPLP will in such situation be required to extend the offer in consecutive increments of up to five (5) business days each but in no event more than fifteen (15) business days in the aggregate (or such other period as the parties may agree), (3) SPLP may extend the offer for up to five (5) business days in order to determine whether the condition that the shares of Steel Excel common stock held by dissenting stockholders shall not have exceeded ten (10%) percent of the shares of Steel Excel common stock outstanding immediately prior to the acceptance time (as defined herein) has been satisfied, and (4) SPLP will extend the offer if requested by the Company special committee, or may extend the offer at its election, in connection with its right to renegotiate the terms of the merger agreement in the event that the Company receives a superior third-party proposal to the offer and the merger.

Other than as described above, SPLP may not extend, terminate or withdraw the offer without the prior written consent of Steel Excel, with the approval of the Company special committee.

Any decision to extend, terminate or withdraw the offer will be made public by a press release or otherwise by a public announcement.

 

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SPLP expressly reserves the right, prior to the expiration of the offer, to waive any condition to the offer (other than the minimum tender condition and the majority of the minority tender condition, which are non-waivable) or modify the terms of the offer, except that, without the prior written consent of the Company, SPLP may not (i) reduce the number of shares of Steel Excel common stock subject to the offer, (ii) reduce the transaction consideration, (iii) add to the conditions to the offer or change, modify or waive any condition to the offer in a manner adverse to Steel Excel’s unaffiliated stockholders, (iv) extend or otherwise change the expiration date of the offer (except as described above), (v) change the form of consideration payable in the offer, or (vi) otherwise amend, modify or supplement any of the other terms of the offer in any manner adverse to Steel Excel’s unaffiliated stockholders.

In the case of any extension, SPLP will make a public announcement of such extension that is issued no later than 9:00 a.m., New York City time, on the next business day following the previously scheduled expiration date. Subject to applicable law and without limiting the manner in which SPLP may choose to make any public announcement, SPLP assumes no obligation to publish, advertise or otherwise communicate any such public announcement of this type other than by issuing a press release or making a public announcement.

If SPLP materially changes the terms of the offer or the information concerning the offer, or if SPLP waives a material condition of the offer, SPLP will extend the offer to the extent legally required under the Exchange Act.

For purposes of the offer, a “business day” means any day other than Saturday, Sunday or a federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, New York City time.

The parties do not anticipate making any subsequent offering period available after the offer.

Exchange of Shares

SPLP has retained American Stock Transfer & Trust Company, LLC as the exchange agent (the “exchange agent”) to handle the exchange of shares for the transaction consideration in both the offer and the merger.

Upon the terms and subject to the satisfaction or waiver (to the extent permitted) of the conditions of the offer (including, if the offer is extended or amended, the terms and conditions of any such extension or amendment), SPLP will accept for exchange (the time of such acceptance, the “acceptance time”) promptly after the expiration date, and will thereafter promptly exchange the transaction consideration for, shares of Steel Excel common stock validly tendered and not properly withdrawn. In all cases, a Steel Excel stockholder will receive consideration for tendered Steel Excel shares only after timely receipt by the exchange agent of certificates for those shares, or a confirmation of a book-entry transfer of those shares into the exchange agent’s account at Depository Trust Company (“DTC”), a properly completed and duly executed letter of transmittal, or an agent’s message in connection with a book-entry transfer, and any other required documents.

For purposes of the offer, SPLP will be deemed to have accepted for exchange shares validly tendered and not properly withdrawn if and when it notifies the exchange agent of its acceptance of those shares pursuant to the offer. The exchange agent will deliver to the applicable Steel Excel stockholders SPLP preferred units issuable in exchange for shares of Steel Excel validly tendered and accepted pursuant to the offer promptly after receipt of such notice informing it of SPLP’s acceptance. The exchange agent will act as the agent for tendering Steel Excel stockholders for the purpose of receiving the SPLP preferred units from SPLP and transmitting such SPLP preferred units to the tendering Steel Excel stockholders. Steel Excel stockholders will not receive any interest on any cash that SPLP pays in the offer in lieu of fractional units, even if there is a delay in making the exchange.

 

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If SPLP does not accept any tendered Steel Excel shares for exchange pursuant to the terms and conditions of the offer for any reason, SPLP will cause to be returned certificates for such unexchanged shares without expense to the tendering stockholder or, in the case of shares tendered by book-entry transfer into the exchange agent’s account at DTC, the shares to be returned will be credited to an account maintained with DTC following expiration or termination of the offer.

Withdrawal Rights

Steel Excel stockholders may withdraw tendered shares of Steel Excel common stock at any time until the expiration time on the expiration date and until SPLP accepts such shares for exchange.

For the withdrawal of shares to be effective, the exchange agent must receive a written notice of withdrawal from the Steel Excel stockholder at its address set forth elsewhere in this document, prior to the expiration time on the expiration date. The notice must include the Steel Excel stockholder’s name, address, social security number, the certificate number(s), if any, the number of shares to be withdrawn and the name of the registered holder, if it is different from that of the person who tendered those shares, and any other information required pursuant to the offer or the procedures of DTC, if applicable.

A financial institution must guarantee all signatures on the notice of withdrawal, unless the shares to be withdrawn were tendered for the account of an eligible institution. Most banks, savings and loan associations and brokerage houses are able to provide signature guarantees. An “eligible institution” is a financial institution that is a participant in the Securities Transfer Agents Medallion Program.

If shares have been tendered pursuant to the procedures for book-entry transfer, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn shares and must otherwise comply with DTC’s procedures. If certificates have been delivered or otherwise identified to the exchange agent, the name of the registered holder and the serial numbers of the particular certificates evidencing the shares withdrawn must also be furnished to the exchange agent, as stated above, prior to the physical release of such certificates.

SPLP will decide all questions as to the form and validity (including time of receipt) of any notice of withdrawal in its sole discretion, and its decision will be final and binding, provided that applicable securityholders may challenge any such determination in a court of competent jurisdiction. None of Merger Sub, SPLP, Steel Excel, the exchange agent, the information agent or any other person is under any duty to give notification of any defects or irregularities in any tender or notice of withdrawal or will incur any liability for failure to give any such notification. Any shares properly withdrawn will be deemed not to have been validly tendered for purposes of the offer. However, a Steel Excel stockholder may re-tender withdrawn shares by following the applicable procedures discussed under the section “— Procedures for Tendering” at any time on or prior to the expiration date.

Procedures for Tendering

To validly tender shares of Steel Excel common stock held of record, Steel Excel stockholders must:

 

    if such shares are in certificated form or are held in book entry form directly with Steel Excel via the direct registration system, deliver a properly completed and duly executed letter of transmittal, along with any required signature guarantees and any other required documents, and certificates, if applicable, for tendered Steel Excel shares to the exchange agent for the offer, at its address set forth elsewhere in this document, all of which must be received by the exchange agent on or prior to the expiration date;

 

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    if such shares are in electronic book-entry form, deliver an agent’s message in connection with a book-entry transfer, and any other required documents, to the exchange agent at its address set forth elsewhere in this document and follow the other procedures for book-entry tender set forth herein, all of which must be received by the exchange agent on or prior to the expiration date; or

 

    comply with the guaranteed delivery procedures described below.

If shares of Steel Excel common stock are held in “street name” (i.e., through a broker, dealer, commercial bank, trust company or other nominee), those shares may be tendered by the nominee holding such shares by book-entry transfer through DTC. To validly tender such shares held in street name, Steel Excel stockholders should instruct such nominee to do so prior to the expiration date.

The term “agent’s message” means a message transmitted by DTC to, and received by, the exchange agent and forming a part of a book-entry confirmation, which states that DTC has received an express acknowledgment from the DTC participant tendering the shares that are the subject of such book-entry confirmation, that such participant has received and agrees to be bound by the terms of the letter of transmittal and that SPLP may enforce that agreement against such participant.

The exchange agent has established an account with respect to the shares at DTC in connection with the offer, and any financial institution that is a participant in DTC may make book-entry delivery of shares by causing DTC to transfer such shares on or prior to the expiration date into the exchange agent’s account in accordance with DTC’s procedure for such transfer. However, although delivery of shares may be effected through book-entry transfer at DTC, the letter of transmittal with any required signature guarantees, or an agent’s message, along with any other required documents, must, in any case, be received by the exchange agent at one of its addresses set forth elsewhere in this document on or prior to the expiration date. SPLP cannot assure Steel Excel stockholders that book-entry delivery of shares will be available. If book-entry delivery is not available, Steel Excel stockholders must tender shares by means of delivery of Steel Excel share certificates. Tendered shares received by the exchange agent after the expiration date will be disregarded and of no effect.

Signatures on all letters of transmittal must be guaranteed by an eligible institution (as defined below), except in cases in which shares are tendered either by a registered holder of shares who has not completed the box entitled “Special Issuance Instructions” or the box entitled “Special Delivery Instructions” on the letter of transmittal or for the account of an eligible institution.

If the certificates for shares are registered in the name of a person other than the person who signs the letter of transmittal, or if certificates for unexchanged shares are to be issued to a person other than the registered holder(s), the certificates must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered owner or owners appear on the certificates, with the signature or signatures on the certificates or stock powers guaranteed by an eligible institution.

If a stockholder desires to tender shares pursuant to the offer and the share certificates evidencing such stockholder’s shares are not immediately available or such stockholder cannot deliver the share certificates and all other required documents to the exchange agent on or prior to the expiration date, or such stockholder cannot complete the procedure for delivery by book-entry transfer on a timely basis, such shares may nevertheless be tendered, provided that all of the following conditions are satisfied:

 

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    such tender is made by or through an eligible institution;

 

    a properly completed and duly executed notice of guaranteed delivery, substantially in the form made available by us, is received on or prior to the expiration date by the exchange agent as provided below; and

 

    the share certificates (or a book-entry confirmation) evidencing all tendered shares, in proper form for transfer, in each case together with the letter of transmittal, properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry transfer, an agent’s message) and any other documents required by the letter of transmittal are received by the exchange agent within three business days after the date of execution of such notice of guaranteed delivery.

The notice of guaranteed delivery should be delivered to the exchange agent at one of its addresses set forth in this prospectus/offer to exchange and must include a guarantee by an eligible institution in the form set forth in the form of notice of guaranteed delivery made available by SPLP.

The term “eligible institution” shall mean a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a member in good standing of the Security Transfer Agents Medallion Program or any other “eligible guarantor institution,” as such term is defined in Rule 17Ad-15 under the Exchange Act.

The method of delivery of Steel Excel share certificates and all other required documents, including delivery through DTC, is at the option and risk of the tendering Steel Excel stockholder, and delivery will be deemed made only when actually received by the exchange agent. If delivery is by mail, SPLP recommends registered mail with return receipt requested and properly insured. In all cases, Steel Excel stockholders should allow sufficient time to ensure timely delivery.

To prevent U.S. federal backup withholding, each Steel Excel stockholder that is a U.S. person, other than a stockholder exempt from backup withholding as described elsewhere in this document, must provide the exchange agent with its correct taxpayer identification number and certify that it is not subject to backup withholding by completing the Internal Revenue Service (“IRS”) Form W-9 included with the letter of transmittal. Certain stockholders (including, among others, certain foreign persons) are not subject to these backup withholding requirements. In order for a foreign person to qualify as an exempt recipient for purposes of U.S. backup withholding, the stockholder must submit an IRS Form W-8BEN, or other applicable IRS Form W-8, signed under penalties of perjury, attesting to such person’s exempt status. In addition, foreign persons may be subject to U.S. federal withholding tax with respect to cash received in lieu of fractional units pursuant to the offer. See “Material U.S. Federal Income Tax Consequences.”

The tender of shares pursuant to any of the procedures described above will constitute a binding agreement between SPLP and the tendering Steel Excel stockholder upon the terms and subject to the satisfaction or waiver, to the extent permitted, of the conditions of the offer (including, if the offer is extended or amended, the terms and conditions of any such extension or amendment).

Grant of Proxy

By executing a letter of transmittal, a Steel Excel stockholder will irrevocably appoint SPLP’s designees as such Steel Excel stockholder’s attorneys-in-fact and proxies, each with full power of substitution, to the full extent of such stockholder’s rights with respect to its shares tendered and accepted for exchange by SPLP and with respect to any and all other shares and other securities issued or issuable

 

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in respect of those shares on or after the expiration date. That appointment is effective, and voting rights will be effected, when and only to the extent that SPLP accepts tendered Steel Excel shares for exchange pursuant to the offer and deposits with the exchange agent the transaction consideration for such shares. All such proxies will be considered coupled with an interest in the tendered shares and therefore will not be revocable. Upon the effectiveness of such appointment, all prior proxies that the Steel Excel stockholder has given will be revoked, and such stockholder may not give any subsequent proxies (and, if given, they will not be deemed effective). SPLP’s designees will, with respect to the shares for which the appointment is effective, be empowered, among other things, to exercise all of such stockholder’s voting and other rights as they, in their sole discretion, deem proper at any annual, special or adjourned meeting of Steel Excel’s stockholders, by written consent or otherwise.

SPLP reserves the right to require that, in order for shares to be deemed validly tendered, immediately upon the exchange of such shares, SPLP must be able to exercise full voting rights with respect to such shares. However, prior to acceptance for exchange by SPLP in accordance with the terms of the offer, the appointment will not be effective, and SPLP will have no voting rights as a result of the tender of shares until such acceptance.

Fees and Commissions

Tendering registered Steel Excel stockholders who tender shares directly to the exchange agent will not be obligated to pay any charges or expenses of the exchange agent or any brokerage commissions. Tendering Steel Excel stockholders who hold Steel Excel shares through a broker, dealer, commercial bank, trust company or other nominee should consult that institution as to whether or not such institution will charge the stockholder any service fees in connection with tendering shares pursuant to the offer. Except as set forth in the instructions to the letter of transmittal, transfer taxes on the exchange of shares pursuant to the offer will be paid by SPLP.

Matters Concerning Validity and Eligibility

SPLP will determine questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tender of shares, in its sole discretion, and its determination will be final and binding, provided that applicable securityholders may challenge any such determination in a court of competent jurisdiction. SPLP reserves the absolute right to reject any and all tenders of shares that it determines are not in the proper form or the acceptance of or exchange for which may be unlawful. SPLP also reserves the absolute right, subject to applicable laws, to waive any defect or irregularity in the tender of any shares. No tender of shares will be deemed to have been validly made until all defects and irregularities in tenders of such shares have been cured or waived. None of Merger Sub, SPLP, Steel Excel, the exchange agent, the information agent or any other person will be under any duty to give notification of any defects or irregularities in the tender of any shares or will incur any liability for failure to give any such notification. Subject to any rights of Steel Excel under the merger agreement, SPLP’s interpretation of the terms and conditions of the offer (including the letter of transmittal and instructions thereto) will be final and binding, provided that applicable securityholders may challenge any such determination in a court of competent jurisdiction.

Steel Excel stockholders who have any questions about the procedure for tendering shares in the offer should contact the information agent, MacKenzie Partners, Inc., at (212) 929-5500 (collect) or (800) 322-2885 (toll free) or at the address set forth elsewhere in this document.

Announcement of Results of the Offer

SPLP will announce the final results of the offer, including whether all of the conditions to the offer have been satisfied or, to the extent permitted, waived and whether SPLP will accept the tendered

 

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shares of Steel Excel common stock for exchange, as promptly as practicable following the expiration date. The announcement will be made by a press release in accordance with applicable securities laws and stock exchange requirements.

Approval of Merger

Promptly after the acceptance time, if Steel Excel stockholder approval is required by applicable law in order to consummate the merger, SPLP will, and will cause its applicable subsidiaries to, execute and deliver to the Company a consent in writing approving and adopting the merger agreement and the merger. The Company will deliver prompt notice of the taking of such action by written consent to those stockholders who have not consented thereto in writing in accordance with Section 228(e) of the DGCL. The Company’s obligations will not be affected by the commencement, public proposal, public disclosure or communication to the Company or any other person of any acquisition proposal or by any adverse recommendation change.

Notwithstanding the foregoing provisions, in the event that SPLP and its subsidiaries acquire that number of shares of Steel Excel common stock which, together with the shares of Steel Excel common stock they already own, constitute in the aggregate at least 90% of the outstanding Steel Excel common stock, pursuant to the offer or otherwise, SPLP, Merger Sub and Steel Excel will, subject to the terms and conditions of the merger agreement, take all necessary and appropriate action to cause the merger to become effective as soon as practicable after such acquisition, without a meeting or written consent of stockholders of the Company, in accordance with Section 253 of the DGCL.

Non-Applicability of Rules Regarding “Going Private” Transactions

The SEC has adopted Rule 13e-3 under the Exchange Act, which is applicable to certain “going private” transactions. Rule 13e-3 is not applicable to the merger because Steel Excel does not have a class of securities registered pursuant to Section 12 of the Exchange Act.

Effect of the Offer on the Market for Steel Excel Common Stock

The purchase of shares of Steel Excel common stock by SPLP pursuant to the offer will reduce the number of holders of shares of Steel Excel common stock and the number of shares of Steel Excel common stock that might otherwise trade on the OTC Market and could adversely affect the liquidity and market value of the remaining shares held by the public. The extent of the public market for shares of Steel Excel common stock after consummation of the offer and the availability of quotations for such shares will depend upon a number of factors, including the interest in maintaining a market in the shares of Steel Excel common stock and other factors. It is anticipated that the merger will be consummated promptly after the completion of the offer. As a result of the merger, shares of Steel Excel common stock will be no longer be quoted on the OTC Market.

Quotation on the OTC Market

The shares of Steel Excel common stock are currently quoted on the OTC Market. Following the consummation of the offer, if the merger is for some reason not consummated, it is possible that shares of Steel Excel common stock would continue to be quoted on the OTC Market. The extent of the public market for such shares would, however, depend upon the interest in maintaining a market in such shares on the part of securities firms and other factors.

 

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Registration Under the Exchange Act

The shares of Steel Excel common stock are not currently registered under the Exchange Act. Steel Excel terminated the registration of the Steel Excel common stock under the Exchange Act on May 3, 2016. The shares of Steel Excel common stock also do not constitute “margin securities” under the Regulations of the Board of Governors of the Federal Reserve System.

Exchange Agent Contact Information

The Exchange Agent for the Offer is:

 

LOGO

 

If delivering by mail:

 

American Stock Transfer & Trust Company, LLC

Operations Center

Attn: Reorganization Department

P.O. Box 2042

New York, New York 10272-2042

 

Phone: Toll-free (877) 248-6417

(718) 921-8317

  

If delivering by hand, express mail, courier

or any other expedited service:

 

American Stock Transfer & Trust Company, LLC

Operations Center

Attn: Reorganization Department

6201 15th Avenue

Brooklyn, New York 11219

 

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MERGER AGREEMENT

This section describes the material terms of the merger agreement. The description in this section and elsewhere in this document is qualified in its entirety by reference to the complete text of the merger agreement and the first amendment to the merger agreement, copies of which are attached as Annex A and Annex B, respectively, and are incorporated by reference into this document. This summary does not purport to be complete and may not contain all of the information about the merger agreement that is important to you. We encourage you to read the merger agreement, as amended, carefully and in its entirety. All references to the merger agreement in this document refer to the merger agreement, as amended by the first amendment to the merger agreement.

Explanatory note regarding the merger agreement and the summary of the merger agreement - representations, warranties and covenants in the merger agreement are not intended to function or be relied on as public disclosures

The merger agreement and the summary of terms included in this document have been prepared to provide you with information regarding its terms and are not intended to provide any factual information about Steel Excel, SPLP, Merger Sub or any of their respective subsidiaries or affiliates. Such information can be found elsewhere in this document or in the public filings that SPLP makes with the SEC, as described in the section entitled “Where To Obtain Additional Information.” The representations, warranties and covenants contained in the merger agreement have been made solely for the purposes of the merger agreement as of specific dates and solely for the benefit of parties to the merger agreement and:

 

    are not intended as statements of fact, but rather as a way of allocating the risk between the parties in the event the statements therein prove to be inaccurate;

 

    have been modified or qualified by certain confidential disclosures that were made between the parties in connection with the negotiation of the merger agreement, which disclosures are not reflected in the merger agreement itself;

 

    may no longer be true as of a given date;

 

    may be subject to a contractual standard of materiality in a way that is different from those generally applicable to you or other stockholders and reports and documents filed with the SEC; and

 

    may be subject in some cases to other exceptions and qualifications (including exceptions that do not result in, and would not reasonably be expected to have, a “material adverse effect”).

Accordingly, you should not rely on the representations, warranties or covenants or any descriptions thereof as characterizations of the actual state of facts or condition of SPLP, Steel Excel, Merger Sub or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and warranties may change after the date as of which the representations and warranties were made in the merger agreement, which subsequent information may or may not be fully reflected in SPLP’s public disclosures. Accordingly, the representations and warranties and other provisions of the merger agreement or any description of such provisions should not be read alone, but instead should be read together with the information provided elsewhere in this document and in the documents incorporated by reference into this document. See “Where To Obtain Additional Information.”

 

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The Offer

Principal Terms of the Offer

The merger agreement provides that, subject to the terms and conditions of the offer and the merger agreement, SPLP will, immediately after the offer expires, accept for payment (the time of such acceptance, the “acceptance time”), and promptly after the expiration of the offer pay for, all shares of Steel Excel common stock validly tendered and not withdrawn pursuant to the offer (excluding shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee). The merger agreement provides that the obligation of SPLP to accept for payment, and pay for, the shares validly tendered (and not withdrawn) is subject to the satisfaction or (if permitted) waiver of the conditions of the Offer.

The merger agreement provides that SPLP expressly reserves the right, prior to the expiration of the offer, to waive any of the conditions to the offer, except that SPLP may not waive (a) the minimum tender condition, (b) the majority of the minority tender condition, or (c) the condition that any governmental authority of competent jurisdiction shall not have enacted, issued, promulgated, enforced or entered any law or order (whether temporary, preliminary or permanent) that is then in effect and has the effect of making the offer or the merger illegal or otherwise preventing or prohibiting consummation of the offer or the merger.

In addition, the merger agreement provides that SPLP expressly reserves the right to modify the terms of the offer, except that, without the prior written consent of Steel Excel, SPLP will not (i) reduce the number of shares subject to the offer, (ii) reduce the transaction consideration, (iii) add to the conditions to the offer or change, modify or waive any of the conditions to the offer in a manner adverse to Steel Excel’s unaffiliated stockholders, (iv) extend or otherwise change the expiration date of the offer (except as required or permitted by the merger agreement), (v) change the form of consideration payable in the offer, or (vi) otherwise amend, modify or supplement any of the other terms of the offer in any manner adverse to Steel Excel’s unaffiliated stockholders.

For administrative reasons, the first amendment to the merger agreement provides that SPLP will cause any shares of Steel Excel common stock purchased pursuant to the offer to be contributed to SPH Group LLC and then to SPH Group Holdings LLC, each of which is a wholly owned subsidiary of SPLP. As of the date of this prospectus/offer to exchange, SPH Group Holdings LLC directly owns 6,611,799 shares of Steel Excel common stock, representing approximately 64.2% of the outstanding shares.

Expiration and Extensions of the Offer

The initial expiration date of the offer shall be 12:00 midnight (New York City time) on the twentieth (20th) business day following the commencement of the offer (determined using Exchange Act Rule 14d-1(g)(3)).

The merger agreement provides that SPLP will:

 

    extend the offer for the minimum period required by any rule, regulation, interpretation or position of the SEC or the staff thereof applicable to the offer; and

 

    if, on the expiration date, any condition to the offer has not been satisfied or waived, extend the offer on one or more occasions in consecutive increments of up to five (5) business days each (or such longer period as the parties may agree) until such time as each such condition has been satisfied or waived.

 

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However, (1) in no event will SPLP be required to extend the offer beyond May 31, 2017 or the valid termination of the merger agreement, (2) if, at any otherwise scheduled expiration of the offer, all of the conditions to the offer, except for the minimum tender condition and/or the majority of the minority tender condition, has been satisfied or waived, SPLP will in such situation be required to extend the offer in consecutive increments of up to five (5) business days each but in no event more than fifteen (15) business days in the aggregate (or such other period as the parties may agree), (3) SPLP may extend the offer for up to five (5) business days in order to determine whether the appraisal rights condition to the offer will have been satisfied, and (4) SPLP will extend the offer if requested by the Company special committee, or may extend the offer at its election, in connection with its right to renegotiate the terms of the merger agreement in the event that Steel Excel receives a superior third-party proposal to the offer and the merger.

The offer may not be extended by SPLP except as specifically provided above. The offer also may not be terminated prior to the expiration date unless the merger agreement is validly terminated in accordance with its terms.

Solicitation/Recommendation Statement and Board Recommendation

The merger agreement provides that the Company will disseminate to its unaffiliated stockholders the Solicitation/Recommendation Statement. In accordance with the merger agreement, the Solicitation/Recommendation Statement will include, among other things, the Company board’s recommendation that the unaffiliated stockholders of the Company accept the offer and tender their shares pursuant to the offer.

The Company also represents in the merger agreement that it has been advised that all of its directors and named executive officers who own shares intend to tender such shares pursuant to the offer.

The Merger

Principal Terms of the Merger

The merger agreement provides that as soon as practicable on the date of the closing of the merger, SPLP, Merger Sub and Steel Excel will cause the merger to be consummated under the DGCL by filing a certificate of merger in such form as required by, and executed in accordance with, the DGCL (the “Certificate of Merger”) with the Secretary of State of the State of Delaware and will make all other filings or recordings required under the DGCL in connection with the merger. The merger will become effective at such date and time as the Certificate of Merger is duly filed with the Secretary of State of the State of Delaware or at such subsequent date and time as SPLP and Steel Excel agree and specify in the Certificate of Merger. The merger agreement provides that, at the effective time of the merger (the “effective time”), Merger Sub will be merged with and into Steel Excel, the separate existence of Merger Sub will cease, and Steel Excel will continue as the surviving corporation of the merger (the “surviving corporation”). As a result of the first amendment to the merger agreement, the surviving corporation will be a wholly owned subsidiary of SPH Group Holdings LLC.

The merger agreement provides that, at the effective time, each share of Steel Excel common stock (other than shares held by the Company, any of its subsidiaries, SPLP, Merger Sub or any other subsidiary of SPLP or held by stockholders of the Company who have properly and validly perfected their statutory rights of appraisal in respect of such shares in accordance with Section 262 of the DGCL) issued and outstanding immediately prior to the effective time will be converted into and become the right to receive the transaction consideration, without interest thereon and subject to any required tax withholding.

 

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The parties agreed that the offer and the merger are integrated transactions and that they will treat the exchange of Steel Excel common stock for SPLP preferred units, whether pursuant to the offer or the merger, as a transaction governed by Section 721(a) of the Code.

Adjustments to the Transaction Consideration

The merger agreement provides that if, between the date of the merger agreement and the acceptance time or the effective time, as applicable, any change in the number of issued or outstanding shares of Steel Excel common stock occurs as a result of a reclassification, recapitalization, share split (including a reverse share split), or combination, exchange or readjustment of shares, or any share dividend or share distribution (including any dividend or distribution of securities convertible into Steel Excel common stock) with a record date during such period, the transaction consideration will be equitably adjusted to reflect such change.

Fractional Securities

No fraction of a SPLP preferred unit will be issued by virtue of the offer or the merger, but in lieu thereof each unaffiliated stockholder of Steel Excel that would otherwise be entitled to a fraction of a SPLP preferred unit (after aggregating all fractional SPLP preferred units that otherwise would be received by such unaffiliated stockholder) will, in lieu of such fractional SPLP preferred unit, upon surrender of such unaffiliated stockholder’s stock certificate(s) or book-entry share(s), be paid an amount of cash (rounded to the nearest whole cent), without interest, equal to the product of: (i) such fraction, multiplied by (ii) $25.00, the SPLP preferred unit liquidation preference.

Treatment of Stock Options, Restricted Stock Units, and Restricted Shares in the Merger

The merger agreement provides that at the effective time:

 

    each stock option that is outstanding and unexercised will become fully vested and will as a result of the merger, without any action on the part of the holder of such stock option, be automatically cancelled and the holder will cease to have any rights with respect thereto except the right to receive a cash payment (without interest) equal to the product of (i) the excess, if any, of $17.80 over the exercise price per share of such option and (ii) the number of shares subject to such option. Options with an exercise price that is equal to or greater than $17.80 will be cancelled without any payment being made in respect thereof; and

 

    each unvested restricted share will become fully vested and will as a result of the merger, without any action on the part of the holder of such restricted share, be automatically cancelled and the holder will cease to have any rights with respect thereto except the right to receive, at the option of SPLP, (i) a cash payment (without interest) equal to $17.80 or (ii) the transaction consideration.

Appraisal Rights

Any shares of Steel Excel common stock that are issued and outstanding immediately prior to the effective time and that are held by unaffiliated stockholders who, in accordance with Section 262 of the DGCL, (i) have not voted in favor of adopting the merger agreement or consented thereto in writing, (ii) shall have demanded properly in writing appraisal for such shares, (iii) have otherwise complied in all respects with Section 262 of the DGCL, and (iv) have not effectively withdrawn, lost or failed to perfect their rights to appraisal (the “dissenting stockholders”), will not be converted into the transaction consideration, but at the effective time, by virtue of the merger and without any action on the part of the holder thereof, shall be cancelled and shall cease to exist and each holder of such shares (the “dissenting

 

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shares”) shall cease to have any rights with respect thereto, other than such rights to be paid the fair value of such dissenting shares provided under Section 262 of the DGCL. However, all shares of Steel Excel common stock held by the stockholders of Steel Excel who shall have failed to perfect or who effectively shall have withdrawn or lost their rights to appraisal of such shares of Steel Excel common stock under Section 262 of the DGCL shall thereupon be deemed to have been cancelled and to have been converted, as of the effective time, into the right to receive the merger consideration relating thereto, without interest, upon surrender of the certificate or certificates that formerly evidenced such shares of Steel Excel common stock or, in the case of book-entry shares, upon adherence to the procedures set forth in the letter of transmittal, in each case in accordance with the merger agreement. From and after the effective time, holders of dissenting shares shall not be entitled to vote for any purpose or be entitled to the payment of dividends or other distributions with respect to Steel Excel, the surviving corporation or SPLP (except dividends or other distributions payable to stockholders of record of the Company prior to the effective time).

Certificate of Incorporation and Bylaws of the Surviving Corporation

At the effective time, (i) the certificate of incorporation of Steel Excel, as in effect immediately prior to the effective time, shall be amended as set forth in the merger agreement and, as so amended, shall be the certificate of incorporation of the surviving corporation until thereafter amended in accordance with the provisions thereof and applicable Law, and (ii) the bylaws of the Company, as in effect immediately prior to the effective time, shall be amended in their entirety to conform to the bylaws of Merger Sub in effect immediately prior to the effective time and, as so amended, shall by the bylaws of the surviving corporation until thereafter amended in accordance with the provisions thereof, the certificate of incorporation of the surviving corporation and applicable law.

Changes of Directors and Officers in Connection with the Merger

The merger agreement provides that from and after the effective time, (i) the directors of Merger Sub immediately prior to the effective time will be the initial directors of the surviving corporation, and (ii) the officers of Merger Sub immediately prior to the effective time will be the initial officers of the surviving corporation, each to hold office in accordance with the certificate of incorporation and bylaws of the surviving corporation until their respective successors are duly elected or appointed and qualified or until the earlier of their death, resignation or removal. As of the date of this prospectus/offer to exchange, the officers and directors of Merger Sub are Warren G. Lichtenstein, Jack L. Howard and Douglas B. Woodworth.

Representations and Warranties

In the merger agreement, Steel Excel has made customary representations and warranties to SPLP, including representations relating to, among other things: corporate existence and power; corporate authorization; qualification to do business; good standing; enforceability; subsidiaries; capitalization; no conflict; required filings and consents; state anti-takeover statutes; SEC reports; absence of certain changes or events; permits; compliance with applicable law and orders; financial statements; absence of certain undisclosed liabilities; absence of litigation; employee benefit plans; labor matters; real property and leases; material contracts; intellectual property; tax matters; environmental matters; brokers; and insurance.

In the merger agreement, SPLP and Merger Sub have made customary representations and warranties to Steel Excel, including representations relating to, among other things: corporate existence and power; corporate authorization; good standing; enforceability; no conflict; required filings and consents; SEC reports; financial statements; capitalization; absence of certain changes or events; interim operations of Merger Sub; brokers; and absence of litigation.

 

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Material Adverse Effect

Certain of the representations and warranties contained in the merger agreement and certain of the conditions to the offer contained in the merger agreement refer to the concept of a “material adverse effect.”

The merger agreement defines a “company material adverse effect” as any change, event, circumstance, occurrence, development or effect (any such item, an “effect”), individually or when taken together with all other effects, that is, or would reasonably be expected to be, materially adverse to (A) the properties, assets, liabilities, business, financial condition or results of operations of Steel Excel and its subsidiaries, taken as a whole, or (B) the ability of Steel Excel to perform its obligations under the merger agreement or consummate the transactions contemplated thereby, except in each case for any such effect resulting from or arising out of the following:

 

  1. any changes in interest rates;

 

  2. general economic conditions in the United States of America or foreign countries or changes therein;

 

  3. U.S. or foreign financial, banking or securities market conditions or changes therein;

 

  4. any event or change in conditions generally affecting Steel Excel’s or any of its subsidiaries’ industries;

 

  5. any change in or interpretations of GAAP or any law;

 

  6. changes in the market price or trading volume of Steel Excel’s stock (except that the underlying facts or occurrences giving rise or contributing to such changes will be taken into account in determining whether there has been a material adverse effect);

 

  7. any failure by Steel Excel to meet internal or published estimates of revenues, earnings or other financial projections, or projections or forecasts of any other person, of revenues, earnings or cash flow for any period ending on or after the date of the merger agreement (except that the underlying facts or occurrences giving rise or contributing to such failure will be taken into account in determining whether there has been a material adverse effect);

 

  8. any pandemic, earthquake, hurricane, tornado or other natural disaster or act of God;

 

  9. national or international political conditions, including any engagement in or escalation of hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any act of sabotage or military or terrorist attack;

 

  10. the announcement or pendency of the merger agreement, including, to the extent arising out of or resulting therefrom, (A) the termination or potential termination (or the failure or potential failure to renew or enter into) of contracts with actual or potential customers, suppliers, distributors, resellers, licensors or other business partners, or any other negative development (or potential negative development) in the relationship of Steel Excel or any of its subsidiaries with any of their respective customers, suppliers, distributors, resellers, licensors or other business partners, (B) the loss or departure of any officers or other employees of Steel Excel or any of its subsidiaries, or (C) any decline or other degradation in Steel Excel’s or any of its subsidiaries’ customer bookings; or

 

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  11. the taking of any action expressly provided by the merger agreement or consented to in writing by SPLP or Merger Sub.

However, in the case of items (1) through (5), (8) and (9) above, if the effect materially disproportionately affects the properties, assets, liabilities, business, financial condition, results of operations or prospects of Steel Excel and its subsidiaries relative to other for-profit industry participants, then only the extent of such disproportionate effects, if any, will be taken into account when determining whether there is, or would reasonably expected to be, a “material adverse effect”.

Conduct of Business

Covenants of Steel Excel

The merger agreement provides that, between the date of the merger agreement and the effective time, except as expressly contemplated by the merger agreement, Steel Excel will, and will cause each of its subsidiaries to:

 

    conduct its business in, and not take any action except in, the ordinary course of business; and

 

    use its reasonable best efforts to preserve substantially intact the business organization of Steel Excel and its subsidiaries, to keep available the services of the current officers, employees and consultants of Steel Excel and its subsidiaries, and to preserve, in all material respects, the current relationships of Steel Excel and its subsidiaries with customers, licensees, suppliers and other persons with which Steel Excel or any of its subsidiaries has business relations. The foregoing obligations will not require any expenditure of money (or commitment thereto) by Steel Excel unless directed in writing by SPLP.

The merger agreement also provides that, except (a) as expressly contemplated by the merger agreement, (b) as directed in writing by SPLP, Merger Sub or of any affiliate thereof, or (c) as specifically approved by the Company board or a standing committee (other than the special committee) thereof (and in the case of committee approval, specifically disclosed to the Company board) prior to the date of the merger agreement, neither Steel Excel nor any of its subsidiaries will, between the date of the merger agreement and the effective time, directly or indirectly, do or agree to do any of the following without the prior written consent of SPLP (such consent not to be unreasonably withheld, conditioned or delayed):

 

    make, revoke or change any tax election, change any method of tax accounting, settle, compromise or incur any liability for taxes, fail to timely file any tax return that is due, file any amended tax return or claim for refund, surrender any right to claim a tax refund, or consent to any extension or waiver of the statute of limitations period applicable to any tax claim or assessment, in each case except as required by GAAP or applicable law;

 

    change the accounting principles used by it unless required by a change in GAAP, applicable law or any governmental authority;

 

    except for short-term borrowings incurred in the ordinary course of business under its existing credit facility, incur or guarantee indebtedness for borrowed money or commit to borrow money, make any loans or cancel, release or assign any indebtedness to any person;

 

    make any capital expenditure in excess of $250,000 in the aggregate;

 

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    acquire, lease or license from any person (by merger, consolidation, acquisition of stock or assets or otherwise), or sell, lease, license, dispose or effect an encumbrance of (by merger, consolidation, sale of stock or assets or otherwise), any material assets other than in the ordinary course of business;

 

    change any compensation arrangement or contract with any present or former employee (except for increases in the base salaries of employees other than officers or senior managers in the ordinary course of business), officer, director, consultant, stockholder or other service provider of Steel Excel or any of its subsidiaries or grant any severance or termination or change in control pay to any such present or former employee, officer, director, consultant, stockholder or other service provider or increase any benefits payable under any severance or termination or change in control pay policies or establish, amend or terminate any benefit plan or increase benefits under any benefit plan, or grant any equity awards or other awards under any stock plan, in each case other than as (a) required pursuant to the terms of any benefit plan or contract as in effect on the date of the merger agreement, (b) annual merit based raises for employees (other than officers) in an amount and on a schedule consistent with past practice or (c) required by law;

 

    declare, set aside or pay any dividend or make any other distribution with respect to equity interests of Steel Excel or any of its subsidiaries, or otherwise make any payments to stockholders in their capacity as such, other than dividends or distributions payable by a directly or indirectly wholly owned subsidiary of the Company to the Company or to another directly or indirectly wholly owned subsidiary of the Company;

 

    effect a “plant closing” or “mass layoff,” as those terms are defined in the Worker Adjustment and Retraining Notification Act;

 

    (i) except as otherwise required pursuant to an existing contract, issue, deliver, sell, pledge, transfer, convey, dispose of or permit the imposition of an encumbrance on any equity interests, or any options, warrants, securities exercisable, exchangeable or convertible into any equity interest, or any right to acquire any equity interest or any voting debt, other than the issuance of shares upon the exercise of options outstanding as of the date of the merger agreement, (ii) redeem, purchase or otherwise acquire, or propose to redeem, purchase or otherwise acquire, any of its outstanding equity interests or (iii) split, combine, subdivide or reclassify any equity interests;

 

    enter into any contract providing for the sale or license of material intellectual property (other than ordinary course software licenses);

 

    except as otherwise provided in the merger agreement, modify, amend or terminate, or waive, release or assign any material rights or claims with respect to, any confidentiality agreement or non-competition agreement or standstill contract that relates to a business combination involving Steel Excel or any of its subsidiaries;

 

    lease, license, mortgage, hypothecate, pledge, sell, sublease, grant any material encumbrance affecting and/or transfer any interest in any owned or leased real property, or enter into any material amendment or extension, or termination, of any leasehold interest in any leased real property or create any new leasehold interest in any leased real property;

 

    take any action that is intended or would reasonably be expected to result in any of the conditions to the offer or the merger not being satisfied;

 

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    make any acquisition of, capital contribution to, or investment in, any assets or stock of any person (other than any wholly owned subsidiary) (whether by way of merger, consolidation, tender offer, share exchange or other activity);

 

    merge or consolidate with any person (other than mergers among wholly owned subsidiaries);

 

    enter into, terminate, materially amend or waive any material rights under any material contract, except for those contracts which terminate or expire in accordance with their terms;

 

    waive, release, assign, settle or compromise any material claim or any material action, suit or proceeding;

 

    satisfy, discharge, waive or settle any material liabilities, other than in the ordinary course of business;

 

    fail to maintain in full force and effect or fail to use commercially reasonable efforts to replace or renew any insurance policies existing as of the date of the merger agreement;

 

    amend its certificate of incorporation, bylaws or other organizational or governing documents; or

 

    enter into any contract to do any of the foregoing.

Covenants of SPLP

Except as otherwise expressly contemplated by the merger agreement, neither SPLP nor any of its subsidiaries shall, between the date of the merger agreement and the effective time, directly or indirectly, do or agree to do any of the following without the prior written consent of the Company (such consent not to be unreasonably withheld, conditioned or delayed):

 

    split, combine, subdivide or reclassify any equity interests;

 

    take any action that is intended or would reasonably be expected to result in any of the conditions to the offer or the merger not being satisfied;

 

    amend its certificate of incorporation, bylaws or other organizational or governing documents in a manner that would prohibit, or hinder, impede or delay in any material respect, the offer, the merger or the consummation of the other transactions contemplated by the merger agreement; or

 

    enter into any contract to do any of the foregoing.

Additional Agreements

Access to Information

The merger agreement provides that from the date of the merger agreement to the effective time and in compliance with applicable laws, Steel Excel will, and will cause its subsidiaries and the officers, directors, employees, auditors, investment bankers, counsel, agents and other representatives (“Representatives”) of Steel Excel and its subsidiaries to afford the Representatives of SPLP reasonable access at all reasonable times to the officers, employees, properties, offices and other facilities, books and records of Steel Excel and each subsidiary, and will furnish SPLP with such financial, operating and other data and information as SPLP, through its Representatives, may reasonably request, subject to the terms of any pre-existing confidentiality obligation which restricts such access.

 

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No Solicitation; Acquisition Proposals

The merger agreement provides that from the date of the merger agreement until the effective time or, if earlier, the termination of the merger agreement in accordance with its terms, none of Steel Excel, its subsidiaries or any of their respective Representatives will, directly or indirectly:

 

    initiate, solicit or encourage (including by way of providing information) the submission of any inquiries, proposals or offers that constitute or may reasonably be expected to lead to any acquisition proposal (as defined below) or engage in any discussions or negotiations with respect thereto or otherwise cooperate with or assist or participate in, or facilitate any such inquiries, proposals, offers, discussions or negotiations; or

 

    approve or recommend, or propose to approve or recommend, an acquisition proposal or enter into any merger agreement, letter of intent, agreement in principle, share purchase agreement, asset purchase agreement or share exchange agreement, option agreement or other similar agreement providing for or relating to an acquisition proposal or enter into any agreement or agreement in principle requiring Steel Excel to abandon, terminate or fail to consummate the transactions contemplated by the merger agreement or breach any of its obligations under the merger agreement or propose or agree to do any of the foregoing.

Subject to the terms of the merger agreement, Steel Excel will immediately cease and cause to be terminated any solicitation, encouragement, discussion or negotiation with any person conducted prior to the date of the merger agreement by Steel Excel or any of its subsidiaries or any of their respective Representatives with respect to any acquisition proposal and use its (and will cause its subsidiaries and their respective Representatives to use their) reasonable best efforts to cause to be returned or destroyed all confidential information provided or made available to any such person on behalf of Steel Excel or any of its subsidiaries.

The merger agreement provides that, notwithstanding anything to the contrary, if at any time following the date of the merger agreement and prior to the acceptance time, (i) Steel Excel has received a written acquisition proposal that did not result from a breach of the no solicitation provisions from a third party that the Company special committee believes in good faith to be bona fide, (ii) the Company board and/or the special committee determines in good faith, after consultation with its independent financial advisors and outside counsel, that such acquisition proposal constitutes or could reasonably be expected to result in a superior proposal (as defined below), (iii) Steel Excel has complied with the terms of the no solicitation provisions in all material respects, and (iv) the Company board and/or the special committee determines in good faith, after consultation with outside counsel, that failure to take such action would be inconsistent with the directors’ fiduciary duties under applicable law, then Steel Excel (acting through the special committee) may:

 

    furnish information with respect to Steel Excel and its subsidiaries to the person making such acquisition proposal; and

 

    participate in discussions or negotiations with the person making such acquisition proposal regarding such acquisition proposal; provided, that Steel Excel will not, and will not allow any of its Representatives to, disclose any material non-public information to such person without entering into a customary confidentiality agreement with such person as provided in the merger agreement, and will promptly provide or make available to SPLP any material non-public information concerning Steel Excel or any of its subsidiaries provided to such other person which was not previously provided or made available to SPLP.

 

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The merger agreement provides that Steel Excel will promptly (and in any event within two (2) business days) notify SPLP if it receives an acquisition proposal from a person or group of related persons, including the material terms and conditions thereof and the identity of the person making such acquisition proposal and will keep SPLP apprised and, at SPLP’s request, will update SPLP as to the status and any material developments, discussions and negotiations concerning such acquisition proposal.

As defined in the merger agreement, “acquisition proposal” means any inquiry, offer or proposal (other than from SPLP, Merger Sub or their respective affiliates) concerning any of the following:

 

    direct or indirect merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving Steel Excel or any of its subsidiaries, the assets or business of which constitutes or generates thirty percent (30%) or more of the revenues, net income or assets of Steel Excel and its subsidiaries on a consolidated basis (a “significant subsidiary”);

 

    direct or indirect sale, lease, pledge or other disposition of assets of Steel Excel or any of its subsidiaries (including equity interests of any subsidiary) or businesses that constitute or generate thirty percent (30%) or more of the revenues, net income or assets of Steel Excel and its subsidiaries on a consolidated basis, in a single transaction or a series of related transactions;

 

    transaction or series of related transactions in which any person or group (other than SPLP, Merger Sub or their respective affiliates) acquires beneficial ownership, or the right to acquire beneficial ownership, of thirty percent (30%) or more of the outstanding equity interests of Steel Excel or any significant subsidiary; or

 

    other purchase or sale of, or tender offer or exchange offer for, equity interests of Steel Excel or any of its significant subsidiaries that, if consummated, would result in any person beneficially owning thirty percent (30%) or more of the outstanding equity interests of Steel Excel or significant subsidiary.

As defined in the merger agreement, “superior proposal” means any bona fide written acquisition proposal (with all references therein to “thirty percent (30%)” being deemed to be references to “eighty percent (80%)”), not obtained in violation of the no solicitation provisions of the merger agreement, that the Company board and/or the special committee determines in its good faith judgment (after receiving the advice of its financial and legal advisors and after taking into account all appropriate legal (with the advice of outside legal counsel), regulatory and financial aspects, including the financing terms thereof and the conditionality and the timing and likelihood of consummation of such proposal, and the person making the proposal) is more favorable to Steel Excel’s unaffiliated stockholders from a financial point of view than the merger agreement (considering any changes to the merger agreement agreed in writing by SPLP in response thereto) and which the Company board and/or the special committee determines in good faith is reasonably likely to be consummated on the terms set forth therein.

Board Recommendation Change

The merger agreement provides that neither the Company board nor any committee thereof may directly or indirectly (x) withdraw, qualify or modify in a manner adverse to SPLP or Merger Sub, or publicly propose to withdraw, qualify or modify in a manner adverse to SPLP or Merger Sub, the Company board’s approval of the offer and the merger, or (y) approve or recommend, or publicly propose

 

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to approve or recommend, any acquisition proposal (each of the foregoing, an “adverse recommendation change”). However, if at any time prior to the acceptance time, Steel Excel receives an acquisition proposal which the Company board and/or the special committee concludes in good faith (after consultation with its independent financial advisors and outside legal counsel and, in the case of the Company board, upon recommendation thereof by the special committee) constitutes a superior proposal (after having complied with, and giving effect to all of the adjustments which may be offered by SPLP pursuant to, the merger agreement), and Steel Excel has complied with the no solicitation provisions in all material respects and such acquisition proposal did not result from a breach of such provisions, the Company board and/or the special committee may (upon the recommendation of the special committee in the case of the Company board) (i) cause Steel Excel to terminate the merger agreement to concurrently enter into a definitive agreement with respect to such superior proposal and (ii) effect an adverse recommendation change if the Company board or the special committee, as applicable, determines in good faith, after consultation with outside counsel, that failure to take such action would be inconsistent with its fiduciary duties under applicable law. Notwithstanding the foregoing, Steel Excel may not terminate the merger agreement pursuant to the foregoing clause (i) and any purported termination pursuant to the foregoing clause (i) will be void and of no force and effect, unless concurrently with such termination Steel Excel pays to SPLP the termination fee as provided in the merger agreement and such acquisition proposal continues to constitute a superior proposal. In addition, Steel Excel may not terminate the merger agreement pursuant to the foregoing clause (i), and the Company board and the special committee may not approve or recommend such acquisition proposal or effect an adverse recommendation change pursuant to the foregoing clause (ii) unless Steel Excel has provided prior written notice to SPLP, at least five (5) business days in advance (the “notice period”), of its intention to effect an adverse recommendation change or terminate the merger agreement to enter into a definitive agreement with respect to such superior proposal, which notice must include a written summary of the material terms and conditions of such superior proposal (including the identity of the party making such superior proposal), and contemporaneously provides a copy of the relevant proposed transaction agreements with the party making such superior proposal and any other material documents relating thereto. During the notice period, Steel Excel (acting through the special committee) will, and will cause its Representatives to, negotiate with SPLP in good faith (to the extent SPLP has notified the special committee in writing of SPLP’s desire to negotiate) to make such adjustments in the terms and conditions of the merger agreement, and the Company board and special committee will take into account any changes to the financial and other terms of the merger agreement proposed by SPLP in response to any such written notice by Steel Excel or otherwise, with a view to providing that the acquisition proposal ceases to constitute a superior proposal. Any amendment to the financial terms or other material terms of such superior proposal will require a new written notice by Steel Excel and a new five (5) business day period. Pursuant to the merger agreement, if the notice period (or any new five (5) business day period) ends on a date that is concurrent with, or later than, the date of the scheduled expiration of the offer, at the written request of the special committee, SPLP will, or at its election SPLP may, extend the offer until 12:00 midnight (New York City time) on the date that is the later of (a) two (2) business days following the last day of the applicable notice period (or any new five (5) business day period) or (b) the last day of the minimum period required by applicable law, interpretation or position of the SEC or its staff or the NYSE for any such extension.

The merger agreement further provides that neither the Company board nor any committee thereof may effect an adverse recommendation change (by withdrawing, qualifying or modifying in a manner adverse to SPLP or Merger Sub, or publicly proposing to withdraw, qualify or modify in a manner adverse to SPLP or Merger Sub, the Company board’s approval of the merger and the offer), except that at any time prior to the acceptance time, the Company board and/or the special committee may effect such an adverse recommendation change if the Company board and/or the special committee determines in good faith, after consultation with outside counsel (and upon recommendation thereof by the special committee in the case of the Company board), that, in light of material facts, events or circumstances that have arisen or occurred since the date of the merger agreement that were not known by

 

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or reasonably foreseeable to Steel Excel or the Company board (or the special committee) prior to the date of the merger agreement, other than an acquisition proposal, or an inquiry, proposal or offer that could reasonably be expected to lead to an acquisition proposal, or the consequences thereof (a “Company intervening event”), the failure to take such action would be inconsistent with the directors’ fiduciary duties under applicable law. The Company board and the special committee may not effect an adverse recommendation change pursuant to the foregoing unless Steel Excel has provided prior written notice to SPLP, at least five (5) business days in advance, of its intention to effect such adverse recommendation change, which notice must describe in reasonable detail the underlying facts giving rise to the Company intervening event and the reasons for taking such action. During such five (5) business day period, Steel Excel (acting through the special committee) will, and will cause its Representatives to, negotiate with SPLP in good faith (to the extent SPLP has notified the special committee in writing of SPLP’s desire to negotiate) to make such adjustments in the terms and conditions of the merger agreement, and the Company board and special committee will take into account any changes to the financial and other terms of the merger agreement proposed by SPLP in response to any such written notice by Steel Excel or otherwise, so that the need for effecting an adverse recommendation change is obviated. Any material developments relating to a Company intervening event will require a new written notice by Steel Excel and a new five (5) business day period.

Director and Officer Indemnification

The merger agreement provides that from and after the effective time, the surviving corporation will indemnify and hold harmless, to the fullest extent permitted under applicable law (and the surviving corporation will also advance expenses as incurred to the fullest extent permitted under applicable law; provided, that the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification), each present and former director and officer of Steel Excel and its subsidiaries (collectively, the “Indemnified Parties”) against any and all costs, expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages and liabilities incurred in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative, arising out of or pertaining to any action or omission or matters existing or occurring at or prior to the effective time, including the transactions contemplated by the merger agreement, to the same extent as provided in the certificate of incorporation or bylaws of Steel Excel in effect on the date of the merger agreement.

For six years from the effective time, the merger agreement provides that the surviving corporation and any of its subsidiaries, as applicable will maintain in effect for the benefit of the directors and officers of Steel Excel or such subsidiary currently covered by the officers’ and directors’ liability insurance policies of Steel Excel or such subsidiary, an insurance and indemnification policy with an insurer with a Standard & Poor’s rating of at least A that provides coverage for acts or omissions occurring at or prior to the effective time (the “D&O Insurance”) covering each such person on terms with respect to coverage and in amounts no less favorable in the aggregate than those of Steel Excel’s or such subsidiary’s directors’ and officers’ insurance policy in effect on the date of the merger agreement. However, the surviving corporation or such subsidiary will not be required to pay an annual premium for the D&O Insurance in excess of 200% of the annual premium currently paid by Steel Excel or such subsidiary for such coverage, but if the annual premiums for such insurance coverage exceed 200% of such annual premium, the surviving corporation or such subsidiary will obtain a policy with the greatest coverage available for a cost not exceeding such amount. Each of the surviving corporation and its subsidiaries may satisfy its obligations under the merger agreement by purchasing a “tail” policy from an insurer with a Standard & Poor’s rating of at least A under Steel Excel’s or the applicable subsidiary’s existing directors’ and officers’ insurance policy, that (i) has an effective term of six years from the effective time, (ii) covers each director and officer currently covered by Steel Excel’s or the applicable subsidiary’s directors’ and officers’ insurance policy in effect on the date of the merger agreement for actions and omissions occurring at or prior to the effective time, and (iii) contains terms that are no less favorable in the aggregate than those of Steel Excel’s or the applicable subsidiary’s directors’ and officers’ insurance policy in effect on the date of the merger agreement.

 

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Pursuant to the merger agreement, the certificate of incorporation and bylaws of the surviving corporation will contain provisions no less favorable with respect to indemnification than are set forth in the certificate of incorporation and bylaws, respectively, of Steel Excel, unless any modification thereof is required by law and then such modification will be made only to the minimum extent required by such law, which provisions may not be amended, repealed or otherwise modified, except as provided in the merger agreement, for a period of six years from the effective time in any manner that would affect adversely the rights thereunder of individuals who, at or prior to the effective time, were directors or officers of Steel Excel or any of its subsidiaries.

Nothing in the merger agreement is intended to, will be construed to or will release, waive or impair any rights to directors’ and officers’ insurance claims under any policy that is or has been in existence with respect to Steel Excel or any of its subsidiaries or their respective officers, directors and employees. The indemnification provided for in the merger agreement is not prior to, or in substitution for, any such claims under any such policies. From and after the effective time, the surviving corporation will honor, in accordance with their terms, all indemnification agreements with Steel Excel in effect immediately prior to the effective time that are applicable to Indemnified Parties.

Notwithstanding anything to the contrary in the merger agreement, if any claim, action, suit, proceeding or investigation (whether arising before, at or after the effective time) is made against any Indemnified Party or any other party covered by directors’ and officers’ liability insurance, on or prior to the sixth anniversary of the effective time, the foregoing indemnification provisions will continue in effect until the final disposition of such claim, action, suit, proceeding or investigation.

If the surviving corporation or any of its successors or assigns (i) consolidates with or merges into any other person and will not be the continuing or surviving entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then, and in each such case, proper provision will be made so that the successors and assigns of the surviving corporation will assume the obligations set forth in the merger agreement relating to directors’ and officers’ indemnification.

Reasonable Best Efforts; Consents and Filings

The merger agreement provides that, subject to its terms and conditions, each of SPLP, Merger Sub and Steel Excel will use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by the merger agreement. Upon the terms and subject to the conditions of the merger agreement, each of SPLP, Merger Sub and Steel Excel agrees to use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary to satisfy the conditions to the consummation of the transactions contemplated by the merger agreement to be satisfied by it.

Without limiting the generality of the foregoing, upon the terms and subject to the conditions of the merger agreement and in accordance with applicable law, each of SPLP, Merger Sub and Steel Excel will use reasonable best efforts to as promptly as practicable (i) obtain any consents, approvals or other authorizations from all governmental authorities and other third parties, and make any filings and notifications, required in connection with the transactions contemplated by the merger agreement, and (ii) make any other submissions either required or reasonably deemed appropriate by SPLP or Steel Excel in connection with the transactions contemplated by the merger agreement under the Securities Act, the Exchange Act, the DGCL, the rules and regulations of the NYSE, the rules and regulations applicable to the OTC Market, and any other applicable law. SPLP, Merger Sub and Steel Excel will cooperate and

 

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consult with each other in connection with the making of all such filings and notifications, including by providing copies of all relevant documents (except to the extent containing confidential information of such party) to the non-filing party and its advisors before filing.

Steel Excel will, and will cause its subsidiaries to, to the extent permitted by applicable law, (i) take all actions necessary so that no “fair price,” “moratorium,” “control share acquisition,” “business combination” or other similar antitakeover law (each, a “takeover law”) becomes applicable to any of the transactions contemplated by the merger agreement or the merger agreement and (ii) if any takeover law becomes applicable to any of the transactions contemplated by the merger agreement or the merger agreement, take all actions necessary so that the transactions contemplated by the merger agreement may be consummated as promptly as practicable as contemplated by the merger agreement and otherwise to eliminate or minimize the effect of such takeover law on the transactions contemplated by the merger agreement or the merger agreement.

Public Announcements

The merger agreement provides that SPLP and Merger Sub, on the one hand, and Steel Excel, on the other hand, agree that no public release or announcement concerning the transactions contemplated by the merger agreement will be issued by either party without the prior consent of the other party (which consent will not be unreasonably withheld, conditioned or delayed), except as such release or announcement may be required by law or the rules or regulations of any securities exchange, in which case the party required to make the release or announcement will use its reasonable best efforts to allow the other party reasonable time to comment on such release or announcement in advance of such issuance. However, each party may make any public statement in response to specific questions by the press, analysts, investors or those attending industry conferences or financial analyst conference calls, so long as any such statements are not inconsistent with previous public releases or announcements made in compliance with the merger agreement and do not reveal non-public information regarding the other party.

Advice of Changes

The merger agreement provides that each of SPLP, Merger Sub and Steel Excel will promptly advise the other parties to the merger agreement of any Effect, (i) in having or that would reasonably be expected to have a material adverse effect on such party, or (ii) that constitutes a material breach of any of its representations, warranties or covenants contained in the merger agreement. No such notification will affect the representations, warranties, covenants or agreements of such party (or remedies with respect thereto) or the conditions to the obligations of the parties under the merger agreement. Each party will give prompt written notice to the other parties of any notice or other communication (x) from any person and the response thereto of such party or its Representatives alleging that the consent of such person is or may be required in connection with the merger agreement or any of the transactions contemplated by the merger agreement, and (y) from any governmental authority and the response thereto of such party or its Representatives in connection with the merger agreement or any of the transactions contemplated by the merger agreement.

Benefit Plans and Employee Matters

SPLP agreed that, for a period of at least one year following the closing of the merger, each employee of Steel Excel who continues employment with SPLP, the surviving corporation or any of their respective subsidiaries after the closing (each, a “continuing employee”) will be provided, at SPLP’s election, with benefits on substantially the same terms as those provided to (i) similarly situated employees of SPLP or (ii) such continuing employee by Steel Excel immediately prior to the effective time. Nothing in the merger agreement requires SPLP, the surviving corporation or any of their

 

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respective subsidiaries to continue to employ any particular employee of Steel Excel following the closing of the merger, or will be construed to prohibit SPLP, the surviving corporation or any of their respective subsidiaries from amending or terminating any employee benefit plan of Steel Excel.

SPLP and the surviving corporation will ensure that, as of the closing of the merger, each continuing employee receives full credit (for all purposes, including eligibility to participate, vesting, vacation entitlement and severance benefits) for service with Steel Excel or any of its subsidiaries under each of the comparable employee benefit plans, programs and policies of SPLP, the surviving corporation or the relevant subsidiary, as applicable, in which such continuing employee becomes a participant; provided, however, that no such service recognition will result in any duplication of benefits. As of the closing of the merger, SPLP will, or will cause the surviving corporation or relevant subsidiary to, credit to each continuing employee the amount of vacation time that such employee had accrued under any applicable employee benefit plan of Steel Excel as of the closing. With respect to each health or welfare benefit plan maintained by SPLP, the surviving corporation or the relevant subsidiary for the benefit of any continuing employee, SPLP will (i) cause to be waived any eligibility waiting periods, any evidence of insurability requirements and the application of any pre-existing condition limitations under such plan, and (ii) cause each continuing employee to be given credit under such plan for all amounts paid by such continuing employee under any similar employee benefit plan of Steel Excel for the plan year that includes the closing for purposes of applying deductibles, co-payments and out-of-pocket maximums as though such amounts had been paid in accordance with the terms and conditions of the applicable plan maintained by SPLP, the surviving corporation or the relevant subsidiary, as applicable, for the plan year in which the closing occurs.

Except as specifically set forth above, nothing in the foregoing, whether express or implied, confers upon any current or former director, officer, employee, independent contractor or consultant of the Company or any of its subsidiaries any rights or remedies, including any right to employment or continued employment for any specified period, of any nature or kind whatsoever. None of the foregoing provisions is intended to modify, amend or create any employee benefit plan of the Company, SPLP, the surviving corporation or any of their respective affiliates.

Stock De-Registration

Steel Excel shall use its reasonable best efforts to cause its common stock to no longer be quoted on the OTC Market as soon as practicable following the effective time.

Approval of Merger

Promptly after the acceptance time, if Steel Excel stockholder approval is required by applicable law in order to consummate the merger, SPLP will, and will cause its applicable subsidiaries to, execute and deliver to Steel Excel a consent in writing approving and adopting the merger agreement and the merger. Steel Excel shall deliver prompt notice (and in any event prior to the filing of the Certificate of Merger) of the taking of such action by written consent to those stockholders who have not consented thereto in writing in accordance with Section 228(e) of the DGCL. Steel Excel’s obligations under these provisions will not be affected by the commencement, public proposal, public disclosure or communication to the Company or any other person of any acquisition proposal or by any adverse recommendation change.

Notwithstanding the paragraph above, in the event that SPLP and its subsidiaries acquire that number of shares of Steel Excel common stock which, together with the shares of Steel Excel common stock they already own, constitute in the aggregate at least 90% of the outstanding shares of Steel Excel common stock, pursuant to the offer or otherwise, the parties shall, subject to the conditions set forth in the merger agreement, take all necessary and appropriate action to cause the merger to become effective as soon as practicable after such acquisition, without a meeting or written consent of stockholders of the Company, in accordance with Section 253 of the DGCL.

 

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Parent Preferred Unit

Prior to the acceptance time, SPLP agrees to (a) cause its sixth amended and restated limited partnership agreement to be executed, and (b) use reasonable best efforts to cause the SPLP preferred units to be issued in the offer and the merger to be approved for listing on the NYSE or, if for any reason they cannot be so listed, on the OTC Bulletin Board or OTC Market.

Conditions to the Offer

Completion of the offer is subject to certain conditions, including, among others:

 

    Steel Excel stockholders having validly tendered and not validly withdrawn prior to the expiration of the offer that number of shares of Steel Excel common stock which, when added to the shares of Steel Excel common stock already owned by SPLP and its other subsidiaries, but excluding any shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee, represents at least a majority of all then outstanding shares of Steel Excel common stock;

 

    Steel Excel stockholders having validly tendered and not validly withdrawn prior to the expiration of the offer that number of shares of Steel Excel common stock (but excluding any shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee) which would represent at least a majority of all then outstanding shares of Steel Excel common stock not owned by SPLP or any of its affiliates;

 

    The registration statement on Form S-4 of which this prospectus/offer to exchange is a part having been declared effective by the SEC under the Securities Act, and no stop order having been issued or proceeding seeking a stop order having been initiated or threatened in writing by the SEC;

 

    The SPLP preferred units to be issued in the offer and the merger having been approved for listing on the NYSE, subject to official notice of issuance, or, if for any reason they cannot be so listed, on the OTC Bulletin Board or OTC Market;

 

    The shares of Steel Excel common stock held by stockholders having properly exercised appraisal rights under Delaware law do not exceed ten percent (10%) of the shares of Steel Excel common stock outstanding immediately prior to the expiration of the offer;

 

    No governmental entity having jurisdiction over SPLP, Merger Sub or Steel Excel having enacted, issued, promulgated, enforced or entered any law, order, decree or ruling (whether temporary, preliminary or permanent) that is then in effect and has the effect of making the offer or the merger illegal or otherwise prohibiting consummation of the offer or the merger;

 

    Since the date of the merger agreement, no material adverse effect on the business, financial condition or results of operations of Steel Excel having occurred;

 

    The representations and warranties of Steel Excel contained in the merger agreement being true and correct as of the date of the merger agreement and the expiration date of the offer, subject to specified materiality standards;

 

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    Steel Excel having complied with or performed in all material respects its obligations under the merger agreement; and

 

    The merger agreement not having been terminated in accordance with its terms.

Conditions to the Merger

The merger agreement provides that the respective obligations of SPLP, Merger Sub and Steel Excel to consummate the merger are subject to the satisfaction or waiver (where permissible), at or prior to the closing, of the following conditions:

 

    Merger Sub having previously accepted for payment all shares validly tendered and not validly withdrawn pursuant to the offer; and

 

    no governmental authority having enacted, issued, promulgated, enforced or entered any law or order (whether temporary, preliminary or permanent) that is then in effect and has the effect of making the merger illegal or otherwise preventing or prohibiting consummation of the merger.

Termination of the Merger Agreement

Termination Prior to the Acceptance Time

The merger agreement may be terminated and the offer, the merger and the other transactions contemplated by the merger agreement may be abandoned at any time prior to the acceptance time as follows:

 

    by mutual written consent of each of SPLP and Steel Excel, duly authorized by the SPLP GP Board and the Company board;

 

    by SPLP or Steel Excel, by written notice, if the acceptance time shall not have occurred on or before May 31, 2017. The right to terminate the merger agreement under this provision shall not be available to any party whose failure to fulfill any obligation under the merger agreement has been the cause of, or resulted in, the failure of the acceptance time to have occurred on or before May 31, 2017;

 

    by SPLP or Steel Excel if any governmental authority shall have enacted, issued, promulgated, enforced or entered any order or applicable law or taken any other action (including the failure to take an action) that is, in each case, then in effect and is final and nonappealable and has the effect of preventing or prohibiting the consummation of the offer or the merger. The right to terminate the merger agreement under this provision will not be available to any party whose failure to fulfill any obligation under the merger agreement has been the cause of, or resulted in, any such order or law having been enacted, issued, promulgated, enforced or entered or any such action having been taken or omitted to be taken;

 

    by written notice of SPLP if any of the following actions or events occurs, whether or not they are permitted by the terms of the merger agreement (any such termination, a “Steel Excel adverse recommendation change termination”):

 

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    the Company board (or any committee thereof) withdraws, qualifies, amends, modifies or changes its approval of the offer and the merger in a manner adverse to SPLP or resolves or publicly proposes to do so;

 

    the Company board (or any committee thereof) approves or recommends an acquisition proposal or resolves or publicly proposes to do so or Steel Excel enters into any letter of intent or similar document or any contract accepting any acquisition proposal;

 

    Steel Excel breaches in any material respect the no solicitation provisions of the merger agreement;

 

    at any time after public announcement of an acquisition proposal, the Company board fails to reaffirm its recommendation of the merger agreement and the transactions contemplated by the merger agreement within three (3) business days of receipt of any written request to do so by SPLP; or

 

    any tender or exchange offer (other than the offer) is commenced that, if successful, would result in any person or group becoming the beneficial owner of 20% or more of the outstanding shares of Steel Excel common stock and the Company board, within ten (10) business days after the commencement thereof, has not recommended that Steel Excel’s stockholders reject such tender or exchange offer and not tender their shares into such tender or exchange offer.

 

    by written notice of SPLP (if SPLP or Merger Sub is not in material breach of its obligations or its representations and warranties under the merger agreement), if there has been a breach by Steel Excel of any of its representations, warranties, covenants or agreements contained in the merger agreement, or if any representation or warranty of Steel Excel has become untrue, in either case that would reasonably be expected to result in a failure of the conditions to the offer relating to Steel Excel’s representations, warranties and covenants; provided, that if such breach is reasonably curable by Steel Excel within twenty (20) days after the occurrence of such breach through the exercise of its reasonable best efforts and for as long as Steel Excel continues to exercise such reasonable best efforts, SPLP may not terminate the merger agreement pursuant to the foregoing provisions until the earlier of the expiration of such twenty (20)-day period and May 31, 2017;

 

    by written notice of Steel Excel (if Steel Excel is not in material breach of its obligations or its representations and warranties under the merger agreement), if there has been a breach by SPLP or Merger Sub of any of its representations, warranties, covenants or agreements contained in the merger agreement, or if any representation or warranty of SPLP or Merger Sub has become untrue, in either case that would reasonably be expected to have a material adverse effect on SPLP; provided, that if such breach is reasonably curable by SPLP within twenty (20) days after the occurrence of such breach through the exercise of its reasonable best efforts and for as long as SPLP continues to exercise such reasonable best efforts, Steel Excel may not terminate the merger agreement pursuant to the foregoing provisions until the earlier of the expiration of such twenty (20)-day period and May 31, 2017;

 

    by written notice of Steel Excel in accordance with the terms of the merger agreement relating to an adverse recommendation change, if Steel Excel concurrently enters into a definitive agreement with respect to a superior proposal; provided, that Steel Excel will not have the right to terminate the merger agreement pursuant to the foregoing provision unless Steel Excel has complied with the no solicitation provisions of the merger agreement and has paid, or simultaneously with the termination of the merger agreement pays, to Purchaser the termination fee (as defined in “— Fees and Expenses” below); or

 

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    by SPLP or Steel Excel, by written notice, if the offer has been terminated or has expired (and not been extended) in accordance with its terms and the terms of the merger agreement without SPLP being required to accept for payment any shares pursuant to the offer; provided, however, that the right to terminate the merger agreement pursuant to the foregoing provision will not be available to any party whose failure to fulfill any obligation under the merger agreement has been the cause of, or resulted in, the failure of the acceptance time to have occurred by such date.

Effect of Termination

The merger agreement provides that in the event of the termination of the merger agreement, as described above, the merger agreement will immediately become void, and there will be no liability on the part of any party to the merger agreement or any of their respective affiliates or the directors, officers, employees, agents or other Representatives of any of them, and all rights and obligations of each party thereto will cease, except for the provisions relating to confidentiality, public announcements, the effect of termination, fees and expenses and the general provisions of the merger agreement, all of which will survive the termination of the merger agreement, and except for any willful or intentional breach by a party of any of its representations, warranties, covenants or agreements set forth in the merger agreement (which willful or intentional breach and liability therefor will not be affected by termination of the merger agreement). Notwithstanding anything to the contrary contained in the merger agreement, nothing will limit or prevent any party to the merger agreement from exercising any rights or remedies under the provisions relating to specific performance in lieu of terminating the merger agreement.

Fees and Expenses

The merger agreement provides that, except as otherwise provided below, all fees and out-of-pocket expenses incurred in connection with the merger agreement and the transactions contemplated by the merger agreement will be paid by the party incurring such expenses, whether or not any of the transactions contemplated by the merger agreement is consummated.

The merger agreement provides that if the merger agreement is terminated:

 

  1. pursuant to a Steel Excel adverse recommendation change termination (if SPLP or Merger Sub is not then in material breach of any of its obligations, representations or warranties under the merger agreement), other than a breach by Steel Excel of the no solicitation provisions of the merger agreement;

 

  2. because Steel Excel has concurrently entered into a definitive agreement with respect to a superior proposal;

 

  3.

(A) (i) because the acceptance time has not occurred on or before May 31, 2017 (if SPLP or Merger Sub is not then in material breach of any of its obligations, representations or warranties under the merger agreement) and, at any time after the date of the merger agreement but prior to May 31, 2017, an acquisition proposal has been publicly disclosed or otherwise becomes generally known to the public and is not withdrawn or terminated, (ii) because of a breach by Steel Excel of any of its representations, warranties, covenants or agreements contained in the merger agreement (other than the no solicitation provisions of the merger agreement) and, at any time after the date of the merger agreement and prior to the breach giving rise to the right of SPLP to terminate the merger

 

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  agreement, an acquisition proposal has been publicly disclosed or otherwise becomes generally known to the public and is not withdrawn or terminated, or (iii) because the offer has been terminated or has expired without SPLP being required to accept for payment any shares pursuant to the offer (and in such case the majority of the minority tender condition was not satisfied as of the expiration or termination of the offer) and, at any time after the date of merger agreement and prior to the expiration or termination of the offer, an acquisition proposal has been publicly disclosed or otherwise becomes generally known to the public and is not withdrawn or terminated, and (B) in the case of any of the foregoing provisions, within twelve (12) months after the date of such termination, Steel Excel enters into a definitive agreement with respect to or consummates an acquisition proposal (provided that, with respect to use of the term “acquisition proposal” in the foregoing provisions, all references in the definition thereof to “thirty percent (30%)” will be deemed to be “fifty percent (50%)”); or

 

  4. because Steel Excel breaches in any material respect any of the no solicitation provisions of the merger agreement,

then:

 

    Steel Excel will pay SPLP an amount equal to $2,000,000 (the “termination fee”) and will reimburse SPLP’s documented transaction costs not to exceed $1,000,000, by wire transfer of immediately available funds, (a) within three (3) business days after the termination of the merger agreement in the case of the foregoing paragraph (1), (b) concurrently with such termination, in the case of the foregoing paragraph (2), and (c) upon the earlier of entry into the definitive agreement with respect to, or consummation of, an acquisition proposal within twelve (12) months after the date of termination, in the case of the foregoing paragraph (3); or

 

    Steel Excel will reimburse SPLP’s documented transaction costs not to exceed $1,000,000, by wire transfer of immediately available funds, within three (3) business days after the termination of the merger agreement, in the case of the foregoing paragraph (4); provided, that if Steel Excel within twelve (12) months after the date of such termination enters into a definitive agreement with respect to or consummates an acquisition proposal, Steel Excel will also pay SPLP the termination fee by wire transfer of immediately available funds, upon the earlier of entry into the definitive agreement with respect to, or consummation of, such acquisition proposal.

In no event will payment of more than one termination fee be made by Steel Excel pursuant to the foregoing provisions.

Any and all rights and remedies of Steel Excel under the termination and fee and expense provisions of the merger agreement will be exercised by Steel Excel at the direction of the Company special committee.

Amendment of the Merger Agreement

The merger agreement may be amended by the parties by action taken by or on behalf of their respective boards of directors (in the case of SPLP, the SPLP GP Board) at any time prior to the closing of the merger; provided that, after the acceptance time, no amendment may be made that would reduce the amount or change the type of consideration into which each share of Steel Excel common stock will be converted upon consummation of the merger or that would result in the merger not being consummated as promptly as practicable after the acceptance time. The merger agreement may only be amended pursuant to a written agreement signed by each of the parties. Any amendment to the merger agreement requires the approval of the special committee.

 

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COMPARATIVE MARKET PRICE AND DIVIDEND MATTERS

Market Price History

SPLP’s common units are listed on the NYSE under the symbol “SPLP.” On April 1, 2016, Steel Excel common stock commenced trading on the OTC Market under the symbol “SXCL.” Prior to such date, Steel Excel common stock was listed on the Nasdaq Capital Market from July 7, 2015 through March 31, 2016 under the ticker symbol “SXCL” and before that, Steel Excel common stock was traded in the over the counter market and quoted on the OTCQB marketplace under the ticker symbol “SXCL.” The following table sets forth, for the periods indicated, as based on published financial sources, the high and low sale or bid prices, as applicable, of each company’s common stock or common units, as applicable.

 

     SPLP Common Units      Steel Excel Common Stock  
     High      Low      Distribution      High      Low      Dividend  

2014

                 

First Calendar Quarter

   $ 17.66       $ 15.68         N/A       $ 32.50       $ 28.10         N/A   

Second Calendar Quarter

   $ 17.23       $ 15.74         N/A       $ 36.10       $ 30.05         N/A   

Third Calendar Quarter

   $ 17.00       $ 16.13         N/A       $ 34.50       $ 30.10         N/A   

Fourth Calendar Quarter

   $ 18.56       $ 15.50         N/A       $ 32.00       $ 23.00         N/A   

2015

                 

First Calendar Quarter

   $ 19.50       $ 16.30         N/A       $ 25.25       $ 20.75         N/A   

Second Calendar Quarter

   $ 19.37       $ 17.07         N/A       $ 21.75       $ 18.01         N/A   

Third Calendar Quarter

   $ 17.79       $ 16.05         N/A       $ 23.84       $ 15.64         N/A   

Fourth Calendar Quarter

   $ 17.96       $ 16.10         N/A       $ 20.35       $ 12.46         N/A   

2016

                 

First Calendar Quarter

   $ 16.49       $ 12.86         N/A       $ 15.06       $ 9.63         N/A   

Second Calendar Quarter

   $ 15.86       $ 14.00         N/A       $ 10.50       $ 9.25         N/A   

Third Calendar Quarter

   $ 15.42       $ 14.25         N/A       $ 11.50       $ 9.45         N/A   

Fourth Calendar Quarter

   $ 16.20       $ 13.70         N/A       $ 15.18       $ 10.90         N/A   

2017

                 

First Calendar Quarter

(through January 20, 2017)

   $ 16.65       $ 15.20         N/A       $ 17.00       $ 15.20         N/A   

On December 7, 2016, the trading day prior to public announcement of the execution of the merger agreement, the closing price per share of Steel Excel common stock on the OTC Market was $11.50, and the closing price per SPLP common unit on the NYSE was $14.60. On January 20, 2017, the most recent practicable trading date prior to the filing of this document, the closing price per share of Steel Excel common stock on the OTC Market was $16.61, and the closing price per SPLP common unit on the NYSE was $16.65.

 

     Per-Share Steel
Excel
Closing Price
     Per-Unit
SPLP
Closing Price
 

December 7, 2016

   $ 11.50       $ 14.60   

January 20, 2017

   $ 16.61       $ 16.65   

The SPLP preferred units are a new series of units to be issued pursuant to the offer and the merger; we intend to file an application to list the SPLP preferred units on the NYSE under the symbol “SPLPPRA.” The value of the transaction consideration, which is based on the liquidation preference of the SPLP preferred units, is fixed and will not change due to fluctuations in the market value of any SPLP securities or the Steel Excel common stock during the offer period. Steel Excel stockholders should obtain current market quotations for shares of Steel Excel common stock before deciding whether to tender their Steel Excel shares in the offer.

 

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Dividends/Distributions

SPLP has not paid regular cash distributions in the last five years and has no current plans to do so. On December 22, 2016, SPLP announced that the SPLP GP Board declared a special, one-time cash distribution of $0.15 per common unit, payable January 13, 2017, to unitholders of record as of January 3, 2017. Any future determination to declare distributions on SPLP’s common units will remain at the discretion of the SPLP GP Board and will be dependent upon a number of factors, including SPLP’s results of operations, cash flows, financial position and capital requirements, among others. No cash dividends have been paid or declared on Steel Excel common stock in the last five years.

 

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OVERVIEW OF STEEL EXCEL

General

Steel Excel and its subsidiaries currently operate in two reporting segments - Energy and Sports. Through its wholly-owned subsidiary Steel Energy Services Ltd. (“Steel Energy Services”), the Company’s Energy business provides drilling and production services to the oil and gas industry. Through its wholly-owned subsidiary Steel Sports Inc., the Company’s Sports business is a social impact organization that strives to provide a first-class youth sports experience emphasizing positive experiences and instilling the core values of discipline, teamwork, safety, respect, and integrity. The Company also makes significant non-controlling investments in entities in industries related to its reporting segments as well as entities in other unrelated industries. The Company continues to identify business acquisition opportunities in both the Energy and Sports industries as well as in other unrelated industries.

Through September 2010, the Company provided enterprise-class external storage products and software to original equipment manufacturers, at which time the Company wound down its remaining business operations. At such time the Company focused on capital redeployment and identification of new business opportunities in which it could utilize existing working capital and maximize the use of net operating losses.

The Company began its Energy business in December 2011 with the acquisition of the business and assets of Rogue Pressure Services, LLC (“Rogue”). The Company expanded the business with the acquisition of the business and assets of Eagle Well Services, Inc. (“Eagle Well”), in February 2012 and the acquisition of Sun Well Service, Inc. (“Sun Well”) in May 2012, both of which operate as Sun Well Service as a combined business. In December 2013, the Company further expanded its Energy business with the acquisition by its wholly-owned subsidiary, Black Hawk Energy Services Ltd. (“Black Hawk Ltd.”), of the business and assets of Black Hawk Energy Services, Inc. (“Black Hawk Inc.”).

The Company began its Sports business in June 2011 with the acquisition of the assets of Baseball Heaven LLC (“Baseball Heaven”), a provider of a wide variety of baseball services, including tournaments, training, teams, and camps. In August 2011, the Company acquired a 75% membership in The Show, LLC (“The Show”), a provider of baseball uniforms to Little League and softball players and coaches. The Company expanded the business in November 2012 with the acquisition of a 50% interest in two Crossfit® facilities located in Torrance, CA, and Hermosa Beach, CA, and in 2014 the Company increased its ownership interest in the Torrance Crossfit® facility to approximately 86%. In January 2013, the Company acquired a 20% membership interest in Ruckus Sports LLC (“Ruckus”), an obstacle course and mass-participation events company that was controlled by the Company through its majority representation on the Ruckus board. The Company increased its membership interest in Ruckus to 45% during 2013. Also in January 2013, the Company acquired a 40% membership interest in Again Faster LLC (“Again Faster”), a fitness equipment company that is accounted for as an equity-method investment. In June 2013, the Company further expanded its Sports business with the acquisition of 80% of UK Elite Soccer, Inc. (“UK Elite”), a provider of youth soccer programs, coaching services, tournaments, tours, and camps.

In July 2012 and November 2013 the Company shut down The Show and Ruckus, respectively, after they did not meet operational and financial expectations. The Show and Ruckus are each reported as discontinued operations in the Company’s consolidated financial statements. In September 2015, the Company fully impaired its investment in Again Faster based on the state of the business and the available strategic alternatives. In January 2016, the Company exchanged its 50% interest in the Hermosa Crossfit® facility for the remaining 14% interest in the Torrance Crossfit® facility.

 

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The Company effected a 1-for-500 reverse stock split (the “Reverse Split”) in June 2014, immediately followed by a 500-for-1 forward stock split (the “Forward Split”, and together with the Reverse Split, the “Reverse/Forward Split”), of its common stock. As a result of the Reverse Split, stockholders holding fewer than 500 shares received a cash payment for all of their outstanding shares based on a per share price equal to the closing price of the Company’s common stock on June 18, 2014, the effective date of the Reverse/Forward Split. Stockholders holding 500 or more shares as of the effective date of the Reverse/Forward Split did not receive any payments for fractional shares resulting from the Reverse Split, and therefore the total number of shares held by such holders did not change as a result of the Reverse/Forward Split.

In December 2010, Steel Excel changed its fiscal year-end date from March 31 to December 31. Accordingly, Steel Excel had a nine-month transition period from April 1, 2010, to December 31, 2010.

The Company was incorporated in California in 1981 under the name “Adaptec, Inc.”, and reincorporated in Delaware in March 1998. The Company subsequently changed its name to “ADPT Corporation” in June 2010 and to “Steel Excel Inc.” in October 2011. The Company’s website is http://www.steelexcel.com. The Company’s website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.

Segment Information

See Note 21 to the Company’s audited consolidated financial statements for information regarding segments.

Services

Energy business. The Energy business provides various services to exploration and production companies in the oil and gas business. The services provided include well completion and recompletion, well maintenance and workover, snubbing, flow testing, down hole pumping, plug and abatement, and rental of auxiliary equipment. Prior to the acquisition of the Black Hawk business in December 2013, the Energy business primarily provided its services to customers’ extraction and production operations in North Dakota and Montana in the Bakken basin, and to a lesser extent serviced customers in Colorado and Wyoming in the Niobrara basin. The acquisition of the Black Hawk business increased the Energy business’ heavy concentration in the Bakken basin, and expanded the business into Texas in the Permian basin and New Mexico in the San Juan basin.

Well completion services involve prepping the well for production, including running frac strings, setting production tubing, installing down hole equipment, drilling out vertical and horizontal plugs, cleaning out the wellbore, and starting production flow. Well recompletion services involve assisting in the re-stimulation of an existing well or plug-back to shut off the flow in the well from points before the plug. Well maintenance and workover services include pulling rods or tubing, installing submersible pumping equipment, repairing casing, and swabbing. Snubbing services involve installing or removing tubes to enable the customer to continue to work on a well and perform many tasks without having to stop production. Flow testing services involve separating the elements - oil, water, gas, and solids - so that the customer can maximize the quality and quantity of their product. Down hole pumping services involve pumping the necessary fluids into the wellbore. Plug and abatement services involve sealing the well and cleaning the site to reduce the potential for any pollution.

Sports business. The Sports business is focused on providing a first-class experience for all families that participate in Steel Excel’s programs through the implementation of the Steel Coaching System. Steel Excel’s baseball business is focused on teams, tournaments, camps, lessons, and showcases.

 

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Baseball Heaven is equipped with four full-sized outdoor fields, three smaller youth-sized outdoor fields, and an indoor facility. Steel Excel’s soccer business covers a wide variety of programs, including teams, coaching services, tournaments, tours, and camps. Soccer programs are run at facilities owned by municipalities or schools and are run either in conjunction with local youth soccer leagues or as a stand-alone offering. Strength and conditioning services as well as yoga, pilates, and spin were provided at the Torrance and Hermosa Crossfit® facilities through January 2016, and are provided solely at the Torrance facility subsequently.

Customers

Steel Excel’s Energy business client base consists of exploration and production companies in the oil and gas industry. For the year ended December 31, 2015, revenues from Oasis Petroleum, XTO Energy, Continental Resources, and Whiting Petroleum represented 16.3%, 12.1%, 11.5%, and 10.5%, respectively, of the Company’s consolidated revenues; for the year ended December 31, 2014, revenues from Oasis Petroleum and Continental Resources represented 20.7% and 20.3%, respectively, of the Company’s consolidated revenues; and for the year ended December 31, 2013, revenues from Continental Resources and XTO Energy represented 17.0% and 10.5%, respectively, of the Company’s consolidated revenues. For the years ended December 31, 2015, 2014, and 2013, revenues from the Energy business’ five largest customers represented 55.7%, 61.2%, and 51.3%, respectively, of the Company’s consolidated revenues. For the years ended December 31, 2015, 2014, and 2013, the Energy business’ five largest customers represented 66.3%, 67.1%, and 56.1%, respectively, of the segment’s revenues and the fifteen largest customers represented 90.4%, 89.0%, and 88.2%, respectively, of the segment’s revenues. The loss of a significant customer could have a material adverse effect on the Energy business and Steel Excel.

Steel Excel’s Sports business client base consists of numerous municipalities, youth sports leagues and organizations, and individuals, none of which provide a significant percentage of the Company’s consolidated revenues. The loss of a customer would not have a material adverse effect on the Sports business or Steel Excel.

Sales and Marketing

Steel Excel relies primarily on its local operations to sell and market the Company’s services. Because they have conducted business together over several years, the members of Steel Excel’s local operations have established strong working relationships with certain of its clients. These strong client relationships provide a better understanding of region-specific issues and enable Steel Excel to better address customer needs.

Competition

Energy business. The Energy business operates in a highly competitive industry that is influenced by price, capacity, reputation, and experience. When oil and natural gas prices and drilling activities are at high levels, service companies are ordering new equipment to expand their capacity as they are seeing increased demand for their services and attractive returns on investment. When oil and natural gas prices are declining, service companies may be willing to provide their services at reduced prices to be able to cover their equipment and other fixed costs. To be successful, Steel Excel must provide quality services that meet the specific needs of oil and gas exploration and production companies at competitive prices. In addition, Steel Excel needs to maintain a safe work environment and a well-trained work force to remain competitive.

Steel Excel’s Energy services are affected by seasonal factors, such as inclement weather, fewer daylight hours, and holidays during the winter months. Heavy snow, ice, wind, or rain can make it

 

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difficult to operate and to move equipment between work sites, which can reduce the Company’s ability to provide services and generate revenues. These seasonal factors affect the Company’s competitors as well. Demand for services in the industry as a whole fluctuates with the supply and demand for oil and natural gas. In general, the need for Steel Excel’s services increases when demand exceeds supply. The oil and gas exploration and production companies attempt to take advantage of a higher-priced environment when demand exceeds supply, which leads to an increased need for the Company’s services. Conversely, as supply equals or exceeds demand, the oil and gas exploration and production companies will cut back on their production resulting in a decline in their well servicing needs or seek pricing concessions from Steel Excel and other service providers when the price of oil declines.

Sports business. The market for the Sports business’ baseball and soccer service offerings is very fragmented, and its competitors are primarily small local or regional operations. The market for its strength and conditioning services is fragmented, and its competitors vary from large national providers of such services to local providers of comparable or other niche services.

The baseball business and the soccer business are affected by seasonal factors, with business volume declining from late autumn through early spring as a result of colder temperatures and fewer daylight hours. In addition, inclement weather during peak seasons can have an adverse effect on the business since fields may not be available to reschedule any canceled events. In 2013, Steel Excel completed the construction of an indoor baseball facility to enable it to provide year-round baseball services to partially mitigate the revenue declines experienced in non-peak months and during periods of inclement weather.

Government and Environmental Regulation

Steel Excel’s businesses are subject to multiple federal, state, and local laws and regulations pertaining to worker safety, the handling of hazardous materials, transportation standards, and the environment.

Among the various environmental laws Steel Excel is subject to, the Clean Water Act established the basic structure for regulating discharges of pollutants into the waters of the United States and quality standards for surface waters. Steel Excel’s businesses could be required to obtain permits for the discharge of wastewater or stormwater. In addition, the Oil Pollution Act of 1990 imposed a multitude of requirements on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills in the waters of the United States. These and comparable state laws provide for administrative, civil, and criminal penalties for unauthorized discharges and impose stringent requirements for spill prevention and response planning, as well as considerable potential liability for the costs of removal and damages in connection with unauthorized discharges.

The Comprehensive Environmental Response, Compensation and Liability Act, as amended, and comparable state laws (“CERCLA” or “Superfund”) impose liability without regard to fault or the legality of the original conduct on certain defined parties, including current and prior owners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposition of the hazardous substances found at the site. Under CERCLA, these parties may be subject to joint and several liability for the costs of cleaning up the hazardous substances that were released into the environment and for damages to natural resources. Further, claims may be filed for personal injury and property damages allegedly caused by the release of hazardous substances and other pollutants. Steel Excel may encounter materials that are considered hazardous substances in the course of Steel Excel’s operations. As a result, Steel Excel may incur CERCLA liability for cleanup costs and be subject to related third-party claims. Steel Excel also may be subject to the requirements of the Resource Conservation and Recovery Act, as amended, and comparable state statutes (“RCRA”) related to solid wastes. Under CERCLA or RCRA, Steel Excel could be required to clean up contaminated property (including contaminated groundwater) or to perform remedial activities to prevent future contamination.

 

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Steel Excel’s businesses are also subject to the Clean Air Act, as amended, and comparable state laws and regulations that restrict the emission of air pollutants and impose various monitoring and reporting requirements. These laws and regulations may require the Company to obtain approvals or permits for construction, modification, or operation of certain projects or facilities and may require use of emission controls. Various scientific studies suggest that emissions of greenhouse gases, including, among others, carbon dioxide and methane, contribute to global warming. While it is not possible to predict how legislation or new regulations that may be adopted to address greenhouse gas emissions would impact the Company’s business, any new restrictions on emissions that are imposed could result in increased compliance costs for, or additional operating restrictions on, the Company’s customers and, which could have an adverse effect on Steel Excel’s business.

Steel Excel is also subject to the Occupational Safety and Health Act, as amended, (“OSHA”) and comparable state laws that regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used or produced in the Company’s operations be maintained and provided to employees and state and local government authorities. Steel Excel believes it is in substantial compliance with OSHA and comparable state law requirements, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances.

Steel Excel cannot predict the level of enforcement or the interpretation of existing laws and regulations by enforcement agencies in the future, or the substance of future court rulings or permitting requirements. In addition, Steel Excel cannot predict what additional laws and regulations may be put in place in the future, or the effect of those laws and regulations on the Company’s business and financial condition. Steel Excel believes it is in substantial compliance with applicable environmental laws and regulations. While Steel Excel does not believe that the cost of compliance is material to the Company’s business or financial condition, it is possible that substantial costs for compliance or penalties for non-compliance may be incurred in the future.

Employees

As of December 31, 2016, Steel Excel had 645 employees, of which 633 were full-time employees and 12 were part-time employees. All of Steel Excel’s employees are located in the United States. Steel Excel also hires additional full-time and part-time employees during peak seasonal periods. None of Steel Excel’s employees are covered by collective bargaining agreements. Steel Excel considers its employee relations to be satisfactory.

Properties

In September 2016 Steel Excel entered into a 62-month lease for 4,510 square feet of office space in Hermosa Beach, CA. With SPLP’s consent, Steel Excel has notified the landlord that it intends to cause this lease to be assigned to a subsidiary of SPLP. Following the assignment, Steel Excel’s Sports business expects to occupy part of this space upon exiting its current Hermosa Beach office lease.

The Energy business owns four buildings in Williston, ND, including one that serves as its headquarters and operations hub in the Bakken basin along with separate buildings with office space and shop space. The Energy business also owns office space and shop space in Texas that serves as its operations hub in the Permian basin. The Energy business also leases shop space and office space in other locations under month-to-month arrangements on an as needed basis, and owns and leases housing for temporary living arrangements for certain of its employees.

 

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The Sports business has a lease for office space in Hermosa Beach, CA, on a month-to-month basis that expires on January 31, 2017, which serves as its headquarters, and a month-to-month arrangement in Sacramento, CA, for executive office space. The Sports business has a lease for approximately 27.9 acres of land in Yaphank, NY, for its baseball services operation that expires in December 2021. Under this lease the Company has one extension option and a right of first refusal to purchase the parcel. The Sports business also has a lease for 9,940 square feet for its Crossfit® facility in Torrance, CA, that expires in March 2023. In addition, the Sports business has a lease for office space in Cedar Knolls, NJ, that expires in February 2019, which serves as the headquarters for its youth soccer operation, and also has leases in various states for small administrative offices to support the soccer operation.

The Company believes that its facilities are adequate to meet its needs.

Legal Proceedings

From time to time Steel Excel is subject to litigation or claims that arise in the normal course of business. While the results of such litigation matters and claims cannot be predicted with certainty, Steel Excel believes that the final outcome of such matters will not have a material adverse impact on Steel Excel’s financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, Steel Excel’s business, financial condition, and results of operations could be materially and adversely affected.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Steel Excel

The following discussion should be read in conjunction with the consolidated financial statements of Steel Excel and the notes thereto included elsewhere in this prospectus/offer to exchange. The discussion includes certain forward-looking statements. For a discussion of important factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Risk Factors – Risks Relating to Steel Excel’s Business” and “Forward-Looking Statements.”

Steel Excel currently operates in two reporting segments - Energy and Sports. The Energy segment focuses on providing drilling and production services to the oil and gas industry. The Sports segment is a social impact organization that strives to provide a first-class youth sports experience emphasizing positive experiences and instilling the core values of discipline, teamwork, safety, respect, and integrity. The Company also makes significant non-controlling investments in entities in industries related to its reporting segments as well as entities in other unrelated industries. The Company continues to identify business acquisition opportunities in both the Energy and Sports industries as well as in other unrelated industries.

The Company began its Energy business in December 2011 with the acquisition of the business and assets of Rogue. The Company expanded the business with the acquisition of the business and assets of Eagle Well in February 2012 and the acquisition of Sun Well in May 2012, both of which operate under Sun Well as a combined business. In December 2013, the Company further expanded its Energy business with the acquisition by its wholly-owned subsidiary Black Hawk Ltd. of the business and assets of Black Hawk Inc.

The Company began its Sports business in June 2011 with the acquisition of the assets of Baseball Heaven, a provider of a wide variety of baseball services, including tournaments, training, teams, and camps. The Company expanded the business in November 2012 with the acquisition of a 50% interest in two Crossfit® facilities located in Torrance, CA, and Hermosa Beach, CA, and in 2014 the

 

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Company increased its ownership interest in Torrance facility to approximately 86%. In January 2013, the Company acquired a 20% membership interest in Ruckus, an obstacle course and mass-participation events company that was controlled by the Company through its representation on the Ruckus board. The Company increased its membership interest in Ruckus to 45% during 2013. Also in January 2013, the Company acquired a 40% membership interest in Again Faster, a fitness equipment company that is accounted for as an equity-method investment. In June 2013, the Company further expanded its Sports business with the acquisition of 80% of UK Elite, a provider of youth soccer programs, coaching services, tournaments, tours, and camps. In 2014, UK Elite acquired the business and assets of three independent providers of soccer clinics and camps.

In November 2013 the Company shut down Ruckus after it did not meet operational and financial expectations. Ruckus is reported as a discontinued operation in the Company’s consolidated financial statements. In 2015, the Company fully impaired its investment in Again Faster based on the state of the business and the available strategic alternatives.

In July 2013, Steel Energy Services, a wholly-owned subsidiary of the Company, entered into a credit agreement, as amended (the “Amended Credit Agreement”), that provides for a borrowing capacity of $105.0 million consisting of a $95.0 million secured term loan and up to $10.0 million in revolving loans. A pre-existing credit agreement at Sun Well that had been fully repaid was terminated upon the initial closing of the Amended Credit Agreement.

During 2015, the Company identified an error related to the manner in which the change in the valuation allowance for deferred tax assets was reflected in its financial statements for all annual and quarterly periods in the years ended December 31, 2014 and 2013. The change in the valuation allowance, which resulted from a change in deferred tax liabilities related to unrealized gains on available-for-sale securities, was recognized as a component of income from continuing operations, resulting in a benefit from or provision for income taxes allocated to continuing operations in each period, with an offsetting provision for or benefit from income taxes allocated to other comprehensive income relating to unrealized gains or losses on available-for-sale securities. Upon subsequent review, the Company determined that proper intra-period allocation of the provision for income taxes would have resulted in this change in the valuation allowance being allocated to other comprehensive income, resulting in no provision or benefit for such item. In periods in which the valuation allowance decreased, the impact of this error was an overstatement of income from continuing operations and an understatement of other comprehensive income; in periods in which the valuation allowance increased, the impact of this error was an understatement of income from continuing operations and an overstatement of other comprehensive income. The correction of this error has resulted in adjustments to the Company’s balance sheet at December 31, 2014, and its statement of operations, statement of comprehensive income, statement of stockholders’ equity, and statement of cash flows for the year ended December 31, 2013.

In June 2014, following stockholder approval and authorization from the Company board, the Company effected the Reverse Split, immediately followed by the Forward Split, of its common stock effective as of the close of business on June 18, 2014. In connection with the Reverse Split, the Company paid $10.1 million in July 2014 for 295,659 shares of common stock and the return of 1,388 non-vested restricted stock awards previously awarded to employees.

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto.

Results of Operations

The continuing weakness in the oil services industry had an adverse effect on the results of operations of the Company’s Energy segment in 2015 and in the first nine months of 2016. The decline

 

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in energy prices, particularly the significant decline in oil prices, has resulted in the Energy segment’s customers, the oil and gas exploration and production companies (the “E&P Companies”), cutting back on their capital expenditures, which has resulted in reduced drilling activity. In addition, the E&P Companies have sought price concessions from their service providers to offset their drop in revenue. Such actions on the part of the E&P Companies had an adverse effect on the operations of the Energy segment in 2015 and 2016. The Company has taken certain actions and instituted cost-reduction measures in an effort to mitigate these adverse effects. The Energy segment’s results of operations going forward will be dependent on the price of oil in the future, the resulting well production and drilling rig count in the basins in which it operates, and the Company’s ability to return to the pricing and service levels of the past as oil prices increase. The drilling rig count in North America has declined significantly since its recent peak in 2014, which has directly impacted the segment’s rig utilization, and the pricing for the segment’s services has declined. The North American drilling rig count continued to decline into the second quarter of 2016, but has since been gradually increasing. However, the North American drilling rig count is still substantially lower than in prior years, and as a result the Company expects the Energy segment to experience a further decline in operating income in 2016 as compared to the prior years’ results.

Three months ended September 30, 2016, compared to three months ended September 30, 2015

Net revenues for the three months ended September 30, 2016, decreased by $6.3 million, or 18.9%, as compared to the 2015 period. Net revenues from the Company’s Energy segment decreased by $4.7 million, or 19.9%, primarily from the decline in rig utilization and the decline in prices that resulted from the adverse effects the decline in energy prices had on the oil services industry. Net revenues in the Company’s Sports segment decreased by $1.6 million, or 16.5%, from a decrease in revenues from the segment’s youth soccer business caused by cancellations and delays resulting from issues encountered in obtaining visas for certain members of its coaching staff.

Gross profit for the three months ended September 30, 2016, decreased by $2.1 million as compared to the 2015 period, and as a percentage of revenue declined to 19.5% in the third quarter of 2016 from 21.9% in the comparable 2015 period. Gross profit in the Energy segment decreased by $1.4 million, and as a percentage of revenue declined to 11.0% in the third quarter of 2016 from 14.7% in the comparable 2015 period. Gross profit in the Energy segment decreased as a result of the decline in revenues. Gross profit in the Sports segment in the 2016 period decreased by $0.7 million primarily as a result of the decline in revenues from the segment’s youth soccer business.

Selling, general and administrative (“SG&A”) expenses in the third quarter 2016 increased by $0.2 million as compared to the comparable 2015 period primarily from an increase in corporate overhead costs.

The Company incurred an operating loss of $4.8 million in the third quarter of 2016 as compared to a loss of $3.1 million in the 2015 period. The operating loss in the Energy segment increased by $0.7 million, resulting in an operating loss of $1.2 million for the period as a result of the adverse effects the decline in energy prices had on the oil services industry. Operating income in the Sports segment decreased by $0.6 million, resulting in operating income of $0.2 million for the period. The operating loss from Corporate activities increased by $0.4 million as a result of additional overhead costs.

Amortization of intangibles in the third quarter 2016 decreased by $0.6 million as compared to the comparable 2015 period as a result of the impairment of intangible assets in the fourth quarter of 2015 and a declining rate of amortization for the intangible assets recognized in connection with prior period acquisitions.

 

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Interest expense of $0.4 million in the third quarter 2016 decreased by $0.2 million as compared to the 2015 period primarily as a result of the repayment of long-term debt.

The Company incurred impairment charges related to its marketable securities of $7.9 million in the third quarter 2015. The impairment charges resulted from the Company’s determination that certain unrealized losses in available-for-sale securities represented other-than-temporary impairments.

Other income of $0.7 million in the third quarter 2016 primarily represented realized gains on the sale of marketable securities of $0.2 million and investment income of $0.9 million, partially offset by realized losses on financial instrument obligations of $0.6 million. Other income of $7.9 million in the third quarter 2015 primarily represented a realized gain on a non-monetary exchange of $9.3 million, realized gains on financial instrument obligations of $1.3 million, and investment income of $1.0 million, partially offset by realized losses on the sale of marketable securities of $3.4 million and a foreign exchange loss of $0.3 million.

The Company recognized a benefit from income taxes of $1.3 million for the three months ended September 30, 2016, primarily from the allowable benefit recognizable on unrealized gains on marketable securities included in other comprehensive income and from the recognition of state deferred income tax benefits. The Company recognized a provision for income taxes of $2.4 million for the three months ended September 30, 2015, primarily from the a reduction in the allowable benefit recognizable on unrealized gains on marketable securities included in other comprehensive income.

Nine months ended September 30, 2016, compared to nine months ended September 30, 2015

Net revenues for the nine months ended September 30, 2016, decreased by $39.1 million, or 36.2% as compared to the 2015 period. Net revenues from the Company’s Energy segment decreased by $37.3 million, or 41.3%, primarily from the decline in rig utilization and the decline in prices that resulted from the adverse effects the decline in energy prices had on the oil services industry. Net revenues in the Company’s Sports segment decreased by $1.8 million, or 10.1%, primarily from a decrease in revenues from the segment’s youth soccer business caused by cancellations and delays resulting from issues encountered in obtaining visas for certain members of its coaching staff.

Gross profit for the nine months ended September 30, 2016, decreased by $11.2 million as compared to the 2015 period, and as a percentage of revenue declined to 17.5% in the first nine months of 2016 from 21.5% in the comparable 2015 period. Gross profit in the Energy segment decreased by $10.4 million, and as a percentage of revenue declined to 10.5% in the first nine months of 2016 from 17.6% in the comparable 2015 period. Gross profit in the Energy segment decreased as a result of the decline in revenues. Gross profit in the Sports segment in the 2016 period decreased by $0.8 million primarily as a result of the decline in revenues from the segment’s youth soccer business.

SG&A expenses in the first nine months of 2016 decreased by $2.7 million as compared to the comparable 2015 period primarily from the 2016 period including the receipt of a litigation settlement of $4.2 million relating to a 2012 acquisition, partially offset by an increase in corporate overhead costs and legal fees totaling $1.1 million in the 2016 period and the 2015 period including the receipt of $0.5 million for a purchase price adjustment related to a 2013 acquisition.

The Company incurred an operating loss of $15.1 million in the first nine months of 2016 as compared to a loss of $8.5 million in the 2015 period. Operating income in the Energy segment decreased by $4.6 million, resulting in an operating loss of $0.9 million for the period. Operating income in the 2016 period included the receipt of a litigation settlement of $4.2 million relating to a 2012 acquisition. Exclusive of the litigation settlement, operating income in the Energy segment decreased $8.8 million as a result of the decline in revenues and margins that resulted from the adverse effects the

 

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decline in energy prices had on the oil services industry. The operating loss from Corporate activities increased by $1.1 million as a result of additional overhead costs and legal fees. The operating loss in the Sports segment increased by $0.9 million, resulting in an operating loss of $2.4 million for the period.

Amortization of intangibles in the first nine months of 2016 decreased by $1.9 million as compared to the comparable 2015 period as a result of the impairment of intangible assets in the fourth quarter of 2015 and a declining rate of amortization for the intangible assets recognized in connection with prior period acquisitions.

Interest expense of $1.2 million in the first nine months of 2016 decreased by $0.7 million as compared to the 2015 period primarily as a result of the repayment of long-term debt.

The Company incurred impairment charges related to its marketable securities of $1.5 million and $30.6 million in the first nine months of 2016 and 2015, respectively. The impairment charges resulted from the Company’s determination that certain unrealized losses in available-for-sale securities represented other-than-temporary impairments.

Other income of $3.4 million in the first nine months of 2016 primarily represented investment income of $2.7 million, realized gains on financial instrument obligations of $0.1 million, and realized gains on the sale of marketable securities of $0.6 million. Other income of $9.2 million in the 2015 period primarily represented a realized gain on a non-monetary exchange of $9.3 million, investment income of $3.5 million, and realized gains on financial instrument obligations of $1.1 million, partially offset by realized losses on the sale of marketable securities of $1.4 million, a realized loss of $2.8 million recognized upon initially accounting for an investment under the equity method of accounting at fair value, and a foreign exchange loss of $0.5 million.

The Company recognized a benefit from income taxes of $2.0 million for the nine months ended September 30, 2016, primarily from the allowable benefit recognizable on unrealized gains on marketable securities included in other comprehensive income and from the recognition of state deferred income tax benefits. The Company recognized a benefit from income taxes of $4.3 million for the nine months ended September 30, 2015, primarily from the allowable benefit recognizable on unrealized gains on marketable securities included in other comprehensive income.

Year ended December 31, 2015, compared with 2014

Net revenues for the year ended December 31, 2015, decreased by $77.5 million as compared to 2014. Net revenues from the Company’s Energy segment decreased by $80.2 million primarily from the decline in rig utilization and the decline in prices that resulted from the adverse effects the decline in energy prices had on the oil services industry. Net revenues in the Company’s Sports segment increased by $2.7 million from an increase in revenues of $2.1 million from UK Elite primarily as a result of operating the businesses acquired during the 2014 period for the full period in 2015 and an increase in revenues of $0.6 million from Baseball Heaven.

Gross profit for the year ended December 31, 2015, decreased by $31.4 million as compared to 2014, and as a percentage of revenue declined to 20.1% from 27.6%. Gross profit in the Energy segment decreased by $31.2 million, and as a percentage of revenue declined to 16.5% in 2015 from 25.9% in 2014. Gross profit in the Energy segment decreased as a result of the decline in revenues. Gross profit in the Sports segment in 2015 decreased by $0.3 million primarily as a result of a decrease in gross profit of $0.2 million from UK Elite.

SG&A expenses in 2015 decreased by $1.7 million as compared to 2014. SG&A expenses in the Energy segment decreased by $2.3 million primarily from cost reduction initiatives and the receipt of a

 

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purchase price adjustment of $0.5 million related to a 2013 acquisition. SG&A expenses also decreased $0.3 million from corporate and other business activities. Such decreases were partially offset by SG&A expenses in the Sports segment that increased by $0.9 million primarily from UK Elite as a result of the businesses acquired during the 2014 period and additional segment management costs.

The Company incurred an operating loss of $40.7 million in 2015 as compared to an operating loss of $23.4 million in 2014. The Company incurred goodwill and intangible asset impairment charges relating primarily to the Energy segment of $25.6 million and $36.7 million in 2015 and 2014, respectively. The operating loss before goodwill and other asset impairments was $15.0 million in 2015 as compared to operating income of $13.3 million in 2014. Operating income before goodwill and other asset impairments in the Energy segment decreased by $27.4 million primarily as a result of the decline in revenues and margins that resulted from the adverse effects the decline in energy prices had on the oil services industry. The operating loss before goodwill and other asset impairments in the Sports segment increased by $1.2 million primarily due to increased losses incurred at UK Elite of $0.6 million and additional segment management costs of $0.4 million. The operating loss from Corporate and other business activities decreased by $0.3 million.

Amortization of intangibles in 2015 decreased by $1.4 million as compared to 2014 as a result of a declining rate of amortization for the intangible assets recognized in connection with prior period acquisitions.

The Company recognized impairment charges of $25.6 million in 2015 related to the goodwill and intangible assets primarily associated with its Energy segment. The impairments resulted from the adverse effects the decline in energy prices had on the oil services industry and the projected future results of operations of the Energy segment.

Interest expense of $2.5 million in 2015 decreased by $0.7 million as compared to 2014 primarily as a result of the repayment of long-term debt.

The Company incurred an impairment charge of $59.8 million related to its marketable securities in 2015. The impairment charge resulted from the Company’s determination that certain unrealized losses in available-for-sale securities represented other-than-temporary impairments during 2015.

Other income of $14.9 million in 2015 primarily represented a gain on a non-monetary exchange of $9.3 million, investment income of $4.7 million, and realized gains on the sale of marketable securities of $5.2 million, partially offset by a loss of $2.8 million recognized upon initially accounting for an investment under the equity method of accounting at fair value, a foreign exchange loss of $0.7 million, and a loss of $0.5 million recognized on financial instrument obligations.

The Company recognized a benefit from income taxes of $6.3 million for the year ended December 31, 2015, primarily from the allowable benefit recognizable on unrealized gains on marketable securities included in other comprehensive income and from the recognition of state deferred income tax benefits.

Year ended December 31, 2014, compared with 2013

Net revenues for the year ended December 31, 2014, increased by $90.1 million as compared to 2013. Net revenues from the Company’s Energy segment increased by $82.0 million as a result of an increase of $75.5 million from Black Hawk Ltd., which business was acquired in December 2013, and an increase in revenues of $6.5 million in the Energy segment’s other operations due primarily to an increase in rig utilization for its snubbing services and an increase in revenues from its flow back services related to new equipment purchased in 2014. Net revenues from the Company’s Sports segment increased by $8.1 million primarily as a result of an increase in revenues of $6.8 million from UK Elite, which was acquired in June 2013, and an increase in revenues of $1.1 million from Baseball Heaven.

 

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Gross profit for year ended December 31, 2014, increased by $25.9 million as compared to 2013, and as a percentage of revenue increased to 27.6% from 26.8%. Gross profit in the Energy segment increased by $22.5 million and as a percentage of revenue increased to 25.9% in 2014 from 24.7% in 2013. Gross profit in the Energy segment increased as a result of an increase of $23.4 million from Black Hawk Ltd., partially offset by a decrease in gross profit of $0.9 million in the Energy segment’s other operations. Gross profit in the Sports segment in 2014 increased by $3.4 million primarily as a result of an increase in gross profit of $2.7 million from UK Elite and an increase in gross profit of $0.6 million from Baseball Heaven.

SG&A expenses in 2014 increased by $14.3 million as compared to 2013. SG&A expenses in the Energy segment increased by $4.4 million primarily as a result of an increase of $4.0 million in costs incurred at Black Hawk Ltd. in 2014. SG&A expenses in the Sports segment increased by $3.8 million primarily as a result of costs incurred at UK Elite, including costs associated with operating the businesses acquired in the current period. SG&A expenses in corporate and other business activities increased by $6.1 million primarily as a result of increased costs incurred for services provided by affiliates of the Company and an increase in stock-based compensation expense in the 2014 period.

The Company incurred an operating loss of $23.4 million in 2014 as compared to operating income of $2.6 million in 2013 primarily as a result of the goodwill impairment charge of $36.7 million relating to the Energy segment. Operating income before goodwill impairments was $13.3 million in 2014 as compared to $2.6 million in 2013. Operating income before goodwill impairments in the Energy segment increased by $17.5 million primarily as a result of an increase of $16.8 million from Black Hawk Ltd. The operating loss in the Sports segment increased by $0.8 million primarily due to the expected seasonal losses incurred in the first half of 2014 at UK Elite with no corresponding losses in the prior year. The operating loss from Corporate and other business activities increased by $6.1 million from increased costs incurred for services provided by affiliates of the Company and an increase in stock-based compensation expense in 2014.

Amortization of intangibles in 2014 increased by $0.9 million as compared to 2013 as a result of amortization expense on the intangible assets recognized in connection with the businesses acquired by Black Hawk Ltd. and UK Elite, partially offset by a declining rate of amortization for the intangible assets recognized in connection with prior period acquisitions.

The Company recognized an impairment charge of $36.7 million in 2014 related to the goodwill associated with its Energy segment. The impairment resulted from the adverse effects the decline in energy prices had on the oil services industry and the projected future results of operations of the Energy segment.

Interest expense of $3.2 million in 2014 increased by $1.5 million as compared to 2013 primarily as a result of the borrowings under the Amended Credit Agreement being outstanding for the full year in 2014.

Other income of $7.1 million in 2014 primarily represented investment income of $6.6 million and realized gains on the sale of marketable securities of $3.8 million, partially offset by a loss of $0.6 million recognized upon initially accounting for an investment under the equity method of accounting at fair value, a foreign exchange loss of $1.1 million, and a loss of $1.8 million recognized on financial instrument obligations.

 

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The Company recognized a benefit from income taxes of $1.3 million for the year ended December 31, 2014, primarily as a result of a foreign tax benefit of $1.7 million recognized upon the conclusion of tax examinations by a foreign tax authority.

The results of operations for the year ended December 31, 2014, included income from discontinued operations of $0.5 million primarily related to an adjustment to the outstanding obligations of Ruckus.

Liquidity and Capital Resources

Steel Energy Services’ Amended Credit Agreement provides for a borrowing capacity of $105.0 million consisting of a $95.0 million secured term loan (the “Term Loan”) and up to $10.0 million in revolving loans (the “Revolving Loans”) subject to a borrowing base of 85% of the eligible accounts receivable. At September 30, 2016, $42.9 million was outstanding under the Amended Credit Agreement, all of which represented the Term Loan, and $8.7 million was available for future borrowing under the Revolving Loans. Borrowings under the Amended Credit Agreement are collateralized by substantially all the assets of Steel Energy and its wholly-owned subsidiaries Sun Well, Rogue, and Black Hawk Ltd., and a pledge of all of the issued and outstanding shares of capital stock of Sun Well, Rogue, and Black Hawk Ltd. Borrowings under the Amended Credit Agreement are fully guaranteed by Sun Well, Rogue, and Black Hawk Ltd. The Company was in compliance with all financial covenants of the Amended Credit Agreement as of September 30, 2016.

The Company finances its operations and capital expenditure requirements from its existing cash and marketable securities balances, which at September 30, 2016, totaled $84.6 million and $80.7 million, respectively, and at December 31, 2015, totaled $31.7 million and $96.2 million, respectively. Working capital in the first nine months of 2016 increased by $21.6 million due primarily to proceeds from the sale of equity method investments of $22.9 million, an increase of $6.9 million from net investment gains, the reclassification to current assets of a $3.0 million note receivable coming due within one year, and cash generated from net losses of $3.1 million, partially offset by the acquisition of treasury shares of $11.3 million and capital expenditures of $1.6 million. Working capital in&nb