Coliseum Capital Fights Back With Lawsuit Filed Against Purple Innovation After Issuing Voting Stock Without Shareholder Approval

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The activist investor has filed a lawsuit after the company rejected suggested Board nominations

Connecticut based hedge fund and activist investor Coliseum Capital disclosed to the market on Tuesday afternoon that they had filed a lawsuit against mattress manufacturer Purple Innovation (NASDAQ:PRPL).

The lawsuit is the latest development in the ongoing saga between PRPL’s largest shareholder and the group’s management since the hedge fund first lobbed a $4.35 per share takeover offer for the company back in September 2022.

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Purple’s management rejected the offer in January, telling the hedge fund that they believed the offer undervalued the company and its future prospects.

Shortly after the proposal was rejected, Coliseum told the Board that it had decided not to proceed with the offer but instead decided to nominate several suggestions for Board election at the upcoming election at the company’s upcoming annual general meeting.

A special committee representing Purple Innovations Board responded with disappointment that the hedge fund submitted a proposal to replace most of the Board only days after the committee rejected their below market buyout proposal.

Towards the end of January, Purple Innovation reported early figures for the upcoming full year result, telling investors that it had generated $574 million in sales for the year with positive adjusted EBITDA of $2 to $7 million. Full year net losses were indicated to be in the range of -$97.5 to -$83.7 million.

Most recently in February, Purple announced an equity raising to provide $50 million of capital to the company with shares being issued at $4.50 each.

Last week, the company announced that it had issued cumulative voting preferred shares that would come in the form of a dividend at the rate of 1 share for every 100 PRPL shares held. The proportional representation preferred link shares will allow shareholders to nominate directors on a cumulative basis, with 10,000 votes for each preferred share held.

What this means is that shareholders will have 10,000 votes per preferred share to allocate across the total election. It means that a ~44% holder such as Coliseum may be able to allocate all of their votes to win a select few seats, but may not have the support to win over as many seats as originally intended.

The lawsuit filed yesterday, made claims that the preferred stock was issued without “the approval of Purple’s stockholders and in direct response to Coliseum’s nomination of directors to the Purple Board of Directors”

Coliseum believes that it violates the company’s charter with a voting regime that prevents holders of a majority from electing or removing the full Board.

Coliseum’s managing partner Adam Gray issued a statement with the lawsuit press release stating “The Purple Special Committee’s brazen action – taken no more than 24 hours after Coliseum proposed five highly qualified candidates for election – demonstrates the lengths to which the incumbent non-executive directors will go to preserve their Board seats at the expense of stockholders.”

Purple Innovation is expected to report full year results around the middle of March, with a general meeting around May. While the outcome of the lawsuit  and the company’s future is yet to be understood, analysts in the market remain bullish on the company for 2023.

Fintel’s consensus target price of $6.66 suggests the stock could see 57.5% upside this year. The average target price has risen 30% from below $5 per share at the beginning of the year as the company secures additional financing to support its planned product launches.

 

The dispersion of analyst targets include 5 buy recommendations, 5 hold calls and 1 sell view on the stock.

The chart below shows analyst forward forecasts for the company which suggest the market is expecting a recovery in profits this year into growth territory next year.

 Purple Innovation

Fintel’s fund sentiment score of 65.22 also remains bullish on the company relative to other global screened securities. The score ranks the company in the top 25% out of 36,358 global screened securities for the highest levels of institutional buying activity.

PRPL currently has 251 institutional shareholders on the register that collectively own 89.84 million shares. The largest holders include: Coliseum Capital Management, No Street LP, BlackRock Inc, Fidelity Funds, Freshford Capital Management, Ave Maria Growth Fund, Brandywine Global Investment Management, Vanguard Group Inc, and Bank Of America Corp.

Article by Ben Ward, Fintel