Edenbrook Capital Sends Letter to Hemisphere Media Group Board

MOUNT KISCO, N.Y., May 16, 2022 /PRNewswire/ -- Edenbrook Capital, LLC (together with its affiliates, "Edenbrook"), one of the largest public shareholders of Hemisphere Media Group, Inc. (NASDAQ: HMTV) ("Hemisphere" or "the Company"), with ownership of approximately 14.94% of the publicly traded A shares and 7.65% of the total company, including the privately held, super-voting B shares, today announced that it has delivered the following letter to the Hemisphere Board of Directors. 

May 16, 2022

Peter Kern
Chairman of the Board
Hemisphere Media Group, Inc.
c/o InterMedia Advisors, LLC
228 Park Avenue South, PMB 67521
New York, NY  10003-1502

Dear Peter:

Our firm, Edenbrook Capital, LLC, is a large shareholder of Hemisphere Media Group, Inc. ("the Company" or "Hemisphere"), with ownership of approximately 14.94% of the publicly traded A shares and 7.65% of the total company, including the privately held, super-voting B shares.  We have been patient, supportive shareholders for nine years, and in that time, we have enjoyed a collaborative, productive relationship with the Company.  But following last week's surprise announcement of a proposed transaction for the Company to be taken private by insiders at a price that significantly undervalues the Company (the "Insider Takeover"), we feel compelled to share our views publicly for the benefit of all shareholders.  In short, we believe this transaction is unfair to public shareholders as it undervalues the Company and allows insiders to disproportionately benefit from the very share price erosion they are responsible for.  In our view, a deal to take the Company private at anything less than $12.00 per share is indefensible and would raise serious questions about the process, motivations and conflicts of interest surrounding the Insider Takeover.

Based on the cover numbers of the Company's most recent Form 10-Q, filed on May 10, there are 20,680,326 publicly traded A shares, and 19,720,381 privately held B shares, for a total of 40,400,707 issued and outstanding shares.  At the proposed $7.00 deal price, the Insider Takeover yields an equity value of approximately $282 million.  After accounting for net debt of approximately $212 million, per that same Form 10-Q, the proposed enterprise value would be approximately $494 million, a dramatic undervaluation of the Company as demonstrated by our analysis below.

Adding up the assets yields an enterprise value of approximately $697 million.  After subtracting the net debt, we are left with an equity value of approximately $485 million, over $203 million above the $282 million equity value in the proposed transaction.  On ~40.4 million shares outstanding, this would yield a conservative equity value of approximately $12.00 per share, more than 71% higher than the price offered by the proposed Insider Takeover.  Notably, the two primary sell-side analysts who covered the Company each had a $12.00 price target on the Company prior to the Insider Takeover announcement.  It is worth noting that these price targets were derived based on simple trading multiples, without taking into account the potential for higher transaction multiples.

But don't just take our word for it, look at the Company's actions.  In September 2021, the Company bought back its own shares for $11.00 a share.  A $12.00 transaction price would therefore represent less than a 10% premium to the price the Company paid for its own shares mere months ago.

Further, as the B shares are held by insiders and related parties who benefit from, and are participating in, the take-private transaction, the additional deal compensation would only be paid to public shareholders.  An additional $5.00 per share for 20.7 million public shares would be approximately $103.5 million, about half the difference between our estimate of equity value and your proposal.  Let's split the difference in equity value, shall we?

And let's not forget why the share price fell so precipitously in advance of your proposed Insider Takeover.  To recap, business operations were quite promising six months prior to your proposed Insider Takeover, when the stock was in the mid-$11 range after third quarter earnings (closing prices the five days after earnings ranged from $11.25 to $11.70).

The Company clearly agreed that its future was bright as its third quarter earnings release on November 5, 2021 included the following statements from CEO and Board member Alan Sokol:

On the third quarter earnings call, Sokol provided the following additional operational color:

On this same call, CFO Craig Fischer said, "We are pleased with our third quarter performance and are on track to finish the year strongly.  Pantaya's future is promising, and together with the ongoing rebound in Puerto Rico, we look forward to continuing to create value for our shareholders."  Fischer also noted that the "revolver is currently undrawn" in discussion of the balance sheet capacity to continue investing in growth.

On November 15, just ten days after the third quarter 2021 earnings, however, Hemisphere announced a surprise secondary offering with no express purpose.  Companies that do secondaries usually do so either from a position of strength, after a big run in the stock or because there's an immediate use for the capital that will drive accretive returns in the near future.  Absent those two cases, companies doing secondaries are perceived to be doing so from a position of weakness, including potential liquidity concerns or worsening business prospects. 

As the announcement did not come on the heels of a big run and as there was no case made for an expected return on the raise, we believe that investors and the market were left concerned.  In contrast with your upbeat earnings call just ten days earlier on November 5, the offering felt like a knee-jerk move in the opposite direction.

In our view, given the low liquidity of the stock, the lack of explanation for the secondary offering and the fact that the Company had purchased stock as recently as two months prior at $11.00, the stock tanked over the next two days before the secondary was pulled on November 17, and over the remaining six weeks of 2021, the stock sold off 36% to end the year at $7.27.

Was this sell-off driven by concerns about board and management credibility, given this poorly conceived financing?  Or was it because of concerns about the ability to finance Pantaya's growth?  If it were the latter, the fourth quarter earnings call on March 8 should have alleviated those concerns.  It was another strong quarter, and despite continued investment in Pantaya, the balance sheet was substantially the same as it had been the prior quarter, with the revolver still undrawn, suggesting continued ability to fund the growth of Pantaya from existing operations. 

Again, notable comments from Alan Sokol in the March 8, 2022 press release highlighted the improving operations and continued dislocation in price versus value:

Sokol went even further on the March 8 earnings call, saying:

This all sounds great.  A well performing company, with a seasoned team and an "extraordinary portfolio of assets" all geared toward creating significant shareholder value.  Except you apparently don't want the public company shareholders to participate in this upside.  Instead, you propose an Insider Takeover at a discount to a price deemed undervalued by the Company itself in your November earnings report, and even below the price the stock cratered to at the end of 2021 after your ill-conceived secondary. 

What's more, after public shareholders have borne the cost of buying and building Pantaya, the Company also proposes, per the May 9 transaction press release, to sell Pantaya to TelevisaUnivision at a discount to the value Hemisphere itself ascribed to the business in 2021, just as TelevisaUnivision is getting into the streaming business itself.  As Hemisphere has significant private shareholders who are also significant shareholders of TelevisaUnivision, this deal is highly problematic.  Who is getting the better deal for the market-leading asset?  Certainly not public shareholders. 

In addition, the May 9 press release states that "Hemisphere contemplates using the net cash proceeds from the TelevisaUnivision transaction to promptly prepay Hemisphere's outstanding senior secured term loans."  Bully for you.  Essentially, you're openly admitting that while public shareholders financed the growth of the business, only the insiders will benefit from the deleveraging.

If the Insider Takeover is as bad as we say it is, why don't we just vote it down?  Simple.  We don't believe the election will be a fair one. 

The Insider Takeover must be approved by a majority of the disinterested shareholders, which purports to be fair because it removes the super vote from most of the private holders, who are interested in the transaction.  We suspect, however, that certain key class B shareholders, whom the Company counts as disinterested and who will likely determine the outcome of the vote, are, in fact, not disinterested at all due to related party transactions and economic ownership, as well as business and personal relationships.  But rather than get into an argument over that at this juncture, we are instead proposing that you pay public shareholders a fair price that allows them to benefit from a portion of the bright future they have financed. 

The private investors can then still make long-term investments in the Company as a private entity and create more value for themselves down the road, and, because they are rolling their stock, they don't have to pay more for their own shares, only for those of public shareholders who can't otherwise participate in this opportunity given the proposed discounted, insider-led take-private transaction.  A fair deal for Hemisphere shouldn't be half a world away. 

Sincerely,

          Jonathan Brolin
                                   Founder and Managing Partner

Edenbrook Capital, based in Mount Kisco, NY, takes a private equity approach to public markets, principally through concentrated, long-term investments in small and mid-cap companies. 

This material does not constitute an offer to sell or a solicitation of an offer to buy any of the securities described herein in any state to any person. In addition, the discussions and opinions in this letter and the material contained herein are for general information only, and are not intended to provide investment advice. All statements contained in this letter that are not clearly historical in nature or that necessarily depend on future events are "forward-looking statements," which are not guarantees of future performance or results, and the words "will," "anticipate," "believe," "expect," "potential," "could," "opportunity," "estimate," and similar expressions are generally intended to identify forward-looking statements. The projected results and statements contained in this letter and the material contained herein that are not historical facts are based on current expectations, speak only as of the date of this letter and involve risks that may cause the actual results to be materially different. Certain information included in this material is based on data obtained from sources considered to be reliable. No representation is made with respect to the accuracy or completeness of such data, and any analyses provided to assist the recipient of this material in evaluating the matters described herein may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any analyses should also not be viewed as factual and also should not be relied upon as an accurate prediction of future results. All figures are unaudited estimates and subject to revision without notice. Edenbrook disclaims any obligation to update the information herein and reserves the right to change any of its opinions expressed herein at any time as it deems appropriate.

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SOURCE Edenbrook Capital