A few weeks ago, I posted about how New Frontier Media, Inc (NASDAQ:NOOF) had received a takeover offer from its largest shareholder, Longkloof Limited. That all-cash offer was $1.35 for the roughly 85% of the company that Longkloof does not own.
Then on Friday, a second bidder emerged (emphasis added):
New Frontier Media, Inc. (NOOF) confirmed that it has received an unsolicited, non-binding, conditional acquisition proposal from Manwin Holding SARL, a provider of adult entertainment, through online, television and mobile distribution platforms, indicating its interest in pursuing theacquisition of all of the outstanding shares of New Frontier Media for $1.50 per share in cash, subject to due diligence and other conditions.
Earlier this month, New Frontier Media had said that it received an unsolicited, non-binding, conditional acquisition proposal from Longkloof Limited, an investment holding company, indicating its interest in pursuing the acquisition of all of the outstanding shares of New Frontier Media not owned by Longkloof for $1.35 per share in cash, subject to due diligence and other conditions.
New Frontier Media said that it has formed a Special Committee of independent directors which will carefully review, with its financial and legal advisors, the acquisition proposals received from Manwin and Longkloof, as well as any other acquisition proposal that may be received by the Company, and then determine the appropriate response to these proposals.
New Frontier Media advised shareholders that they need not take any action at this time in response to either acquisition proposal pending review by New Frontier’s Special Committee.
Where does this leave Longkloof’s bid? A hint might be offered by considering Longkloof’s position relative to Manwin. As mentioned, Longkloof is already NOOF’s largest shareholder, holding approximately 15% of the company. Let’s consider this the ante.
How much is this ante worth? According to this SC 13D, the company initiated its position in NOOF in the summer of 2010, buying 11.5% of the company’s shares (or 2,243,731 shares). Item 3 in this filing is the key (emphasis added):
Item 3. Source and Amount of Funds or Other Consideration.The Reporting Persons expended an aggregate of USD $4,023,122 using their respective working capital to acquire the beneficial ownership of the Shares described herein.
Then, in this amendment, we see that the company purchased more shares in February 2011:
The aggregate purchase price of the additional 81,000 shares purchased on February 15 and 16, 2011, respectively was approximately $172,268, including brokerage commissions. The foregoing shares were purchased with working capital (which may, at any given time, include margin loans made by brokerage firms in the ordinary course of business) in open market purchases as follows:
Shares of Common Stock Purchased Price per Share (USD) Date of Purchase 59,527 $2.122 February 15, 2011 21,473 $2.140 February 16, 2011
This brought the total number of shares held to 2,324,731, for an aggregate purchase price of $4,195,390.
Most recently, Longkloof has again amended its ownership information to include purchases made in the fall of 2011 (average purchase price of $1.136 for 254,100 shares). The company now owns 2,578,831 shares and has spent $4,315,123 in acquiring these shares.
So where does this leave us? Or rather, where does this leave Longkloof? Longkloof now faces the choice of letting its current low bid stand, or rebidding at a level higher than Manwin’s.
It would be wildly inappropriate for NOOF’s Board to accept Longkloof’s current bid given the existence of the superior Manwin bid, so I think it would be safe to ignore a scenario where the Board accepts a $1.35 offer over $1.50 (note that insiders own 9.1% of the company).
If the Board accepts neither bid, shareholders can expect to see NOOF’s shares fall to pre-bid levels. Unfortunately, we’ve seen this type of shareholder unfriendly behaviour many times (stay tuned as there is a prime example coming later this week). This would be undesirable for Longkloof given the size of its current investment and desire to enact the changes necessary to show its investors a return. One might expect Longkloof would rather increase its bid to put pressure on the NOOF board to not reject a sale out of hand (recall, they saw value in this company when they were purchasing above $2 in a far worse economic environment. Given their bid, it would appear Longkloof is tired of waiting).
If the Board accepts Manwin’s bid, Longkloof’s position in the company falls in value to $1.50 per share, or $3,868,247 in the aggregate, for a loss of $446,876 (more than 10%). Longkloof investors should be unhappy with this result, given the significant negative alpha of this result since the summer of 2010. Further, given that Longkloof saw value above $2, we might expect it would be a disappointment for Longkloof management to see its initial reorganization plans thwarted by the sale of the company at a bargain basement price.
The question becomes whether Longkloof sees enough value in NOOF to raise its bid or whether it will abandon the plans it once had for the company (sunk costs?). My guess is, given Longkloof’s investment and NOOF’s many upside scenarios (see my first post here for discussion of the company’s strong free cash flows and low capital demands, and attractive international growth oppoertunities), we’ll see higher bids emerge.
What do you think of NOOF?
Author Disclosure: Long NOOF
By Frank Voisin