Wednesday, April 11, 2007

AVP (AVPI) Buyout Creates Activist on Activist Situation

In a 13D filing on AVP, Inc. (OTCBB: AVPI), 18.02% holder Diker Management disclosed a letter to the Board of Directors of the Company expressing significant reservations about the proposed acquisition of the Company by certain affiliates of Shamrock Holdings, Inc. for $1.23 per share. Diker Management said the consideration is "grossly inadequate." Diker also said the process by which the deal was proposed and evaluated was flawed by clear conflicts of interest.

NOTE: The purchaser, Shamrock Holdings, runs well-known activist hedge fund, The Shamrock Activist Value Fund.

A Copy of the Letter:

Dear Board Members,

Diker Management, LLC and its affiliates are the second largest outside shareholder of AVP, Inc. ("AVP" or the "Company"). We currently own in excess of3.1 million shares of common stock - approximately 15.8% of the Company's outstanding common stock, and hold warrants to purchase an additional 541,177 shares.

We invested in AVP after significant due diligence and analysis based on our positive view of the longer-term prospects for the Company. We have been pleased with the execution of management to date, but we have strong reservations about the proposed below-market-price acquisition of the Company by a Shamrock Holdings entity. This offer is grossly inadequate and the process by which the deal was evaluated is flawed by clear conflicts of interest.

If the terms of the Merger Agreement are not amended to better reflect the true value of the Company, Diker Management and its affiliates will not support the transaction. Diker Managment and its affiliates may also decide to elect appraisal rights if the terms of the Merger Agreement are not amended. In such circumstances Shamrock will have effectively been given a non-binding option to purchase AVP since Shamrock may elect to terminate the Merger Agreement if 5% or more of AVP's stockholders elect appraisal rights.

The proposed consideration of $1.23 per share is significantly below the intrinsic value of the Company. Specifically, the proposed acquisition price is a staggering 18% below the prior day's closing price of $1.50, an anomaly in the world of acquisitions. From the start of 2007 until the announcement of this shareholder-value-destroying acquisition, the average closing share price of AVPI is $1.39 (on material cumulative volume of 1.36 million shares). The share price has closed above the proposed acquisition price each and every trading session over the past two months, except for one (February 12, 2007). The stock has closed as high at $1.75 (January 22, 2007, a day on which the shares saw an intra day high of $2.00). We further note that due to the $5.1 million cash on AVP's balance sheet as of December 31, 2006, Shamrock's offer is actually $0.17per share less than the $1.23 (using the implied 30m shares, options, and warrants included in Shamrock's offer).

We believe that the Shamrock offer seriously undervalues the Company based on historical results and also denies AVP's public shareholders their opportunity to participate in the Company's strong future growth.

As its 2006 Form 10KSB makes obvious, AVP's current business momentum is strong. Revenues grew 38% in 2006, and gross profit expanded by 80%. Net loss decreased very significantly from $(8.96) million to a near-break-even level of $(0.34)million. Published GAAP results actually understate AVP's strong 2006performance. To quote AVP's 2006 10KSB: "Net income for the year ended December31, 2006 would have been $0.1 million ... if warrant expense, the contra-revenue expense resulting from the issue of warrants to the title sponsor of the AVP tour, and the gain on warrant derivative were excluded from net income." We also note that, excluding administrative costs associated with the capital raise and one-time expenses such as $300,000 spent to redesign the logo to include the new title sponsor, AVP would have been significantly profitable in 2006.

Moreover, AVP's future prospects appear very bright. We strongly agree with AVPCEO Leonard Armato's positive outlook for the Company "to achieve even greater success in 2007." Specifically, we expect the Company to move from a slight published net loss in 2006 to a strong positive net income of $3 to $4 million in 2007 and substantially higher in 2008. In support of our assessment, we note that the Company has recently: (a) signed or renewed sponsorship agreements with McDonald's, Hilton, Schick, Nature Valley, and Banana Boat; (b) has announced a schedule of at least 18 events for 2007 (up from 16 in 2006) and (c) plans on further reducing expenses while expanding revenue. In conversations and other public discussions, AVP Management has said nothing to dissuade us from our assessment of the Company's prospective earnings power.

Other positive factors creating upside potential to our estimates include (a)the recent ruling by the California Coastal Commission to allow AVP to charge for 90% of paid admission at its California beach events during summer; (b) the initiation of a winter event season (not included in the 18 event count above);(c) the redesign of AVP's website, which is now run by Major League Baseball Advanced Media on a revenue share model and (d) and the absence of such one-time expenses as the $300,000 spent redesigning the logo in 2006.

AVP, a lifestyle sports entertainment company that focuses on live and televised professional beach volleyball events, offers a uniquely positioned business model. For comparative analysis purposes, we use a peer group of other domestically traded lifestyle sports and entertainment companies focused on live and televised events. Such peers include World Wrestling Entertainment (NYSE:WWE), International Speedway Corp (NASD:ISCA), Speedway Motorsports (NYSE:TRK),and Dover Motorsports (NYSE:DVD). We believe that AVP has much more exciting growth prospects than this peer group.

The proposed acquisition of AVP values the company at an enterprise value of$31.8 million, or 1.48 times trailing 12 month revenue. The peer group detailed above trades at an average and median of 3.1 times trailing 12 month revenue. Applying that same 3.1 times multiple of enterprise value to trailing 12-month revenue would suggest a price of $2.38 per AVP share.

The same peer group trades at a median 9.2 times multiple of enterprise value to2008 consensus EBITDA estimate. Applying this multiple to our 2008 EBITDA estimate implies a price substantially higher than the $1.50 closing price prior to the announcement of the proposed transaction. Note that forward EBITDA increases even further for the intended acquirers, who would be able to remove public company costs.

Our reservations about this transaction extend beyond the unsatisfactory price being proposed to the process by which the deal was proposed and evaluated. There is an inherent conflict of interest in a buyout when the buying group includes the existing management team. In such a transaction, the management team has little incentive to seek the highest price for the existing equity as its stake in the company will roll into the new company. Indeed, Mr. Armato will contribute to the new company "all of the shares of AVP common stock that he owns," making him at best indifferent to the price of this transaction. We also note than AVP's management's ownership stake is heavily skewed toward options rather than stock, and it is unclear whether those options will be exercised or rolled into the newly created vehicle, perhaps for more tax-preferable founder's stock.

Jefferies & Co. appears to have a conflicted role in the proposed transaction. Jefferies & Co. served as AVP's financial advisor to the special committee of AVP's board of directors on the proposed transaction and also rendered the opinion that the transaction (for which it served as financial advisor) was indeed "fair to AVP stockholders from a financial point of view." We note that an analyst of Jefferies & Co., who has participated in AVP's conference calls, also covers World Wrestling Entertainment (NYSE:WWE), a stock we include in our Peer Analysis above and presumably one included in Jefferies' "fairness"assessment. Jefferies analyst Robert Routh rates shares of WWE a BUY despite that security trading at close to twice the multiple of enterprise value to sales accorded to AVP in this proposed transaction.

We are concerned that the evident conflicts in this case have resulted in a deal that is unfair to the outside shareholders. We urge the Board to reconsider. As stated above, if the terms of the Merger Agreement are not amended to better reflect the true value of the Company, Diker Management will not support the transaction.

Michael Grant
Mark Diker
Charles Diker

Labels: , , ,


Post a Comment

<< Home