MOUNT
KISCO, N.Y., June 8, 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.
June 8,
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").
We are 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 the May
16 letter, we discussed our view that the Insider Takeover
"undervalues the Company and allows insiders to disproportionately
benefit from the very share price erosion they are responsible
for." We wrote that a deal to take the Company private at
anything less than $12 per share was
indefensible, as opposed to the $7.00
being offered. But after reading the additional financial
disclosures in the Company's Pre-Marketing Lender Presentation
("the Presentation") filed as an exhibit to a Form 8-K on
June 3, 2022, we now realize that our
estimates were too conservative, and that the equity value for
public shareholders should be at least $16-23 per share, as we'll demonstrate, and that
this Insider Takeover dramatically disadvantages public
shareholders, is rife with conflicts of interest and is borne out
of a flawed, unfair process that benefits insiders at the expense
of public shareholders.
Updated Valuation
On page 34 of the Presentation, on a slide titled, "Compelling
Financial Profile," the Company details its pro forma free cash
flow calculation for the 12 months ended March 31, 2022. The total of that free cash
flow is $70.5 million, and the
footnote highlights that this is unlevered free cash
flow.
To calculate the levered free cash flow that would actually flow
to public equity holders, were they allowed to participate as
shareholders in an ongoing entity, we account for the interest
owed. As per the Company's most recent Form 10-Q, filed on
May 10, the Company had net debt of
approximately $212 million at its
most recent quarter end, the same end date for the last 12 months
calculation for the free cash flow. But this number
overstates the pro forma net debt, because the May 9 press release announcing the Insider
Takeover states that "Hemisphere contemplates using the net cash
proceeds from the TelevisaUnivision transaction to promptly prepay
Hemisphere's outstanding senior secured term loans." Recall,
this TelevisaUnivision transaction involves the acquisition of
Pantaya, Hemisphere's streaming platform. As we wrote in our
May 16 letter, Hemisphere has
significant private shareholders who are also significant
shareholders of TelevisaUnivision, making that deal highly
problematic, as we will demonstrate. 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). If we thus
reduce the net debt of the company by the $125 million coming from TelevisaUnivision, net
debt would decrease to $87
million. As of this writing, the interest rate on that
debt is approximately 5.165%1, making the annual
interest payment on the remaining net debt approximately
$4.5 million. Subtracting that
interest payment from the $70.5
yields levered free cash flow of $66
million. Modest changes in interest rates or levels of
net debt will not have meaningful impacts on the equity value
calculations that follow.
Comparable companies trade at free cash flow yields of
7-10%. The price/free cash flow multiple, the inverse of the
free cash flow yield, is thus 10-14.3X free cash flow.
Applying that multiple range to the $66
million of free cash flow yields an equity value of
$660-$943.8
million. As Hemisphere has approximately 40.4 million
shares outstanding, that yields an equity price per share of
$16.34-$23.36. Note that the low end of this
valuation range is more than double the $7.00 per share offer of the Insider Takeover,
and the high end is more than triple that price.
The Insider Takeover appears to be a brazen attempt to buy
Hemisphere for just 4.3x free cash flow (40.4 million shares at
$7.00 is $282.8 million of equity value, divided by
$66 million of pro forma levered free
cash flow, as described above, equals 4.3x). Further, this
valuation is based on today's free cash flow per share, and as
we'll show shortly, the Company is expecting strong growth in these
numbers. This low valuation being offered, 4.3x free cash
flow, is one you might see for an over-levered, distressed company,
not one with the following characteristics: 1) conservative
financial profile; 2) strong organic growth and with demographic
and industry trends in Hemisphere's favor; 3) stable, predictable
revenue streams; 4) strong cash flow generation; and 5) ability to
de-lever quickly. Those aren't our characterizations of the
Company, they come from page 39 of the Presentation, where the
Company describes itself to the lending community. Sounds
like a great business to own! If only insiders weren't trying
to wrest it from public shareholders for a song.
Given the high quality of the Company's remaining assets after
the sale of Pantaya, and its industry leading margins, per page 33
of the Presentation, we think the valuation should be at the higher
end. Further this valuation excludes any value for Canal Uno,
which as we mentioned in the May 16
Letter, is the Company's joint venture in a Colombian broadcast
network, into which Hemisphere has invested approximately
$130 million in recent years.
There is only an oblique reference on the final page of the
Presentation, in an organizational chart, to an entity called HMTV
Uno S.A.S. (Colombia). Is
the Company saying that it has frittered away $130 million of value, or are public shareholders
also being deprived of the rights to an asset for which they
invested approximately $3.22 per
share? And the other assets, including equity stakes in Snap
Media, a content distribution business, and Remezcla, a Latin
American cultural media company, what of their value? They
are also part of the Insider Takeover, with no value being given to
public shareholders.
Robbing Peter to Pay Paul
Per the May 8-K, 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 Capital Partners, L.P. ("Searchlight").
Notably, per a December 29, 2020
press release, Searchlight, along with another entity, became
majority owners of Univision, now TelevisaUnivision. As we
mentioned in the May 16 Letter, per
the May 9 transaction press release,
Hemisphere intends 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 and searching for scale. The same
TelevisaUnivision in which Searchlight is part of the ownership
group. The same Searchlight that is also the controlling
shareholder of Hemisphere. Instead of entertaining a full
search process for a buyer of Pantaya, Searchlight is moving
Pantaya from its right pocket to its left. Are public
shareholders to believe that Hemisphere is getting a fair deal for
Pantaya, when the proposed buyer is also the seller?
What's more, we argue that the $7.00 being offered to public shareholders has
effectively cost Searchlight, the sole investor in Gato,
nothing. A little history here is instructive. In 2016,
InterMedia Partners, LP, an investor in Hemisphere, sought to
provide liquidity to its limited partners as the fund through which
it invested in Hemisphere was near the end of its term, per a
Company press release on September 7,
2016. Searchlight offered $9.75
in cash for those shares, at a time when the stock was trading at
$12.85, a $3.00+ discount. Were
public shareholders offered this deal to participate in the equity
at a lower price? They were not. And when the deal
concluded, Searchlight had purchased approximately 16.5 million of
the privately held, super-voting B shares, per a Company press
release on October 24, 2016, which
represents approximately 84% of the outstanding B shares, a 41%
economic interest and a commanding 76% of the voting interest in
the Company. Did public shareholders have the option to buy
shares with 10 votes per share? They did not, meaning this
$3.00+ discount significantly understates the discount Searchlight
received on these shares at the expense of public shareholders, as
they came with substantially more rights, at substantially less
cost.
Further, as we noted in our May 16
letter, the Company was purchasing its own stock in September 2021 for $11.00 per share. But now the Insider
Takeover has insiders only offering $7.00 per share to public shareholders, a
$4.00 discount to the price the
Company itself paid in September. Quick math here suggests
that $3.00 plus $4.00 equals $7.00,
meaning that insiders have already enjoyed a $7.00 benefit relative to public
shareholders. Public shareholders are not only being stiffed
on the valuation, they are effectively being done so with found
money.
All Wrong
The English translation of the hit movie "Todo Mal," streaming on Pantaya, is "All
Wrong." A rather apt description of all sides of these
transactions, the insider sale of Pantaya and the Insider Takeover,
or take under, of Hemisphere at the expense of public
shareholders. If selling Pantaya is really the right
strategic decision, why not just do so through a robust, open
process and allow public shareholders to own the remaining business
as a public entity? A business with the characteristics the
Company described on page 39 of the Presentation, being scooped for
a valuation of 4.3x free cash flow, with effectively found money,
sounds like a steal. But it is the public shareholders who
are being robbed (at least those who aren't also holders of the
super-voting B shares, including various insiders and participants
in the Insider Takeover).
As the Special Committee of the Board overseeing this
transaction, you have a duty to treat public shareholders fairly
and to not allow the Company to be taken private at such a low
price and in such a conflicted series of transactions. Will
we learn more when you file the Proxy Statement detailing the
history of these transactions? Here's betting that the
history the Company will show flatters the case on behalf of the
Insider Takeover. Unfortunately the Presentation you already
filed will likely give lie to any attempt to suggest that the
remaining assets ex-Pantaya are distressed and that the offer for
Hemisphere is fair. Will you allow this to take place on your
watch? The world is watching.
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.
1 The interest rate the Company pays is a floating
rate of US 3-month LIBOR + 350 basis points on one tranche and a
slightly lower rate on the other tranche, but to be conservative,
we have used the more expensive debt for this calculation.
Contact: Mike Goodwin,
Mgoodwin@stantonprm.com, 646-502-3595
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SOURCE Edenbrook Capital