The Donerail Group LP (together with its affiliates, “Donerail”,
“We”, or “Us”), one of the largest shareholders of Turtle Beach
Corporation (the “Company” or “Turtle Beach”) (NASDAQ:HEAR), with
beneficial ownership of approximately 7.4% of the Company’s
outstanding shares, released the following statement on December
22, 2021:
On December 20, 2021, Donerail presented to the
Company’s Board of Directors (the “Board”) a Revised Offer to
acquire the Company in an all-cash transaction at a proposed price
of $32.86 per share.
In our Revised Offer, we again attempted to
address the two principal concerns the Board has expressed in its
previous declinations to engage with us a potential acquiror: i)
that the proposed acquisition prices have not been “sufficient”1
and ii) that there were concerns regarding “Donerail’s ability to
consummate a transaction and its financing sources.”2
Hours after we submitted that Revised Offer, the
Company issued a press release reiterating those concerns. Perhaps
the Board had chosen not to review our Revised Offer before
authorizing its press release, but that does not change the fact
that the Company’s press release omits material information about
our interaction with the Company as of the time it was issued.
Accordingly, we feel it is important to summarize our Revised Offer
and the efforts it contemplated to address these concerns that the
Board has previously expressed.
Offer Price
Our revised offer of $32.86 per share stands at
a 51% premium to the Company’s closing share price on December 14,
2021 and a 28% premium to the 30-day volume weighted average price
of the shares. We believe that such price warrants immediate
engagement.
While we believe that we could potentially
meaningfully increase our offer price subject to due diligence,
since the Company rejected our bid of $36.50 per share over the
summer, there has been reason to lower our initial offer
price:
The Company has not executed on its operating
plan, as evidenced by the Turtle Beach management’s lowering of
their annual 2021 earnings guidance by 20% on November 4, 2021,
causing the stock price to decline nearly 25% in the weeks
following the release.3 While we believe such a profitability
warning could likely have been avoided with more prudent cost
management and a more intentional focus on operations, we do remain
hopeful that such issues are unlikely to have created a meaningful
long-term value dislocation. Subject to confirming that such
beliefs are true, we would consider substantially increasing our
offer.
It has been unclear to us at what price the
Company would be willing to engage with us to sell the Company, and
we have historically been provided limited
direction.
Recent events have, however, afforded
shareholders a clearer view as to what management believes to be
fair value of the Company’s equity, and such visibility has
provided us with additional clarity, too.
Regulatory filings published just weeks ago
detailed that the Company’s CFO, John Hanson, chose to sell nearly
his entire personal equity position in Turtle Beach at an average
price of $27.38 per share in mid-November 2021. In constructing a
revised offer to acquire the Company, we felt most compelled to
ensure that shareholders receive, at a minimum, at least an
attractive 20% premium to where Mr. Hanson sold nearly the entirety
of his personally held shares.
No doubt that as both shareholders and the Board
assess the attractiveness of our Revised Offer against management’s
own standalone plan, one must call into question the credibility of
any management-led standalone plan when one of the Company’s chief
executives responsible for such plan has liquidated nearly his
entire holdings in recent weeks – at a significantly lower price
than our offer.
In summary, in the months following the
rejection of our prior $36.50 per share offer, the Company’s
management has now missed and lowered its own annual profitability
guidance targets, the CFO has now sold nearly the entirety of his
equity stake in the Company, and prior to our public reassertion of
our interest in acquiring the Company, Turtle Beach stock had
fallen precipitously to nearly 52-week lows.
On behalf of all shareholders, we are hopeful
that this Board does not refuse to engage with us at this price
today.
Financing Considerations
It is true that Donerail is not a traditional
private equity buyer and, although we have raised acquisition
financing a number of times in recent years, participating in sales
processes to acquire the entirety of companies is not generally a
focus of ours. While Donerail’s committed pools of capital do offer
flexibility to enter illiquid investments, any acquisition of
Turtle Beach by Donerail would require equity co-investment
financing which, like our prospective debt financing, can only be
fully committed once we have the ability to conduct due diligence
of the Company’s confidential information.
Conscious that an acquisition by Donerail would
inherently have a dissimilar financing structure from the structure
used by traditional private equity acquirers, Donerail has extended
itself at great lengths to provide comfort for this Board to move
forward on behalf of shareholders.
Over the past nine months, Donerail has provided
the Company with support documentation from other large asset
managers that have indicated a desire to partner with us in an
equity co-investment financing vehicle for Turtle
Beach. In addition, Donerail has connected the Company
to our investment bankers that have shown the Board an eagerness to
provide debt capital required for a transaction.
It should be noted that, in providing financing
support for the Company’s bankers to review, a number of our
potential financing partners requested to have their institutions’
names and identifying information redacted from initial
documentation provided to the Company; although confidentiality is
generally expected in these matters, the Board has the right not to
respect privacy and release such documents publicly, as this Board
has done, and many prospective financing partners only want to be
visible when the non-disclosure agreements are
signed.
That notwithstanding, the highly redacted
document that the Board released as part of its December 20th
release was just one document that, on its own, clearly lacks
sufficient merit to warrant proceeding further in negotiations with
us.
Critically, that redacted document was just one
document in the suite of documents, banker conversations, and
investor communication that the Board reviewed in context of our
proposed financing – a review that led the Board to communicate to
us on July 9, 2021, that our offer had become viewed as both
“credible” and “fundable”.
In short, the Board assessed our financing and
deemed it “credible” and “fundable”, yet in its December 20, 2021
press release, the Board chose to release a singular, redacted
document that, presumably, played but a small role in the Board’s
subsequent deeming of our financing as such.
Such a tactic should strike shareholders as
concerning: a Board willing to, quite atypically, release privately
disclosed information that serves to potentially evade good faith
discussions with a “credible” and willing acquiror, simply for the
sake of distracting shareholders from the core issues that the
Board seemingly refuses to engage with us on, does not benefit
shareholders. Shareholders are right to note that such actions
illustrate a Board that does not appear to be seeking to optimize
the price that such an acquiror can offer shareholders, but rather,
a Board that seeks to discourage or even embarrass such an acquiror
from even continuing with its effort. Frankly, shareholders deserve
better.
Importantly, once the Company and its bankers
signaled we could move forward with our proposed financing
structure, it was also then explicitly conveyed to us that if we
were able to increase our offer price, the Board would be willing
to sign a non-disclosure agreement and constructively engage with
us in sale discussions. As has been disclosed previously, we chose
not to increase our offer price and discussions stalled.
Given the above, until just recently, we were of
the clear understanding that price, not financing concerns, was the
gating item to negotiating a transaction.
In its press release on December 20, 2021,
surprisingly and without explanation to us as to why, the Board
reversed its prior, historically resolved concerns about our
prospective financing package, erasing months of behind-the-scenes
work that we completed in good faith alongside the Company’s
bankers.
Such a maneuver by the Board to continue to
stall a willing acquiror further illustrates what we believe is a
lack of good faith at the Board level, and we are unconvinced that
this Board is open to selling the Company, at any price.
To establish that the Board is even willing to
entertain a sale of the Company as an option against its standalone
risk-weighted plan, we are again calling on the Company to publicly
disclose that it is running a Strategic Review process, if such a
process is underway, and if it is not, we call on the Company to
initiate one in short order.
To be clear, such a public announcement of a
Strategic Review process does not conflict with our own desire to
purchase the Company at an attractive price; it is naïve to believe
that a public company with a heightened level of scrutiny would
agree to sell to any single party in a one-off, directly negotiated
transaction. What an announcement of a public Strategic Process
does do, however, is create an accountability for the Board to run
a transparent, comprehensive, and robust process that shareholders
can then assess against this management team’s own risk-weighted
standalone plan.
We believe that this is all shareholders want,
and we believe this is what shareholders deserve.
To highlight our readiness to transact, we
intend to send the Board a typical and customary non-disclosure
agreement for transactions of this type which will facilitate the
transmission of the diligence materials we need to secure
financing, while ensuring that we do not waive certain rights that
other shareholders and our own investors would expect us to
maintain.
We eagerly look forward to engaging with this
Board in an expeditious fashion.
About Donerail
The Donerail Group LP is a Los Angeles-based
investment adviser that employs a value-oriented investment lens
focusing on special situations and event driven investments.
Investor Contact:Wes Calvert, (310) 564-9992
__________________________________1 Turtle Beach
Press Release dated 23-Aug-20212 Turtle Beach Press Release dated
23-Aug-20213 Turtle Beach Press Release dated 4-Nov-2021
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