MIAMI--(BUSINESS WIRE)--The following is an open letter to Skullcandy shareholders:
Dear Shareholders of Skullcandy,
I am writing this letter to express my extreme disappointment in the sale process of Skullcandy, Inc. (SKUL).
My name is Derek Capo, founder of eFin and investor of Skullcandy stock. I along with other private investment corporations, family members and friends collectively own more than 69,500 shares of Skullcandy or .24% of the company. I strongly believe Skullcandy is worth more than $8 a share given cash flow of Skullcandy and growth potential of Astro Gaming, the hidden gem.
I first invested in Skullcandy in 2013 and have researched the company heavily visiting their China operations and participating in investor conferences. I have also written on Seeking Alpha that the company should go private given its business transition at $8.00 given the profits generated by the Skullcandy brand and strong growth of Astro Gaming. I stated it would be difficult to value given the company has never released the financials of Astro Gaming.
Therefore, we demand that the company release to ALL SHAREHOLDERS Astro Gaming financials.
Astro Gaming was acquired in 2011 for $10.2 million and the company has NEVER broken down what percentage of the revenues, operating profit, and net income is contributed by Astro Gaming. Industry channel checks estimate that the revenues of Astro Gaming are between 10% to 25% of the total revenues of Skullcandy. This is material information that could significantly benefit shareholders.
Astro gaming has shown through the years’ strong growth via public statements made by the CFO and CEO and will continue to show strong growth given the increased popularity of video gaming and the eSports industry, a multi-billion-dollar industry. The Astro gaming business is still in its infancy and could one day generate as much revenues as the Skullcandy legacy business. This is one of the reasons why I invested in the company along with excellent financials, products and management.
Astro Gaming deserves a high valuation given its strong growth and long-term potential, which is NOT being reflected in the acquisition price. We believe ASTRO gaming is worth at least $70 million or $2.50 a share given its growth and niche in the gaming industry. This valuation is based on a multiple of 1x to 3x revenues, if our estimates are correct. The Cash per share on the balance sheet is $44 million, or $1.50 a share, leaving the value of Skullcandy business segment at $1.75 or $50 million which is ridiculous given the segment generates more than $210 million in revenues and generates more than $10 million in operating income a year.
Also, we believe there are serious conflicts and transactions that the public should be aware of:
1. Incipio received a minority investment from Goode Capital Partners January of this year. Goode was a major investor of Skullcandy when it first became a public company in 2010, Goode held 14.3% of the company. By 2012 Goode sold all of its shares and is now buying back Skullcandy via Incipio for $5.75. Goode is selling at $15 and now buying at $5.75 which shows that Skullcandy is EXTREMELY undervalued. Also, the company NEVER told the other bidders of this relationship given Goode knows the business better than the other bidders.
2. Management does not care about its shareholders given their golden parachutes. The CEO will generate millions in cash compensation and continue to keep his job with Incipio. Mill Road Capital offered a higher price to shareholders but given the very high break-up fee it does not benefit the new private company, however, shareholders would benefit by more than $8 million. The Board and CEO is not making this deal in the best interest of shareholders.
3. The bidding process was conducted poorly given there were only 4 strategic and 3 private equity investors invited to bid when there are at least 20 private equity companies and more than 15 strategic companies worldwide that would be interested in ALL or PARTS of the business. Companies in other industries have up to 60 companies bidding for far less attractive assets than Skullcandy. We believe that the investment banker did a poor job, remember they have every motivation to close the deal quickly and receive their more than $4 million fee. The founder stated an intent to bid for the company and involved three board members to join the bidding process causing the company to form a special committee of only 3 independent board members to decide on the deal. The board eliminated the founders bid.
In conclusion, Skullcandy today is performing better than in 2010 and 2013, when the business was in turmoil and during that time period the stock traded at more than $5.75 a share and the market has appreciated considerably. Small investors are being cheated if they are to accept the $5.75 tender by Incipio.
I ask you to NOT tender your shares and ask for Astro Gaming financials to be released to improve the acquisition price of the company.
Thank you for your support!
CEO of eFin