Hemisphere Media Stock: New Competing Bids Offer Upside (NASDAQ:HMTV)

An important update to our previously written NASDAQ:HMTV article from two months ago – see it here. For a quick catch-up – small cap US-Hispanic-focused media company Hemisphere Media is being taken out opportunistically by insiders for $7/share. Activist fund Edenbrook Capital (owns 15% A shares, 7.7% economic interest) opposed the deal saying the management had artificially depressed the share price before the takeover and that HMTV is worth at least $12/share. However, the main risk is that management affiliates appear to be holding just enough voting power to outvote the remaining shareholders in a minority vote. When we wrote the last article, the share price was trading at 5% to the offer price, so the situation seemed interesting and on top of that, you had a low-risk option for a small offer price bump.

At the end of June, HMTV price suddenly jumped up and now trades at 12% above the current offer. This was because the company had released a preliminary proxy, which showed that during the last week of the go-shopping period HMTV received two competing bids:

• On June 3 – an undisclosed buyer named ‘company E’ proposed a bid at $9/share.
• On June 7 – another bidder ‘company F’ made an offer at $8/share.

Quite conveniently, the go-shop period ended on June 8, which limited HMTV ability to engage with the bidders. HMTV share price reaction seemed quite optimistic given that management could’ve just easily ignored these offers easily and proceeded with their buyout (especially as they had the needed shares to win the minority vote). However, apparently, the market thought that these two higher bids combined with the activist pressure will force management to increase their own bid. By the way, another activist Boyar Asset Management has recently joined Edenbrook Capital saying that management’s offer is ridiculously low:

this offer dramatically undervalues the Company: not only is it ~7% below the value of the stock at the beginning of 2022, but it’s also nearly 50% below Hemisphere’s 52-week high. This wholly inadequate “takeunder” is hardly in the best interests of long-term investors and is fraught with conflicts of interests. To add insult to injury, much of the past year’s price decrease appears to have been attributable to some of the Company’s own questionable capital allocation and managerial decisions. It is a travesty that the very people in our opinion who are responsible for the share price decline at HMTV are now the ones set to benefit from this laughably low bid.[…]The proposed takeover price dramatically undervalues Hemisphere, raising fears that Company insiders may be attempting to capitalize on the reduced valuation (for which they themselves could partly be blamed) by taking the Company private at a level they know to be well below its intrinsic value. Such a take-private deal might benefit insiders, who could continue participating in the potential synergies and accelerated growth opportunities of the combined entities, but we believe that public investors are getting a raw deal.

Apparently, the market’s optimism was right on point as the recently updated proxy unveiled that the ‘company E’, which previously offered $9/share has continued to conduct due diligence on HMTV during June and July. Moreover, on July 20 HMTV management and ‘company E’ entered into a confidentiality agreement for sharing of the bidders’ confidential information. This kind of signals that, after all, HMTV management might be interested in a sale. It’s not impossible that, given management’s large ownership of HMTV shares, it might even try to beat out a price increase here. Headroom for the price increase seems sufficient. See the previous article for Edenbrook’s sum-of-the-parts breakdown, which resulted in HMTV a target price of at least $12/share.

Conclusion

If negotiations proceed successfully, there’s a 15%+ potential upside to the competing bid from the ‘company E’ vs an 11% downside to the current management’s offer. The main risk remains the same – management walking away from negotiations and proceeding with their own $7/share bid. Given the recent events, this risk looks substantially lower now. Overall, the risk/reward is positively skewed and there’s a chance that the potential downside might be even lower here due to all of the pressure on the management to increase their own offer price.