MOUNT
KISCO, N.Y., Aug. 15,
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 Members
of the Special Committee of the Board of Directors of
Hemisphere.
August 15,
2022
Sonia Dulá
Rick Neuman
John Engelman
The Members of the Special Committee of the Board of Directors
Hemisphere Media Group, Inc.
Dear Sonia, Rick and John:
Our firm, Edenbrook Capital, LLC, is writing this letter as a
follow-up to the one we sent to Chairman Peter Kern on May 16,
2022 ("May 16 letter") and to
one we sent to you, the Special Committee, on June 8, 2022 ("June
8 letter"). We are once again addressing this letter
to you, the independent members of the Board of Directors who sat
on the Special Committee that blessed the proposed transaction for
Hemisphere Media Group, Inc. ("the Company" or "Hemisphere") to be
taken private by insiders (the "Insider Takeover"). In our
previous letters we highlighted how the proposed Insider Takeover
by Searchlight Capital Partners, L.P.1
("Searchlight") dramatically undervalues the Company. In this
letter we aim to demonstrate multiple troubling examples of how
Searchlight appears to have abused its position as insider owners
of Hemisphere and, by extension, how we believe the Special
Committee abrogated its fiduciary duty to public shareholders by
allowing Searchlight to run roughshod over the process in a way
that favored Searchlight at the expense of public shareholders.
The Theft of Pantaya
In our previous letters, we discussed how, in conjunction with
the Insider Takeover, Hemisphere intends to sell Pantaya, its
streaming platform, to TelevisaUnivision at a price below what
Hemisphere itself paid for this business in 2021, and how this deal
is conflicted because Searchlight is both the controlling
shareholder in Hemisphere and part of the ownership group of
TelevisaUnivision. Specifically, on a Form 8-K, dated
May 9, and filed May 10 ("the May 8-K"), the Company notes that it
will be receiving $115 million in
cash for selling Pantaya plus a promissory note for $10 million (as well as some radio stations in
Puerto Rico). However, in
the Preliminary Proxy Statement filed on Schedule 14A on
June 27, 2022, the Company notes that
on April 22, 2022, Company A
"delivered to Hemisphere a…proposal to acquire Pantaya for
$200 million in cash, subject to
completion of financial and legal due diligence." Did the
Company jump on this opportunity to sell Pantaya at a
gain2 rather than sell it to insiders at a
loss? To the contrary, per the June
27 Proxy, on May 1 the Special
Committee met with its bankers from Moelis & Company LLC
("Moelis"); upon being told by Moelis that "Company A reported that
they had not seen any significant issues in their due diligence to
date," the Special Committee tasked Moelis with asking Company A to
"submit an updated proposal in the next week." On
May 4, Company A told Moelis that it
would need "at least another month to complete their due diligence
and finalize transaction documents." Not only was Company A
not afforded this extra month, but on May
5, Searchlight told Moelis that "Searchlight understood that
Univision was not willing to agree to a go-shop with respect to
Pantaya." Again, Searchlight is the controlling shareholder
in Hemisphere and part of the ownership group of
TelevisaUnivision. So Searchlight is saying that Searchlight
wouldn't agree to a go-shop with respect to Pantaya, precluding a
higher bid from Company A or others coming in after a deal was
announced.
What was the rush? Why could more time not be granted to a
serious bidder at a higher price? If timing was of the
essence to announce the sale of Pantaya to TelevisaUnivision, why
not then allow a go-shop? The decisions to forego and neglect
these options were, from our perspective, most certainly not in the
best interests of public shareholders, however there was one party
that clearly benefited from each, Searchlight. It's now
three-plus months since the Insider Takeover was announced and
valuations for technology and streaming companies have improved
since May. Could the Company really not afford to give
Company A the extra month to deliver more value to
shareholders?
But it's even worse than that. By agreeing to an
inside deal for Pantaya with Searchlight that is contingent upon
Searchlight also being able to consummate the Insider Takeover for
the rest of the Company at $7.00 per
share, per terms outlined in the May 8-K, Searchlight is, in our
view, stacking the deck in its favor and effectively saying: 1)
only Searchlight, via TelevisaUnivision, can bid for Pantaya, and
will do so at a sweetheart price; and, 2) Searchlight will only do
so if also given the right to buy the rest of the Company at a
song.
Had the Company sold Pantaya for $200
million in an independent transaction, what would be left is
a highly cash-generative company with approximately $70 million in EBITDA and $63 million of free cash flow and basically a
debt-free balance sheet after using the proceeds from Pantaya to
pay down debt. According to FactSet, the average current
trading multiple for comparable companies is 7x for Enterprise
Value to EBITDA and 12x for Price to Free Cash Flow. That
suggests that the stub trading value of Hemisphere would be
$490-756 million, or $12.13-$18.71 per
share, using approximately 40.4 million issued and outstanding
public and private shares. A transaction multiple would be
well in excess of this, and again, similar to the prior letters, we
have not ascribed any value to other assets, including the
$130 million ($3.22 per share) that the Company invested in
Colombia broadcast company Canal
Uno. In short, had the Company sold Pantaya to a willing
bidder for $200 million, we believe
public shareholders would have a remaining public company valued as
an ongoing tradeable company at prices 73-167% above the
$7.00 per share transaction price
proposed by the Insider Takeover.
Are Other Buyers Getting Fair Looks?
In the June 27 Proxy, the Company
disclosed that on June 3, 2022, the
Special Committee received an Acquisition Proposal from Company E
for $9.00 per share in cash, 29%
above the proposed Insider Takeover of $7.00 per share. Also, per the June 27 Proxy, on June 5,
2022, the Special Committee received an Acquisition Proposal
from Company F for $8.00 per share in
cash. Despite two higher prospective cash bids, the Company
still recommended the lower $7.00 per
share bid from insiders when it filed the June 27 Proxy.
In an amended Proxy Statement filed on Schedule 14A on
July 22, 2022, the Company disclosed
that "during the months of June 2022
and July 2022, representatives of
Company E continued to conduct due diligence on Hemisphere and to
show an interest in pursuing a potential transaction with
Hemisphere.
On July 20, 2022, Hemisphere and
Company E entered into a confidentiality agreement for the sharing
of Company E's confidential information." Despite further
demonstrated interest from Company E in a higher cash offer, the
Company still recommended the lower $7.00 per share bid from insiders in the
July 22 Proxy.
In an additional amended Proxy Statement filed on Schedule 14A
on August 10, 2022, the Company
disclosed that "the Special Committee received a modified
Acquisition Proposal from a representative of Company E to acquire
all of the Hemisphere Common Stock for $8.00 per share in cash and $1.00 in the form of registered, freely-tradable
shares of common stock of a public entity." Despite continued
interest from Company E in a higher priced bid in cash, plus
additional value in stock, the Company still recommended the lower
$7.00 per share bid from insiders in
the August 10 Proxy.
More troubling, in the August 10
Proxy, the Company disclosed that "Moelis and Davis Polk [legal advisor to the Special
Committee] have not held initial substantive negotiations with the
representatives of Company E and Company F." Two companies
offered higher cash prices, and neither the bankers nor the
attorneys representing the Special Committee have had initial
substantive negotiations in the two months that have passed
since receiving those bids. We wonder, how can you be
properly exercising your fiduciary duty if you have not had initial
negotiations with these parties who are offering higher cash
prices? How can you continue to recommend a lower-priced cash
offer when paths exist for higher cash bids?
It is particularly troubling that these other higher bids aren't
being pursued with vigor when you allowed Searchlight to lower its
own bid price from $8.00 to
$7.75 to $7.00, per the June
27 Proxy, without receiving any valuable consideration in
exchange. Further, the lowball bid from Searchlight, which
you have recommended, has anchored other prospective buyers into
thinking they can offer modest bumps in their introductory bids,
rather than trying to get fair value, as we have demonstrated in
our multiple letters. The Company has now, effective as of
the August 10 Proxy, set a voting
date of September 8 for the Insider
Takeover, despite better options being available for Pantaya and
the Company as a whole.
In closing, we believe that you have allowed, and continue to
allow, Searchlight to escape with a lower price for Pantaya and for
the Company as a whole, when public shareholders would be better
off selling Pantaya to an unconflicted outside buyer and
maintaining ownership in the remaining valuable, cash-generative
assets. Why not just start over and pursue selling Pantaya
along with the entire Company to an unconflicted outside
buyer? In any case, your continued recommendation that public
shareholders support a $7.00 bid from
a conflicted insider that dramatically undervalues the company is,
in our view, an outrageous dereliction of your fiduciary duties to
all shareholders.
Sincerely,
Jonathan
Brolin
Founder and Managing Partner
About Edenbrook Capital
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.
Disclaimer
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.
Contact: Mike Goodwin, Mgoodwin@stantonprm.com,
646-502-3595
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1 Per the
form 8-K dated May 9, 2022 and filed May 10, the entity proposing
to acquire Hemisphere is HWK Parent, LLC, which is a subsidiary of
Gato Investments LP ("Gato"). Gato is itself a portfolio
investment of Searchlight, and Searchlight is the sole investor in
Gato, making Searchlight the ultimate proposed acquiror
here.
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2 In
April 2021, Hemisphere paid $124 million for the 75% of Pantaya
that it did not already own, putting a valuation on Pantaya then of
approximately $165 million.
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SOURCE Edenbrook Capital, LLC