Edenbrook Capital Sends Letter to Hemisphere Media Group Special Committee

Rhea-AI Summary

Edenbrook Capital, a significant shareholder in Hemisphere Media Group (HMTV), has expressed concerns regarding the proposed Insider Takeover led by Searchlight Capital. Edenbrook claims the deal undervalues the company and accuses the Special Committee of neglecting their fiduciary responsibilities. The firm highlights that Hemisphere is set to sell its streaming service Pantaya for $115 million, less than the $200 million offer from another company. Edenbrook argues that public shareholders would fare better if Pantaya were sold to independent buyers, not insiders.

Positive

• None.

Negative

• Proposed sale of Pantaya undervalues the asset at $115 million, compared to a prior offer of $200 million.
• Searchlight, the controlling shareholder, is accused of conflicts of interest in the Insider Takeover process.
• The Special Committee failed to seriously negotiate higher acquisition proposals, including bids of $9.00 and $8.00 per share.

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

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.
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

FAQ

What concerns did Edenbrook Capital have about Hemisphere Media Group's Insider Takeover?

Edenbrook Capital criticized the Insider Takeover as undervaluing Hemisphere and accused the Special Committee of failing to uphold fiduciary duties to public shareholders.

How much is Hemisphere Media Group selling Pantaya for?

Hemisphere is set to sell Pantaya for $115 million, significantly lower than a previously received proposal of $200 million.

What were the higher acquisition proposals received by Hemisphere Media Group?

Hemisphere received higher bids of $9.00 and $8.00 per share but recommended the lower $7.00 per share offer from insiders.

Why does Edenbrook believe the Insider Takeover is detrimental to shareholders?

Edenbrook argues that public shareholders would benefit more from an independent sale of Pantaya rather than selling to insiders at a lower price.