Bankers,
This letter is
further to our phone conversation earlier today regarding our need for
financial advice. We are assessing who we will retain as our investment
bankers.
Our firm ("ParentCo"),
is a medium sized (slightly less than $550m in market cap and approximately
$800m in
revenues), non‐dividend‐paying publicly traded entity with two reporting units,
one involved in the media business ("MediaCo") and the other involved
in the apparel business ("ApparelCo").
There are
several hedge funds who own small percentages (each hold less than 4% of total
outstanding common shares, but none have a board seat) in the Company.
Recently, one hedge fund, Activist Capital, publicly released a letter asking
ParentCo to divest ApparelCo and focus on its media business. Activist Capital
argues that this course of action will raise the stock value for shareholders.
Activist Capital also noted that if we don't do this, they will push to replace
management and/or to demand a sale of ParentCo.
In the midst of
all this, we have actually been thinking of acquiring a certain private fashion
company ("FashionCo"), which is approximately the same size as
ApparelCo in terms of revenue and this could be a prime opportunity to
accelerate our growth, improve margins and regain public confidence in our
commitment to drive value creation.
We are looking for you to help
us through this process and advise us on whether we should:
·
look to sell ApparelCo and if so, at what price
would be reasonable to sell;
·
look to acquire FashionCo, and at what price
should we make an offer;
·
keep the status quo;
·
or pursue other
options.
In providing this advice, we
would like to know the following:
·
What are ApparelCo and FashionCo
worth individually? What might change the value if they were combined?
·
Given these valuations as well
as other circumstances, should we bid on FashionCo and, if so, how much should
we bid?
·
What other strategies are
available to provide liquidity and/or enhance value to the ParentCo
shareholders?
ParentCo,
located in Los Angeles, California, is involved in the media and apparel
industries through its MediaCo and ApparelCo reporting units. The Company was
founded approximately 40 years ago by Harvey Masterson. Harvey resigned as the
chairman of the board and CEO of ParentCo 15 years ago but is still an
important stockholder in the Company and regularly provides advice as a board
member. The Company was known as MediaCo until the formation of ApparelCo 10
years ago, at which time the Company changed its name to ParentCo.
·
Aside from MediaCo and ApparelCo, there are no
other entities that are a part of ParentCo.
MediaCo is engaged in the publishing of daily, weekly and monthly
periodicals, and operates a website and small television production company that
all focus on consumer product reviews. Harvey originally started MediaCo as a
once‐a‐month periodical providing reviews of consumer goods that could be
purchased in local retail outlets. As MediaCo grew, it expanded into several
more periodicals (mainly newspapers), developed relationships with television
networks to produce programming based on its periodical content and developed a
website approximately 10 years ago that primarily provides content available in
its periodicals.
·
The majority of MediaCo periodical sales are
made to professionals between the age of 45
and
65. However, management has made
efforts in the past year to target a younger audience.
·
Over 90% of MediaCo revenues come from the sale
of periodicals.
·
Management believes the production po1tion
of the business is barely
making a profit but
enhances MediaCo's marketing reach.
·
After a significant push over the past 10‐15
years, growth has slowed and management does not see many more opportunities
for organic growth in the coming years, aside from capturing new customers that
are younger than 45.
ApparelCo
designs, develops, sources, markets, and distributes fashion‐forward apparel
and accessories products for men and women. ApparelCo was founded 10 years ago
as a means of capitalizing on the relatively well‐known brand name of MediaCo
through the design and sourcing of apparel carrying the MediaCo logo. ApparelCo
products are sold in a limited number of mass retail outlets and are considered
to be of high quality and fashionable.
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