Spark Networks Inc. (LOV
) is worth far more than the paltry $3.10 per share cash offer
by Great Hills Partners, said one dissident activist shareholder. In fact, it could
be worth between $6 and $7 per share in the event of a fair auction process.
Spark Networks Inc. (LOV) is still considering a $3.10 per share offer from Great
Hills Partners that has been drawing criticism from many shareholders, including 6.1%
owner Osmium Parnters, which sent a letter to the board of directors expressing its
outrage. Shareholders seem to agree with this belief with shares trading above the
offer price at $3.50 per share.
Osmium Partners urged the special committee appointed by the board of directors to
evaluate the Great Hills Partners buyout proposal to reject the offer and instead
hire an investment bank to undertake an open and fair process. If done, the 6.1% shareholder
believes that the firm could fetch a $6 to $7 per share offer from a strategic buyer.
"When GHP invested 5 years ago, the valuation equated to $6.95 a share or 11.2x current
EBITDA, and after growing EBITDA significantly over that time frame GHP now expects
to buy out fellow investors at a multiple of 5.2 times adjusted EBITDA," said Osmium
Partners Managing Partner John Lewis in a letter to the board.
Osmium believes that Spark Networks could attract a superior offer from a strategic
buyer due to potential synergies, strong affinity brands, and an ability to raise
the average revenue per user by cross-promoting with a significant existing membership
base. The hedge fund sees these buyers paying between 9.1x and 11.3x EBITDA, which
is where public comparable trade.
Osmium further notes that the true value of Spark Networks is obscured by its Other
Affinity segment and chronic mismanagement. The company's iconic JDate segment has
92% contribution margins, while its Other Affinity division stands at just 33%. And
while it generates 23% adjusted EBITDA margins, management could be doing a lot more
to build value.
"All of the decline in total subscribers over the last three years can be attributed
to a management ordered intentional run-off of the General Markets segment," continued
Mr. Lewis in his letter. "Other factors that have hurt the company's ability to grow
include a 14% price hike on JDate in April 2008, a 50% cut in JDate's marketing budget,
and a large investment in subscale brands with deteriorating economics."
In the end, Osmium demanded that the board of directors reject the proposal and seek
a more open and fair sale by hiring an investment bank to consider strategic offers.
Whether or not this materializes remains to be seen, but shareholders are clearly
expressing some bullishness, as shares are trading above the proposed buyout price
of $3.10 per share.