Believes Veritas Capital’s
Announces Intention Not to Tender its Shares and Encourages Employees to Review the Facts Before Making a Decision
Dear Members of the Board and Valued Employees:
Laughing Water Capital, LP (together with its affiliates, “LWC” or “we”) is a significant stockholder of
Troublingly, it appears that management has presented this tender offer as a fait accompli in internal communications to employee-stockholders, noting only that the offer is dependent on “customary closing conditions,” rather than informing employee-stockholders that they have the RIGHT TO CHOOSE whether they will support this transaction by tendering, or NOT tendering their shares.2 We believe it is misleading and disingenuous to withhold such information from employees when informing them of this POTENTIAL transaction.
We further question the timing of this POTENTIAL transaction, as the deal was announced only two days before HMHC’s previously scheduled Q4’21 conference call, where management would have surely provided guidance for FY’22, and provided information about the continued growth of HMHC’s SaaS offerings, which clearly deserve a higher multiple than traditional education assets. This is noteworthy in light of CEO
We also question the price the Board chose to endorse. We give full credit to the hard work that has been accomplished since
Putting aside this historical marker, simply examining the Company’s “normalized” ability to generate free cash flow (“FCF”) suggests that HMHC can generate
If HMHC specifically - or the K-12 Content Industry more broadly – was about to plummet off a cliff, then perhaps this multiple would be justifiable. However, there is no cliff on the horizon. In fact, due to massive Federal stimulus dollars meant to address Covid related learning loss,
We believe that
We would not argue that this super-normal FCF potential should be capitalized indefinitely in the form of a drastically higher acquisition multiple, but to suggest that stockholders should sell at an extreme discount to normalized levels in advance of super-normal levels boggles the mind.
In our view, a more appropriate multiple would be a minimum of 15x steady state normalized FCF, which suggests a price of
Again, we question the way in which this POTENTIAL transaction has been presented to employees of HMHC, the timing of this POTENTIAL transaction which seems designed to prevent stockholders from having the information necessary to make an informed decision and the valuation of this POTENTIAL transaction. We are thus forced to ask ourselves additional questions:
1) Management has repeatedly stated that the market has not yet fully recovered from the impacts of the pandemic, most recently on the Q3’21 earnings call. Given the rock-solid balance sheet and substantial FCF being generated by the Company, there is clearly no NEED to sell the Company at this time. So why should stockholders CHOOSE to tender their shares at a low multiple now?
2) Management has clearly indicated that the last several years have seen increased investment in “Plate CapEx” as the Company’s digital platform was being developed, but that the heavy lifting is now complete so future expenses will be lower. Why should long suffering stockholders CHOOSE to allow Veritas to benefit from these investments, without paying a full price for them?
3) Management has clearly indicated that due to Federal stimulus dollars meant to address the Covid learning gap, the K-12 instructional materials market should greatly benefit over each of the next 3 years. Given management’s stated belief that the Company can generate 65% incremental FCF margins, these stimulus dollars represent the potential for enormous incremental FCF. Why should stockholders CHOOSE to tender their shares now, and allow Veritas to reap this bounty?
4) In our view, with a net cash balance, at present the Company’s balance sheet is woefully inefficient, contributing to a depressed share price. Further, during our December meeting with management we explicitly stated our fear that an unlevered balance sheet was an invitation for private equity buyers to storm the gates, and attempt a “take under” of HMHC. Management acknowledged this risk, yet it now appears that they and the Board intentionally left the door wide open, and set out a welcome mat. Why should stockholders CHOOSE to tender their shares to Veritas now, rather than having management appropriately lever the Company, and internally tender for shares in order to increase the per share value of the Company?
If the Company were to apply net leverage of 3x 2021 EBITDA-Pre-publication Costs (conservative by industry standards, and the Company’s own history), and then tender for shares at
Why is this not a better path forward when those stockholders who would prefer to sell for
5) In July of 2021 the Company hired
6) The timing of Mr. Symanoskie’s hiring also calls into question the completeness of the Board’s sale process. Examining public filings related to Veritas’ 2018 acquisition of Cambium Learning shows a process that lasted ~10 months, and included contacting 99 potential buyers.7 In our view, the Company would not hire a new head of Investor Relations at the same time it was considering a sale process, which suggests at most the Board spent a “few” months considering a sale of the Company. We apologize for using the vague term “few,” but given the Company’s statement it held discussions with “several” potential buyers, “few” seems appropriate. In any event, “several” is drastically less than 99. Did the Board undertake a full and complete sale process designed to maximize stockholder value? Or was the search limited to those potential buyers that management and the Board had a preference for?
7)
Is it possible that rather than Veritas providing HMHC with the opportunity to accelerate momentum, Veritas will instead allow management to operate without the scrutiny that comes from being a public company? We recognize that re-making a company in public is no easy task, but management wanting to avoid scrutiny does not mean that stockholders should CHOOSE to tender their shares at an insufficient price after what appears to have been an abbreviated sales effort.
Is it possible that Veritas will accelerate momentum through realizing synergies?
However, surely HMHC employees are aware of the history of workforce reductions in the education world more broadly as Private Equity has been consolidating the industry in recent years. Are employees to believe that Veritas will not eventually seek to reduce overlap between Cambium Learning, a company that boasts a presence in 94% of
We estimate that between consolidating the HMHC and Cambium sales forces and attaching Cambium’s Extensions offerings to HMHC’s Core, Veritas could realize more than
To be clear: We believe the synergies alone could be worth billions of dollars to Veritas. Should employees be comforted by the statement that there are no plans to realize these synergies at this time? Should stockholders CHOOSE to support this transaction by tendering their shares at a price that not only undervalues the Company on a standalone basis, but also allows any future potential synergies to accrue entirely to Veritas?
8) As demonstrated above, we do not believe this transaction is in the best interest of stockholders, who are being asked to tender their shares at a price that is well below our estimate of fair value, and we do not believe this transaction is in the best interest of employees, who are being doubly dishonored by being asked to tender their shares at a price that is not only low on a standalone basis, but insanely low on a synergized basis at a time when their jobs are likely months away from the chopping block.
If neither stockholders nor employees stand to benefit, then who does benefit? The obvious answer is management, although we cannot be certain as thus far there has been no disclosure around whatever sweetheart deal management may have been offered as part of this transaction. But will management be thrown in the same bucket as the rank and file employees whose jobs will likely be on the line as a result of this transaction? Or will they be granted new options packages when Cambium and HMHC inevitably merge, and then given the opportunity to realize tens of millions worth of gains when the combined entity likely once again comes public several years later? Why should employee-stockholders not be entitled to participate in some of this potential upside?
In conclusion, we believe this PROPOSED transaction comes with more questions than answers as it does not appear to be in the best interest of stockholders or employees. We thus WILL NOT TENDER OUR SHARES, and we invite the Board and management to ponder the above questions internally when considering if they are fulfilling their fiduciary duties. We believe an honest assessment would lead the Board to conclude that it is in the best interest of the Company, its stockholders and employees to withdraw its support for Veritas’ woefully insufficient tender offer. We further invite employees and other stockholders to ponder these questions as they consider their own response to the PROPOSED transaction.
Sincerely,
Managing Partner
Laughing Water Capital, LP
About
Laughing Water Capital is a value focused investment firm based in
Contact
Laughing Water Capital, LP
msweeney@laughingwatercapital.com
1 https://static1.squarespace.com/static/5d93ed0b59166652b0d66427/t/6140aa00b501454ed0c93167/1631627777129/LWC+-+HMHC+-+ValueXVail+-+final.pdf
2 https://d18rn0p25nwr6d.cloudfront.net/CIK-0001580156/e1c52a26-50d5-473c-b1ee-00415ba6799b.pdf
3 HMHC at
4 Normalized FCF defined as average 2016-2019 billings,
5 HMHC Q1’21 conference call
6 2021 adj. EBITDA – Prepub =
7 https://www.sec.gov/Archives/edgar/data/1466815/000119312518323759/d627705dprem14c.htm#tx627705_21
8 https://d18rn0p25nwr6d.cloudfront.net/CIK-0001580156/e1c52a26-50d5-473c-b1ee-00415ba6799b.pdf
9 https://d18rn0p25nwr6d.cloudfront.net/CIK-0001580156/e1c52a26-50d5-473c-b1ee-00415ba6799b.pdf
Source: Laughing Water Capital, LP
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