The Donerail Group LP (together with its affiliates,
“Donerail”), one of the largest shareholders of Turtle Beach
Corporation (the “Company”, “Turtle Beach”, or “HEAR”), owning more
than 4% of the outstanding shares of the Company, released the
following letter today sharing its perspectives on its
investment.
In its letter, Donerail disclosed its significant concern
regarding the Company’s rejection of Donerail’s attractive offer to
purchase the entirety of the Company and detailed its unwavering
commitment to continue to work to maximize value for all
shareholders.
The full text of Donerail’s open letter to the Company
follows:
July 19, 2021
Juergen StarkTurtle Beach Corporation11011 Via Frontera Suite
A/B San Diego, CA 92127
cc: Board of Directors
Dear Juergen and Members of the Board of Directors,
As you know, The Donerail Group LP, together
with its affiliates (“Donerail” or “we”), is one of the largest
shareholders of Turtle Beach Corporation (the “Company”, “Turtle
Beach”, or “HEAR”). Over the last five months, we have appreciated
the more than dozen meetings that we have had with you, your
management team, your representatives and members of the Board of
Directors (the “Board”), and we have more conviction than ever that
Turtle Beach is meaningfully undervalued at today’s share
price.
At Donerail, engagement with management teams
and boards is a highly critical component of our investment
strategy, and we very much endeavor to build constructive dialogue
with the management teams and boards of the companies in which we
choose to invest. While Donerail is a relatively new investment
manager, our principals have had a long history of success working
with management teams to help create value for all shareholders. In
our experience, we have found that providing our thoughts and
advice privately to management teams and boards can oftentimes lead
to superior outcomes for shareholders, as doing so outside of the
public domain generally minimizes distraction for the company, its
employees and its customers. As such, private engagement will
always be our prevailing preference, and to date, we have refrained
from sharing our thoughts on HEAR publicly.
With that being said, recent engagement with the
Board and its representatives has left us with a heightened level
of concern regarding the Company’s strategy for creating value and,
as a top shareholder, we feel compelled to raise our concerns with
other shareholders and share this letter publicly.
Over the past five months, we have actively
engaged with you regarding a multitude of value-creation and
governance-enhancing topics. While those discussions have
admittedly had their fair share of friction, we were pleased to see
your responsiveness in our request to increase the diversity and
skill set of your Board, and we applauded you for the appointment
of Yie-Hsin Hung, an accomplished and talented executive, as a
start. Further, we commended you for heeding our concerns regarding
the lackluster acquisition history of this management team, and we
were pleased to see you increase the Company’s buyback
authorization in lieu of acquiring additional risk-enhancing
assets. As we have expressed to you, greater diversity in the
boardroom and mindful capital allocation are paramount interests of
ours.
Rather than begin the debate on the efficacy of
your historical capital allocation initiatives or certain of your
corporate governance decisions, our most pressing and immediate
concern is principally related to your quizzical and confounding
unilateral rejection of our highly attractive acquisition proposal
for the Company that we sent on April 27, 2021.
As our conviction in the power of the Turtle
Beach brand grew, we decided the best path forward for us was not
to simply remain a top shareholder, but rather, to pursue an
acquisition for the whole company. Consequently, we sent you an
acquisition proposal for Turtle Beach (the “Proposal”) that
detailed our initial offer to purchase the entirety of the Company,
detailed our ability to finance the transaction, highlighted our
view that we would not need a financing contingency as part of a
transaction, and articulated that “upon completion of an expedited
confirmatory due diligence process”, we would “be able to
meaningfully increase our offer” if, based on our diligence, we
found evidence of additional value inherent in the Company that
would warrant a higher premium.
It should be noted our incredible excitement for
this opportunity led us to making an unsolicited overture: simply
put, following our significant research, we have come to believe
Turtle Beach to be one of the preeminent brands in gaming
peripherals today, and the market-leadership that the brand has in
console headsets is both remarkable and enviable. Through our
industry research, it has become quite clear that the quality of
personnel at the Company includes some of the brightest and most
impressive talent in the industry who, under appropriate leadership
and strategy, can drive significant value for equity holders well
into the future.
Over the past eight weeks, we have worked in
good faith to provide comprehensive details regarding the
prospective financing package for our Proposal, as you requested.
While we found certain of your requests to be significantly time
consuming and surprising given the strength of our financing
package and partners, we were nonetheless pleased to learn that on
July 9, 2021, the Board had limited financing concerns and
confirmed the credibility of our prospective financing package.
Typically, such approval would support entering into an NDA that
would allow us to proceed with our due diligence and begin
negotiating a transaction.
In the same meeting, however, we were informed
that our initial offer was not deemed sufficiently high enough to
warrant further engagement. We found this news to be perplexing.
While it may not make sense to detail the specific price of our
initial offer in this public letter, it should be noted that our
offer represented both i) a significant premium to the Company’s
closing share price on July 8, 2021, the day prior to our most
recent meeting; and ii) a significant premium to any 30-day VWAP in
the past 7 years of the Company.
As shareholders, we have questions on the back
of such a rebuttal.
Indeed, we believe that the Company’s shares are
materially undervalued and that Turtle Beach’s leading and
strategic position in console headsets is durable, stands to grow
meaningfully over time, and will generate significant amounts of
cash flow. And while there clearly appears to be a debate to be had
regarding the most optimal and value-maximizing strategic plan that
leadership of Turtle Beach could take to drive shareholder returns
in the future, to refuse to enter into substantive discussions with
us, make a counteroffer to us, or otherwise engage with us on the
back of our all-cash offer – at such an attractive price –
naturally heightens our concern that this Board may simply be
entrenched.
To be sure, as public shareholders, there is an
appropriate and significant degree of opacity that inherently
exists in the information available to us. Perhaps you, as a Board,
are entertaining multiple value-creating strategic options that are
significantly more attractive on a risk-and-time-weighted basis
than what our all-cash offer – or any increase to our offer – can
provide. If that is the case, as one of your largest shareholders,
we would encourage you to pursue any such option with vigor.
Our growing fear, however, is that while you
have heeded certain advice that we have offered in the past, you
are now outright refusing to assess certain value-creating actions
that would enrich shareholders simply because such actions may
involve replacing you as executives and board members. Such
entrenchment would be intolerable to us, if that is in fact the
case.
Indeed, while we are flummoxed by your outright
refusal to engage with us as a bona fide buyer of the Company, we
are unwavering in our commitment to ensure maximum shareholder
value is realized for all shareholders.
William Z. WyattManaging Partner The Donerail Group LP
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
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