Robotti & Company, LLC Letter to Corel Corporation Board of Directors
NEW YORK, April 14 /PRNewswire/ -- Robotti & Company, LLC sent the following letter to Corel Corporations Board of Directors today:
New York Via Fed-Ex, Email and Facsimile
April 14, 2008 Board of Directors Dear Board Member: I am a sell side analyst with Robotti & Company, LLC in New York City and I have recommended purchase of Corel Corporation (Nasdaq: CREL; TSX: CRE) shares to my clients who are investment managers in the United States and Canada. In addition, a partnership of which I am the General Partner, owns 82,500 Corel shares. I have been following Corel since December 2006 and have communicated with David Dobson numerous times in person, by phone and via email. Both my firm and I have a long term and patient value oriented investment philosophy. I am writing to you because I believe that the $11 per share offer by Vector Capital (owner of 69% of Corel's outstanding shares) to acquire the shares of Corel that it does not already own, is extremely inadequate and that it is not in the best interest of Corel's public shareholders to sell the company at anything close to that price. I believe that Corel's management has done an outstanding job of building an extremely profitable and diversified global software business. I furthermore believe that with its highly competent management team, extensive distribution capabilities and hundreds of millions of tax loss carry-forwards, that Corel is an excellent platform which can be used to accretively acquire smaller and inefficiently run software companies with large installed user bases. Specifically, I would note that Corel has the following very attractive characteristics: Predictable Revenues. Corel's diversified product offering brings predictable and recurring type revenues into the company at very high margins. With an installed base of over 100 million users and with most of its products having been upgraded multiple times, Corel management has a very good sense of how much revenue a newly upgraded product will bring. High Margins / Strong Free Cash Flow. Adjusted EBITDA margins were over 22.5% in the year ended 11/30/07 and management has stated publicly on recent conference calls that these margins should improve over time. Cap-ex requirements are minimal and the company is not likely to be paying taxes anytime soon due to its hundreds of millions of tax loss carry-forwards, therefore, free cash flow is very strong. Corel's debt is very well covered with an EBITDA / Interest expense ratio of approximately 4.0x. Solid Performance. Corel's adjusted EBITDA performance has been excellent, demonstrating a strong and consistently growing company. Fiscal 2005 - $49.0 million *accounting rules did not allow Corel to bring on $11.8 million of newly acquired InterVideo revenue in Q1 of 2007, causing a several million dollar hit to EBITDA -- the $57.3 million fiscal 2007 adjusted EBITDA number excludes this impact. Attractive Valuation. At the current market price of approximately $11, Corel trades for less than 7x forward earnings (using the midpoint of management's guidance of $1.50 - $1.70 in non GAAP EPS for fiscal 2008 -- April 3, 2008 Q1 earnings release). It is for these reasons that I urge you to reject Vector Capital's $11 bid for the company. I am quite frankly stunned at how low the bid is. At $11 per share, Vector is proposing to take the company private at less than 7x forward earnings. I challenge you to find a solidly profitable global software company with good growth opportunities and hundreds of millions in tax losses (an extremely valuable asset) that has been sold for a single digit earnings multiple! I think it would be very useful to look at Corel using a three year time horizon. Let us make the following assumptions: -- $62 million in adjusted EBITDA for fiscal 2008 (less than the consensus
If one wanted to assume zero adjusted EBITDA growth with no acquisitions, then Corel would have a small debt balance (less than $20 million) by year end 2010 and would exit that year with a $1.90 - $2.00 in non GAAP EPS run rate. A 10x earnings multiple on the $1.90 - $2.00 would bring a share price of close to $20. In either case, the company could begin to pay a significant and growing annual dividend. With no (or minimal) debt post 2010, the annual dividend could easily be $1.50 per share annually under each of the scenarios above. Of course, Corel is likely to do more acquisitions. While it is not possible to know what Corel might acquire and how much it might spend, it does seem reasonable to think that acquisitions would be accretive to the $2.20 calculated above, and therefore, $2.50 - $3.00 in non GAAP EPS might be achievable by 2010. Given all this, it is extremely difficult to see how a sale of the company today makes sense at anywhere close to the $11 that Vector is offering. It is my understanding that Vector Capital earned more than 3 times its investment the last time it acquired Corel (see endnote ii), presumably it hopes to earn multiples on its investment this time around. My question to the independent members of the board is very simple: Why should we, the public owners of this company not be entitled to share in this success of Corel, either by having Corel stay a public company or by selling our shares for better than a 7x forward multiple on the $1.60 in non GAAP EPS that management expects for 2008 (7.4x trailing 12 month non GAAP earnings of $1.48 per share)? I urge you to fully explore all of the alternatives available to the company in order to achieve a sale price that more closely reflects the value of the company. If no such offer is forthcoming then I would recommend that the company remain public so that "all" of its owners can fully benefit from the success that we all expect. There is simply no reason to sell the company to Vector Capital, allowing them to reap all the benefits of owning Corel for $11, while the minority public shareholders are shut out at a terribly inadequate price. I would note that Vector is being extremely opportunistic in the timing of its offer: -- All of the costs of the InterVideo integration have been borne by the
Lastly, I have enclosed two articles which should be of interest to you. In a 10/24/06 Reuters news piece(i), Vector Capital General Partner and Corel board member Alex Slusky is quoted as saying that "at current values of Corel, Vector is emphatically not a seller". Corel shares closed at $12.85 the day before the Reuters piece was put out. If Vector was not a seller at $12.85, then why would we, the public shareholders, want to sell our stock at $11? The company is earning more money now than it was in 2006! In a 10/9/06 Business Week article(ii) Slusky is quoted as saying that "an industry player like Corel can always pay a bit more for an acquisition than a purely financial buyer" and CEO David Dobson is quoted as saying "Corel spent hundreds of millions of dollars [in the past] to build its sales infrastructure," says Dobson. "We can leverage that platform through acquisitions." I believe that Slusky is correct that an industry player can always pay a bit more for an acquisition than a purely financial buyer, and therefore it is incumbent on the special committee to seek out an industry buyer for Corel. CEO Dobson's comment is one more reason why it may make more sense for Corel to stay a public company if the independent committee of the board is unable to achieve a fair price for Corel shareholders, I would be happy to discuss my letter with you any time. You may call me at 212.986.4800 x164, or email me at jj@robotti.com. Thank you for your time. Sincerely, Jeffrey Jacobowitz
Contact: Jeffrey Jacobowitz This press release is only intended to furnish information and is not to be construed as a solicitation or as an offer to buy or sell any securities. Information contained herein has been obtained from sources which we believe to be reliable, but we do not make any representation as to its accuracy or its completeness and it should not be relied on as such. Opinions expressed herein constitute our judgment at this date and are subject to change and Robotti & Company, LLC does not undertake to update or supplement this information contained herein. You should assume that Robotti & Company, LLC or one or more of its officers, directors, employees, affiliates or clients for which we have discretion now have (and from time to time have had or will have) a long or short position in the securities mentioned and such information is available upon request. Robotti & Company, LLC is a member of FINRA (www.finra.org) and SIPC ( ii. Business Week 10/9/06 "Beyond the Strip and Flip - How Corel, maker of First Call Analyst:
CONTACT: Jeffrey Jacobowitz of Robotti & Company, LLC, +1-212-986-4800, Web site: http://www.robotti.com/
2008-04-14 19:41:38 0335465 PRNEWSWIRE
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