UTR, LLC Sends Letter to Outdoor Channel’s Board of Directors

- Calls for Immediate Halt to Proposed Merger with InterMedia Outdoor Holdings, LLC

- Insists Upon Transparent Process to Maximize Value for All Shareholders

NEW YORK--()--UTR, LLC (“UTR”), owners of more than two percent of the outstanding shares of Outdoor Channel Holdings, Inc. (NASDAQ: OUTD) (the “Company” or “Outdoor Channel”), today sent a letter to the Company’s Board of Directors (the “Board”) calling for them to immediately cease any additional steps regarding Outdoor Channel’s proposed merger with InterMedia Outdoor Holdings, LLC (“IMOTSC”).

“We question why the Special Committee of disinterested directors convened by the Board and tasked with reviewing and evaluating the strategic options available to the Company appears to have been disbanded and never formally reconvened during the period when the latest round of acquisition proposals was run.”

UTR believes the Company’s Board:

1. Ran an inefficient process,
2. Accepted inadequate consideration,
3. Failed to protect outside shareholders against the interests of sizable insider shareholders, and
4. Saddled shareholders with an illiquid stub equity.

“We believe the current merger agreement is not in the best interest of shareholders and fails to realize the full potential of the Company’s true intrinsic value,” said Andrew Franklin, President, UTR. “Furthermore, the unattractive consideration accepted by the Board of Directors is the direct result of its failure to exercise its fiduciary obligations to all shareholders, not just insiders.”

Franklin concluded: “We question why the Special Committee of disinterested directors convened by the Board and tasked with reviewing and evaluating the strategic options available to the Company appears to have been disbanded and never formally reconvened during the period when the latest round of acquisition proposals was run.”

As a result, UTR requests the Board:

  • Immediately cease any additional steps towards completion of the merger at this time;
  • Retain an independent financial advisory firm to offer a fairness opinion to determine the true value of the Company, and that these findings be made available to the public; and
  • Run an open bid process, led by the Company’s Special Committee of disinterested directors, that markets the Company to a broad selection of potential qualified buyers.

The full text of the letter can be found below:

February 12, 2012

Board of Directors
Outdoor Channel Holdings, Inc.
43445 Business Park Drive, Suite 103
Temecula, CA 92590

Dear Sirs,

As owners of roughly 550,000 shares, or more than two percent of Outdoor Channel Holdings, Inc.’s (the “Company” or “Outdoor Channel”) common stock, we write to you today to express our great concern regarding the Company’s proposed merger with InterMedia Outdoor Holdings, LLC (“IMOTSC”).

In sum, we believe the Board of Directors:

1. Ran an inefficient process,
2. Accepted inadequate consideration,
3. Failed to protect outside shareholders given the potentially divergent interests of sizable inside shareholders, and
4. Saddled shareholders with illiquid stub equity.

It is our strong belief, which has been echoed by several other independent and sizeable Outdoor Channel shareholders, that the merger is not in the best interest of shareholders as it fails to realize the full potential of the Company’s true intrinsic value. We believe the unattractive consideration accepted by you, the Board of Directors of Outdoor Channel (the “Board”), is the direct result of your failure to exercise your fiduciary obligations to all shareholders by neglecting to run a public auction or, alternatively, conduct a comprehensive market check when the Company formed a special committee of disinterested directors (the “Special Committee”) in 2010 to explore strategic options.

The Board formed the Special Committee, presumably in part because of the large controlling interest owned by Outdoor Channel’s co-founders, and largest shareholders, Perry T. Massie and Thomas H. Massie. The Special Committee was tasked with reviewing and evaluating the strategic options available to the Company, but it curiously appears to have been disbanded and never formally reconvened after May 2011 to protect the disinterested shareholders during the period when the latest round of acquisition proposals was run.

Furthermore, we are surprised that with such an enormous personal interest at stake, the Massie brothers would not recuse themselves from any vote, as would be customary in similar situations.

Finally, we believe that the existing fairness opinion provided by the financial advisory firm hired by Outdoor Channel is based on a flawed set of assumptions and valuations.

As a result, we insist that you:

  • Immediately cease any additional steps towards completion of the merger at this time;
  • Retain an independent financial advisory firm to offer a fairness opinion to determine the true value of the Company, and that these findings be made available to the public; and
  • Run an open bid process, led by the Company’s Special Committee of disinterested directors, that markets the Company to a broad selection of potential qualified buyers.

Since its inception in 1984, Outdoor Channel has built a strong enterprise that has grown to become the leader in the outdoor lifestyle space and the envy of other companies looking to capitalize on the estimated 82 million outdoor enthusiasts across the United States. Given its market leadership position and status as the “Tiffany” network in the space, the Company possesses significant inherent value, thereby providing it with considerable leverage in maximizing shareholder value through a transaction or other strategic alternative. We are surprised and disappointed that the independent directors, as part of their fiduciary responsibility, did not take full advantage of this position of power as it evaluated a number of strategic options to allegedly benefit all shareholders, including a potential sale of the business or a merger.

Unfortunately, the Board failed to effectively maximize this power position when it decided to run a private process to gauge interest in the Company, which likely excluded potential strategic and financial suitors that the Company may not have been aware of due to the nature of the private “process”. The merger agreement before us today is the result of the Board’s failure to run a robust, public bidding process, and reflects the Board’s agreement to woefully inadequate deal terms to merge the Company with IMOTSC.

FLAWED SALE PROCESS

Outdoor Channel conducted a flawed sales process that ultimately resulted in the current merger agreement which exposes shareholders to considerable risk.

In 2010, after receiving interest from potential bidders that included the proposed “rollover of the Massie Parties shares into equity in the potential purchasers,” at the advice of legal counsel, the Board “created a special committee of disinterested directors (the “Special Committee”) to review and evaluate strategic alternatives, including without limitation, a possible sale of Outdoor Channel.” We certainly believe that was the fair and right thing to do.1

However, by the Company’s own admission, “the Special Committee held its last meeting in May 2011.” As such, the Special Committee never reviewed the current proposed merger (which includes a substantial portion of the Massie interest to be rolled over).2 In our view, this lacks any possible rational explanation.

Why did the Special Committee not review the current proposal? What changed from the spring of 2010 when the Board felt an obligation to convene the Special Committee to review options, to the fall of 2012 when the Board elected to enter into the current agreement?

Perhaps had the Special Committee been involved it might have been compelled to question the current proposed agreement. In addition, it would certainly have had to give real consideration to any other potential proposals.

To that end, it is our belief that Outdoor Channel received a more attractive proposal from the private equity firm labeled as “Party A” in the S-4 that offered liquidity to all shareholders, at a higher value, and with fewer complications than the proposed transaction.3 Had the Board accepted this proposal, we would be looking at a higher likelihood of success, a much faster path to close, and greater liquidity to all shareholders. Every shareholder we have spoken to would have preferred “Party A’s” offer, or no transaction whatsoever, versus the proposal the Board accepted. One cannot help but ask, why would the Board accept inferior consideration? As over 40 percent of shares are represented at the Board level, we implore the Board to explain why it believes the current agreement is in the best interest of all shareholders vs. other proposals received or remaining as a stand-alone operator in a space in which it enjoys a significant leadership position.

For example, “Party A” approached the Company with several serious offers, including one that would have allowed for an all-cash acquisition of $7.50 per share. Since “Party A’s” simpler private equity proposal would have certainly closed in 2012, not only would all shareholders have received full liquidity, but they also would have enjoyed the benefit of far more attractive 2012 capital gains tax treatment. This stands in stark contrast to the current proposal, which will likely take months to close and will require shareholders to pay an additional nine percent on their capital gains. By ignoring these tax consequences, we and many other outside shareholders are very upset that the Board chose to allow IMOTSC to raid the Company’s balance sheet to finance part of the proposed transaction and facilitate a refinancing of the acquiring company’s debt at more attractive terms, rather than distributing the lion’s share of the Company’s cash as a tax-efficient special dividend in 2012.

Given all of the foregoing, we wonder, had the Board elected to run a conventional public auction with clearly delineated deadlines, and not the mismanaged and meandering shadow process that it did, perhaps the Board would not have confused itself enough to pursue a transaction that DOES NOT have the higher after-tax value, DOES NOT provide sufficient liquidity and DOES NOT have the simplest path to close.

POOR TERMS

Process issues aside, the current merger agreement takes the form of a cash and stock election that entitles Outdoor Channel shareholders to receive $8 per share in cash or one share of stock in the newly formed InterMedia Outdoor Holdings, Inc. However, that nominal share price overstates the implicit valuation since the Board, in what could only be considered a deficient judgment, does not provide the most important consideration to its exceedingly patient shareholder base: LIQUIDITY. In total, only $115 million in cash will be available for use as consideration in the proposed transaction, thereby negating the ability for the public shareholders of the Company to cash out their positions in full and effectively forcing us to remain holders of a public stub that will undoubtedly be even more illiquid than the current Company’s stock.

In addition, with the Massie’s electing to receive a mix of 56 percent cash and 44 percent stock – resulting in a net a total of over $45 million in cash to them – it leaves less than $70 million of cash to be allocated amongst the remaining shareholders. This in turn restricts the number of outstanding Company shares that outside shareholders can liquidate, limits the amount of cash that they are eligible to receive, and forces them to take a stub equity position in a risky and highly levered new company. It is important to note that stub stocks historically do not trade well and are highly illiquid.

One must ask, with a limited pool of cash available, why should outside shareholders be forced to bear the burden of the risks associated with the newly formed company while insiders enjoy a significant cash payment, comprising approximately 40 percent of the fixed cash allotment of the deal? The very same insiders – who by virtue of their ownership block and contractual obligation to this transaction – obviously had a hand in crafting this unacceptable deal for outside shareholders and seemingly put their objectives ahead of the outside shareholder base. If they are so committed to the combined entity, why would they not elect stock and thereby fully reap the rewards of the upside in which they presumably believe?

BAD DEAL

Yet, almost as troubling as the flawed sales process, is the future of the Company and what that means to the shareholder base that will inevitably be forced to accept stub equity. When shareholders initially invested in Outdoor Channel, they were obtaining equity in a pure-play company that had an EBITDA multiple trading profile of 14-19x based almost entirely on its broadcast network and currently has an implied price target by Noble Financial of over 21x. However, these same investors will now be required to take a stub stock position in a new company with a significant stake in publishing, a famously shrinking asset class generally valued only at only 5x EBITDA, while offering bleak prospects for future growth. Furthermore, the proposed merger would allow for IMOTSC to utilize the $65 million of cash on Outdoor Channel’s balance sheet to finance a portion of the merger consideration, while simultaneously leveraging the assets of the newly combined company to take on a $150 million financing commitment to refinance IMOTSC’s existing $85 million worth of outstanding debt at prevailing, and improved, rates.

Consequently, rather than owning shares in a pure-play cable channel with a low debt-to-equity profile, shareholders will now own a company that has considerable long term debt, little available cash on hand, and exposure to a struggling publishing unit. The publishing industry is still working to transform its subscription-based profit model to keep pace with the digital transition and non-traditional revenue streams, and the proposed transaction would saddle current Outdoor Channel shareholders with the debt required to attempt to revive the struggling and overleveraged publishing arm of IMOTSC. These investors would not be guaranteed a cash equivalent for their shares, but would be saddled with a position in which they are to shoulder the risks associated with an industry whose fundamentals are poor and outlook uncertain.

A GOOD DEAL WILL BENEFIT ALL SHAREHOLDERS

The Board of Directors has a fiduciary duty to act in the best interest of all shareholders, not just insiders. The current terms of the proposed transaction fail to fully and fairly value the assets of Outdoor Channel.

The fact that the current merger agreement with IMOTSC does not adequately capture the full value of the Company or maximize benefits for all shareholders unfortunately should come as no surprise – the process was characterized by backroom dealings not privy to the public, while the Board did not protect outside shareholder value by negotiating for customary “go-shop” and “Majority-of-the-Minority” provisions. Worse still, the Board stipulated to a large break-up fee, effectively disincentivizing other suitors. All of these factors have prevented a truly comprehensive and public bidding process, and act to strongly discourage any potential topping bids.

As a shareholder with a considerable stake in Outdoor Channel, we ask that the independent directors of the Company act immediately to take control of this process and fully maximize value for all of its shareholders.

Sincerely,

Andrew Franklin
President
UTR, LLC

1 Outdoor Channel Holdings, Inc., Form S-4 Registration Statement (filed Nov. 21, 2012), p. 66, from SEC web site, http://www.sec.gov/Archives/edgar/data/1562300/000119312512478810/d440728ds4.htm, accessed January 31, 2013.
2 Ibid.
3 Ibid., 67.

About UTR, LLC

UTR is an independent investment firm representing small high-net-worth investors based in Los Angeles, CA.

Contacts

For UTR, LLC
Anton Nicholas, Phil Denning, John McKenna
203-682-8200
Anton.Nicholas@icrinc.com
Phil.Denning@icrinc.com
John.McKenna@icrinc.com