Star Equity (NASDAQ:STRR) CEO Jeffrey Eberwein outlined the company’s strategy of combining microcap public companies and private businesses under a multi-industry holding-company structure, citing acquisition opportunities, cost reductions and potential use of tax assets as key elements of its growth plan.
Speaking at an investor conference, Eberwein said Star Equity has combined three former publicly traded microcap companies and has signed an agreement to merge with a fourth, Harte Hanks. The company filed an S-4 registration statement for the transaction earlier in the week, and Eberwein said the deal is expected to close by year-end.
Star Equity also has non-convertible preferred stock trading on Nasdaq under the ticker STRRP, which Eberwein said the company has used as acquisition currency. He said insiders own about 35% of Star Equity’s common stock, including his personal ownership of approximately 30%.
Financial Targets and Portfolio Structure
Eberwein said Star Equity generated roughly $225 million in revenue and $6 million in EBITDA over the trailing 12 months, while remaining unprofitable on a net-income basis. He said the company’s goal is to reach $400 million in revenue and $40 million in EBITDA by 2030 without requiring additional acquisitions, though Star Equity continues to pursue transactions.
The company has more than $200 million in net operating loss carryforwards, according to Eberwein. He said those NOLs could provide a tax shield for income generated by current operations and future acquisitions.
Star Equity’s operating portfolio includes businesses in building solutions, business services and energy services, as well as an investments division. The operating companies collectively employ about 1,500 people, while Star Equity’s corporate team has 12 employees, Eberwein said.
- Building Solutions: Factory-based wood construction operations in the Northeast and Minneapolis area, including prefabricated homes and walls, lumber yards, design teams and engineered wood products.
- Business Services: Hudson, which provides outsourced recruitment, staffing and human-resources-related services to large companies.
- Energy Services: A rental-tool business serving drilling applications including geothermal, carbon capture, hydrogen, helium, mining and water wells.
- Investments: Real estate assets, equity investments and activist positions in selected microcap companies.
Eberwein said the Building Solutions business is operating at a cyclical low point but could benefit from increased adoption of factory-built construction. He said factory-built construction’s market share has risen from 3% before the COVID-19 pandemic to 7% currently.
For Hudson, Eberwein said Star Equity has invested in growth and artificial intelligence capabilities. He said the business has moved from ninth to third in global industry rankings over the past two years. Hudson’s earnings are currently reduced by approximately $3 million to $4 million due to investments, he said, but Star Equity expects the business could return to $20 million in EBITDA in coming years.
Harte Hanks Deal Focuses on Cost Reductions
Eberwein said Harte Hanks is projected to generate about $150 million in revenue and $7.5 million in EBITDA. Star Equity expects to remove approximately $10 million in costs from Harte Hanks’ corporate and unallocated expense structure, potentially adding about $15 million in EBITDA after the transaction closes.
He said the acquisition would be completed without issuing common stock. Eberwein acknowledged that Harte Hanks has experienced declining revenue, which he attributed partly to conditions in the business-services and outsourcing sector following a period of strong growth after COVID-19. He also said some of the decline may have resulted from underinvestment and potential AI-related risk in certain operations.
Star Equity views Harte Hanks’ fulfillment logistics business as having the greatest long-term potential and plans to invest in its growth, Eberwein said. He added that the company is open to selling portfolio businesses if they have greater strategic value to another buyer.
Acquisition and Activist Strategy
Star Equity seeks businesses with low capital-expenditure requirements, limited obsolescence risk, organic growth prospects and opportunities for bolt-on acquisitions, Eberwein said. The company generally avoids technology and healthcare businesses where it lacks specialized expertise, he added.
The company also takes minority positions in microcap companies it believes are undervalued or may be candidates for strategic alternatives. Eberwein said Star Equity may take a 5% to 10% stake, engage privately with management and, if necessary, pursue public activism, director nominations or a proxy contest.
He cited prior investments in an oil-services company and aerospace component maker Servotronics. In the Servotronics case, Eberwein said Star Equity built a position at an approximate $11-per-share cost basis before the company was ultimately acquired by TransDigm for $47 per share.
Star Equity also owns a stake in GEE Group, a staffing company trading under the ticker JOB. Eberwein said Star Equity’s public engagement helped put the company into a sale process, though he said it remains uncertain whether Star Equity or another buyer will acquire it.
At the end of June, Star Equity had approximately $14 million of debt at operating companies and net debt of about $5 million, according to Eberwein. He also said the company’s real estate and investment holdings could generate an estimated $20 million to $30 million of cash over the coming years, providing additional capital for acquisitions and growth initiatives.
About Star Equity (NASDAQ:STRR)
Star Equity Holdings, Inc is a diversified holding company that operates primarily through its Building Solutions and Healthcare businesses. The company was formerly known as Digirad Corporation and adopted the Star Equity name as it expanded beyond its historical healthcare operations.
Through its Building Solutions segment, Star Equity provides engineered building products and construction services, including modular and prefabricated structures, structural wall panels, and related components for residential, commercial, and other construction applications.
