Benzinga | Apr 7, 2021 08:13AM EDT

Stockholder Group Responds To Proposed Acquisition Of Leaf Group By Graham Holdings Company (Full Statement)

A group of stockholders of Leaf Group Ltd. ("LEAF" or the "Company")(NYSE:LEAF), comprised of VIEX Opportunities Fund, LP --Series One, Osmium Capital, LP and Oak Investment Partners XI, Limited Partnership (together with their affiliates, "we" or the "Stockholder Group"), who beneficially own approximately 25% of the outstanding common stock of the Company, today issued the following statement in response to the proposed acquisition of LEAF by Graham Holdings Company ("Graham"):

"While we are generally supportive of a sale of the Company, we are concerned that the recently announced merger of the Company into Graham for $8.50 per share does not reflect the Company's full and fair market value (the "Merger Transaction"). Specifically, we have concerns that the "shotgun style wedding" sale process for the entire Company in less than seven weeks was deeply flawed and not only crystalizes a significant conglomerate discount but also fails to compensate shareholders for a change of control premium. Based on figures reported in the Company's most recent Annual Report on Form 10-K and estimates supported by sell-side analysts, we believe a conservative sum of the parts valuation of LEAF's assets yields a price of $15.83 to $17.43 per share, comprising of the following elements:

* Net cash of $1.76 per share;1

* Revenue from the Digital Marketplace segment, which grew 73% in fiscal 2020, is approximately $195 million, and at a 2x multiple, would yield $390M in a sale, or $10.89 per share;2

* Revenue from the Digital Media business is approximately $57 million, and at a 2-3x multiple, would yield $114 to $171 million in a sale, or $3.18 to $4.78 per share;3

* The Company has $269.7 million in net operating loss carry forwards that may substantially shield taxable income and represent significant potential value to the right acquirer, which we have valued at zero to be conservative.

* Total value = $15.83 to $17.43 per share.

Accordingly, LEAF's proposed sale to Graham at $8.50 represents an estimated 50% discount4 to the existing haircut of 40% to 80% relative to its publicly traded peers. To starkly contrast this differential, if LEAF achieved a public peer multiple in its Digital Media and Digital Marketplace business of 5.5x and 8.8x sales, respectively, the value of the Company's combined businesses would be nearly $1.68 billion or $46.86 per share. We acknowledge that the Company operates below peer profit margins and possesses other leadership challenges which need to be discounted and accounted for. Nonetheless, we are deeply concerned with the consideration proposed in the Merger Transaction.

We also have concerns with the process described in the Company's press release announcing the Merger Transaction. In our view, contacting just ten additional financial and strategic buyers about their interest in acquiring Leaf Group following the receipt of a proposal from Graham to acquire the Company does not appear to be a broadly conducted sales process, particularly in light of the fact that the Board had received a nomination notice from the Stockholder Group seeking to replace three incumbent directors.

We intend to carefully review the Company's proxy materials seeking approval of the Merger Transaction before determining how we plan to vote our shares. However, we urge the Board to proactively reengage with Graham to achieve a more equitable price for the benefit of all stockholders before filing preliminary proxy materials."