Monday, March 12, 2012

Takeover Offer At New Frontier Media

Long-time readers of this site will be familiar with New Frontier Media, a company that has been discussed a few times here for both its high cash flow and high cash balance relative to its market cap. Unfortunately, the company has been plagued by some poor-looking capital allocation decisions (perhaps in turn cause by low insider ownership) and high compensation relative to its size. Now, one shareholder has decided to go active, creating a potential catalyst situation.

Longkloof Limited owns approximately 15% of the company, and wrote this letter on Friday to the company's board of directors. It offered to acquire the rest of the company for $1.35 per share, sending shares up 17% to $1.32.

As tweeter Kevin (@kglowalla) argues, it looks like a low-ball offer:

"Low ball offer if I've ever seen one -- effectively 1x FCF if they take out excessive G&A / capex, shutter DTC & film"

In the letter, Longkloof also argues that the board has been unwilling to engage in constructive discussions with Longkloof, concluding that this must be the result of cozy privileges, generous director fees and limited director ownership. The letter also hints that Longkloof may propose its own slate of directors at the upcoming shareholder meeting. With low insider ownership and what is likely to be a disgruntled shareholder base (the share price has fallen from $10 in 2007 to just over $1 today), the results might not go the insiders' way (unlike the situation at Manhattan Bridge).

A few months ago, New Frontier Media was described on this site as "pre-catalyst". Those days are over, as the company has now entered a phase where a catalyst appears present. Shareholders should pay close attention, or even participate, in order to maximize their return.

Disclosure: Author has a long position in shares of NOOF

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