Engine Capital Founder & Managing Partner Arnaud Ajdler joins Yahoo Finance Live to discuss Veritas's buyout offer.
Video Transcript
BRIAN SOZZI: All right, one of the activist investors taking on Kohl's has a bone to pick with another company. Engine Capital says tech investment firm Veritas is undervaluing shares of education services provider Houghton Mifflin in its deal to take it private. Engine Capital is a longtime holder of Houghton Mifflin and has a 2.7% stake in the company. For more on this, Engine Capital Managing Partner Arnaud Ajdler is here. Arnaud, great to see you here. Make your case. Why are you coming out in strong opposition to this transaction?
ARNAUD AJDLER: Well, hi, Brian, first, and thanks for having me. So look, we think that the $21 per share undervalues the company. Effectively, if we look at 2020 for free cash flow that the company is going to generate, we believe that Veritas is buying the company at around 7.4 times that free cash flow.
Related Videos
And we think that's just too low for a good business that's growing, that's transitioning from being historically a textbook publisher to today being effectively increasingly an ed tech company, an educational technology company. We think that that's too low a multiple. And that's really, at the core, we are value investors. And our job is to value businesses. And we think $21 is too low. That's problem number one.
Problem number two, we think that the process was flawed. And we can go into that if you're interested. And then finally, we believe there is a better alternative for shareholders, which is to keep the company public and continue to write the upside. And we have run some math, which we have a public presentation. People can go on our website, DontStealMyHMHC.com, and you can access the presentation. And we believe the company could be worth $42 per share, so almost a double in 3 years, if the companies were to stay public.
BRIAN SOZZI: Arnaud, Engine Capital, and you as well, are big names in this activist space. Have you had an opportunity to talk to Veritas? And if so, do you get any sense that they are likely to raise their offer?
ARNAUD AJDLER: Look, at this point, Veritas doesn't have to do anything. Veritas first has to see whether shareholders are going to tender their shares or not. So this transaction is structured as a tender offer. It's not structured as a typical merger agreement. So shareholders don't vote. Shareholders decide whether they tender their shares or whether they don't tender their shares.
So the deadline to tender, I believe it's on April 7. And so Veritas is going to stay quiet until they see whether people tender their shares or not. If less than 50% of the shares are tendered, then Veritas has to make a choice, either to walk away from the deal or to increase the offer.
Now, we have run the math. We think this is an incredible deal for them. At $21 per share, we believe they are going to generate an IRR of between 31% and 37%. So we don't believe they are walking away. So if shareholders stick together here, and if shareholders don't tender, and less than 50% of shares are tendered we think the odds are overwhelming that Veritas is going to end up increasing its offer.
JULIE HYMAN: Arnaud, it's Julie here. At the same time, it's my understanding you think that the company could continue and still do well, even if it was not purchased. Are there any changes, though, that it needs to make in strategy if it does not end up getting acquired by Veritas or someone else?
ARNAUD AJDLER: The beauty of the situation is that the answer is no. This is a good business. It's run by an excellent management team. The CEO, Jack Lynch, has done a great job over the last few years transitioning the business to a more digital company. And so the company doesn't have to change strategy. Now what we are suggesting, if the company were to stay public, we suggest the company do a Dutch tender offer and retire around 20% of its share outstanding, between $21 and $22 per share.
The idea of the tender is to relever the balance sheet, not too much. What we are suggesting is effectively taking a company that's today basically has no debt to two time EBITDA, so conservative leverage, to juice the return for remaining shareholders, but also to effectively provide an exit for all the arbitragers who have now bought shares after the announcement of the deal.
Arbitragers typically don't want to stay long term shareholders of a company. And so that's a way for them to exit at a slight premium to the $21 per share offer from Veritas. But besides a little bit of financial engineering, we like the strategy. We like what management has done. And we think the company is also a big beneficiary of the stimulus. A lot of money is going to schools. And so HMHC is a beneficiary of that. And we think there's a lot of upside to keeping the company public.
Now again, I want to reiterate, I think odds are this company is going to be taken private, because either people will tender at $21, or more likely, if people don't tender, Veritas will have to increase its offer.
BRIAN SOZZI: Arnaud, let's put this deal aside for a second. Now yesterday, we talked to Jonathan Duskin over at Mclellan Capital Management. He told us he's keeping the pressure on the management team over at Kohl's, still going forward to essentially almost nominating an entire new board ahead of the company's annual meeting. Now, you put out a very tough letter to Kohl's back in December. Have you talked to Kohl's? And do you think they will accept one of these numerous bids that have been reportedly, that they have gotten this month?
ARNAUD AJDLER: Sure. Kohl's has been also an interesting situation. For months now, we have advocated for the company to start a process in sell itself. They are finally doing it. It's interesting that you ask this question, because one of our concern all along is that the board has too high a view of what the company is worth. And so they may end up rejecting offers because of an unrealistic view of what the company is worth.
So we came out recently with a letter effectively telling the board, run a process, and in the final offer, you put that offer to the shareholders, and you let the shareholders decide, as opposed to you, the board, deciding whether it's $69, whether it's $72, who knows? Rather than you guys making the decision, let the shareholder make the decision.
BRIAN SOZZI: So Arnaud, do you think they do accept-- there's been some estimates. I know Jonathan has told me that Kohl's could be worth $100 a share. Do you do you think they could accept something in the low 70s?
ARNAUD AJDLER: Look, you know, I'm not going to talk for John's estimate. But when we came out with our letter in December, we give an estimate of around $75 per share for Kohl's, which we think is approximately the intrinsic value of the company. So people are today talking about maybe high 60s, low 70s. So we are not very far away from that $75 estimate.
I think given what's going on in the world, I think shareholders would be better off taking an offer in the high 60s, low 70s, instead of letting the company be public. Look, I think the company had an analyst day a few weeks ago, and on that day, the stock came down 13%. And I think this was the market telling the company that they don't like the standalone prospect of the company.
And generally, I think this is a company that can be better optimized in the public market. And so look, I think the transaction makes sense. And I think at the end of the day, the board is going to realize that. So look, I'm optimistic that there will be a good outcome. But you don't know until you see the press release.