Spanish
Broadcasting System Inc. (NDAQ: SBSA) shares have fallen over 80 percent since
the summer began and is now in danger of being delisted from the Nasdaq. Once in the
spotlight thanks to a quickly growing Spanish market, Spanish broadcasting firms are
quickly losing ground thanks to the economic slowdown and advertising weakness. Analyst
downgrades citing weak momentum with no upturn yet in sight hasn't helped the cause
either.
Spanish Broadcasting shares have fell from a high of $20 per share in 1999 to just
$0.24 right now. In the meantime, at least one activist shareholder has been trying
to unlock value. Discovery Group has insisted that the company form a special committee
to explore strategic alternatives, including a going-private transaction, sale to
a strategic party, or at least the adoption of modern corporate governance practices.
Investors believe that Spanish Broadcasting may hold a number of properties that large
media channels may be interested in acquiring. The company enjoys market leadership
position, operating in a highly attractive geographic market and is situated in the
most promising media genre. However, CEO Alacron has refused to entertain any offers
that would involve him relinquishing control of the company. This includes offers
that have already been made at a substantial premium.
According to a letter sent months ago:
"We now know this claim to be justified because we have direct knowledge
of an important public media company (“XYZ”) that is interested in a potential transaction
that could yield a substantial premium to the current SBSA stock price, yet Mr. Alarcon
refuses to engage in an evaluation of this opportunity. During a meeting with Mr.
Alarcon in December 2007 members of our firm presented the rationale for a combination
with XYZ, to which SBSA would bring great strategic value and substantial, immediate
cost synergies. Mr. Alarcon concurred with the analysis and suggested that we get
the reaction of XYZ’s management to the idea.
"Our team met in January 2008 with XYZ’s Chairman/Chief Executive Officer and its
Chief Financial Officer. We communicated to Mr. Alarcon that the XYZ officials were
very enthused about the possible combination and wish to engage in a further dialogue
directly with Mr. Alarcon. Mr. Alarcon is also in possession of detailed materials
prepared by Discovery that outline a proposed structure for this transaction which
yields a premium in excess of 100% to SBSA shareholders.
"Suddenly and without explanation, Mr. Alarcon refuses to discuss this opportunity.
While Mr. Alarcon’s change in posture is consistent with his industry reputation,
it is surprising nonetheless. Mr. Alarcon’s resistance in this case cannot be attributed
to valuation because the proposed structure gives him the option to either remain
invested or liquidate his shares. Rather, it appears that Mr. Alarcon fears a loss
of control. That fear is interfering with Mr. Alarcon’s ability to act in the interest
of all shareholders."
It is clear that there is a lot of value that can be unlocked if Discovery
Group can successfully pressure Spanish Broadcasting into at least entertaining such
offers. Moreover, a simple move to modernize governance practices would enable shareholders
to more forcefully make demands designed to maximize value. In the end, this is a
valuable company being held back by a poor management team, but Discovery Group aims
to change all that.
