Activist Investor Group Urges Redbox Parent to Go Private

19 Feb, 2016 By: Erik Gruenwedel

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With one analyst characterizing Redbox as a cash cow on a death spiral, others contend the kiosk vendor and nation’s largest movie disc rental service has business legs that should last for years.

Regardless, there seems to be near unanimous opinion that Redbox parent Outerwall redouble efforts on the movie rental business while downsizing G&A expenses, capital investments in secondary businesses, which include consumer electronics kiosk Gazelle and coin exchange vendor Coinstar, and shuttering CE recycler ecoATM.

In a strongly-worded to Outerwall’s board, Engaged Capital, which owns more than 15% of the company, recommended the board issue a $7.50-per-share dividend and take the company private. The investor group alleges failed ongoing share repurchase plans have cost investors more than $1 billion in shareholder capital.

“Share repurchases do not create value in and of themselves. The business is not broken. The valuation of the business is broken and fixing the stock’s valuation is entirely in the hands of the board and management,” read the letter.

The investor group argues Outerwall has underperformed against the S&P 600 and other indexes, in addition to compiling a laundry list of failed businesses, which include Chirp, Gizmo, Crispmarket, Rubi, Sample It, Orango, Star Studio, Redbox Instant and Redbox Canada.

A year ago Outerwall abruptly dismissed CEO Scott Di Valerio, a move some pundits attributed to the poorly received Redbox Instant, which attempted to meld disc rental with streaming. While the business (with partner Verizon) took a long time to launch, an inability to invest in content rendered the streaming service inferior to established competitors Netflix, Amazon Prime Video and Hulu Plus, among others.

“We learned a lot about our consumers — what they like, what they don’t like, what they trust about us, and we’ll put that into the evaluation that we do,” Di Valerio told a month before he was let go.

Last summer, former Clearwire CEO Erik Prusch took over the top position at Outerwall. Five months later he dismissed Redbox president Mark Horak, a former Warner Bros. Home Entertainment executive — a decision analysts say was largely due to inventory issues.

Horak was let go despite signing new (and more lucrative) distribution agreements with major studios Universal Pictures Home Entertainment, Warner Home Video, Lionsgate and 20th Century Fox Home Entertainment.

The kiosk vendor earlier this month reported fourth-quarter (ended Dec. 31) operating income of $62.6 million, down 50% from operating income of $125.8 million in the previous-year period. Revenue fell 17% to $407 million, from $490.7 million; the $83.7 million decrease reflects a 24.3% decline in movie rentals year-over-year.

Engaged Capital said the kiosk vendor’s recent fiscal guidance only “serves to fan” market concerns that “Redbox is dying.” In addition, it contends investors remain concerned management will “waste” substantial (but declining) free cash flows on risky growth initiatives. 

The concern is echoed by Wedbush Securities analyst Michael Pachter.

“I have long believed ecoATM was a sink hole, but think they should be permitted to integrate Gazelle and see if an omni-channel approach increases the value of the business,” he said in an email. 

The investor group believes taking Outerwall private would help a company whose businesses are in secular decline continue to rebound without dealing with Wall Street scrutiny ever 90 days.

“We have been contacted by numerous private buyers and financial sponsors who are interested in potentially acquiring [Outerwall],” the letter read.

B. Riley & Co. analyst Eric Wold agrees taking Outerwall private, in addition to issuing a dividend, could increase shareholder value.

“Although we acknowledge that recent Redbox rental patterns have been weak and investors have a right to be concerned, should the board make the simple switch of allocating more of the 75% to 100% of [free cash flow] toward a dividend instead of share repurchases, the shares have a more likely chance of reflecting the value of that cash flow,” Wold wrote in a Feb. 19 note.

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