Star Equity (NASDAQ:STRR) CEO Jeff Eberwein outlined the company’s strategy of combining microcap public companies and private businesses under a centralized corporate structure, saying the model is intended to reduce public-company costs, spread overhead across a broader operating base and allow local management teams to focus on day-to-day execution.
Speaking at the NOBLE Capital Markets Virtual Equity Conference, Eberwein said Star Equity’s businesses generated approximately $225 million of trailing revenue and about $6 million of EBITDA. The company operates across Building Solutions, Business Services, Energy Services and Investments.
Long-Term Growth Targets
The CEO said Star Equity believes it can reach $40 million in EBITDA by the end of the decade without additional acquisitions, based on organic growth across its existing operations. The company expects its current businesses to grow revenue organically by 10% to 15%, according to Eberwein.
- Building Solutions: Star expects approximately $100 million in revenue, 25% gross margins and about $15 million in EBITDA by the end of the decade.
- Business Services: The Hudson business is projected to reach $100 million in gross profit and $20 million in EBITDA before the end of the decade.
- Energy Services: The company expects this segment to generate about $10 million in EBITDA.
Eberwein said the company expects to generate operating leverage because it does not anticipate needing to increase corporate costs as revenue and EBITDA grow. He cited Star’s 2025 merger with Hudson Global, which he said was expected to produce $2 million in cost synergies but ultimately produced closer to $3 million.
Star also has more than $200 million of net operating losses, or NOLs, which Eberwein said could shield a significant portion of future income from taxes and make free cash flow more closely resemble EBITDA.
Harte Hanks Merger Process Continues
Eberwein discussed Star Equity’s pending merger agreement with Harte Hanks, which has approximately $150 million of revenue. If completed, the transaction would bring Star’s pro forma revenue close to $400 million, he said.
The companies are working on an S-4 registration statement with the Securities and Exchange Commission, and Eberwein said Star hopes to close the transaction by year-end. Harte Hanks shareholder approval is required, while Star shareholder approval is not, he said.
The proposed consideration includes cash and Star preferred stock, allowing Harte Hanks shareholders to elect their preferred form of payment. Eberwein said the preferred stock structure may provide a tax-efficient alternative for shareholders choosing stock consideration.
Harte Hanks’ businesses include fulfillment logistics, customer care, marketing services and marketing research, serving Fortune 500 clients. Eberwein said these outsourced business-process offerings align with Hudson’s talent and HR outsourcing operations. Star believes it could eliminate approximately $10 million of Harte Hanks costs over time, though he said those savings would not occur immediately. He also cited potential cross-selling opportunities between the companies’ client bases.
While competing proposals were received during Harte Hanks’ go-shop period, Eberwein said Star’s offer remained the superior proposal. He added that Star would receive a breakup fee of about $1.2 million if another bidder ultimately acquires Harte Hanks.
Building Solutions Faces Weak Market Conditions
Eberwein described Building Solutions as Star’s weakest segment currently, attributing the performance primarily to industry conditions. He said the single-family construction market is weak and commercial multifamily development is even weaker amid higher interest rates.
However, the company is seeing activity in affordable housing, workforce housing and senior living projects. Star announced a $4 million senior living project in New Hampshire earlier this year, and Eberwein said it has additional projects in the pipeline.
He said the division’s backlog stopped declining and began increasing in the most recent quarter. In a more normalized environment, Star believes the business could produce about $80 million in revenue, 25% gross margins and $8 million to $10 million in EBITDA. The company is also evaluating private-company acquisition targets in the sector.
Capital Allocation and Balance Sheet
Star reported about $5 million in net debt at the end of June, while subsidiary debt totaled approximately $14 million and was generally held with local banks. Eberwein described the company as lightly leveraged.
When allocating cash, Eberwein said Star’s first priority is investing in its existing operations. He ranked share repurchases next, followed by acquisitions, with debt repayment as the lowest priority. The company has used 10b5-1 plans to buy shares regularly and has also made block purchases, he said.
Eberwein said insiders own approximately 35% of Star’s common shares and have been buyers over time. He also highlighted the company’s investment assets, including real estate expected to be monetized and a book-value investment of $15 million in Catalyst MedTech, which Star expects could convert to cash when its private-equity majority owner eventually sells the business.
About Star Equity (NASDAQ:STRR)
Star Equity Holdings, Inc (NASDAQ: STRR) is a diversified holding company that operates through its Building Solutions and Healthcare businesses. The company’s Building Solutions operations design, manufacture and distribute modular buildings, structural wall panels and other engineered building components for residential, commercial and industrial applications.
Through its Healthcare business, Star Equity provides diagnostic medical imaging services and related solutions to hospitals, physician practices and other healthcare providers.
