Spanish Broadcasting System (NDAQ: SBSA) is under pressure from at least one activist shareholder disappointed with the company's performance. Discovery Group demanded a list of shareholders today in an effort to put pressure on the board to act by encouraging them to withhold their votes. The activist hedge fund also aims to draw awareness to its campaign to unlock value in a company whose shares have dropped from $20 in 1999 to under $2 now.
Discovery Group sent a letter to the board about a month ago demanding that it form a special committee to explore strategic alternatives, including a going-private transaction, sale to a strategic party, or at least the adoption of modern corporate governance practices. Current management has failed to build value internally by spending money on acquisitions that provide no incremental value and failing to growth operating income at all.
Spanish Broadcasting holds many properties that would be of great interest to an acquiring party. The company enjoys a market leadership position, operating in highly attractive geographic markets and is situated in the most promising media genre. However, CEO Alacron has refused to entertain any offers that would involve him relinquishing control of the company. This includes offers that have already been made at a substantial premium to today's price.
Discovery Group validated these claims with an anecdote in their
February letter:
"We now know this claim to be justified because we have direct knowledge of an important public media company (“XYZ”) that is interested in a potential transaction that could yield a substantial premium to the current SBSA stock price, yet Mr. Alarcon refuses to engage in an evaluation of this opportunity. During a meeting with Mr. Alarcon in December 2007 members of our firm presented the rationale for a combination with XYZ, to which SBSA would bring great strategic value and substantial, immediate cost synergies. Mr. Alarcon concurred with the analysis and suggested that we get the reaction of XYZ’s management to the idea.
"Our team met in January 2008 with XYZ’s Chairman/Chief Executive Officer and its Chief Financial Officer. We communicated to Mr. Alarcon that the XYZ officials were very enthused about the possible combination and wish to engage in a further dialogue directly with Mr. Alarcon. Mr. Alarcon is also in possession of detailed materials prepared by Discovery that outline a proposed structure for this transaction which yields a premium in excess of 100% to SBSA shareholders.
"Suddenly and without explanation, Mr. Alarcon refuses to discuss this opportunity. While Mr. Alarcon’s change in posture is consistent with his industry reputation, it is surprising nonetheless. Mr. Alarcon’s resistance in this case cannot be attributed to valuation because the proposed structure gives him the option to either remain invested or liquidate his shares. Rather, it appears that Mr. Alarcon fears a loss of control. That fear is interfering with Mr. Alarcon’s ability to act in the interest of all shareholders."
It is clear that there is a lot of value that can be unlocked if Discovery Group can successfully pressure Spanish Broadcasting into at least entertaining such offers. Moreover, a simple move to modernize governance practices would enable shareholders to more forcefully make demands designed to maximize value. In the end, this is a valuable company being held back by a poor management team, but Discovery Group aims to change all that.
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