The video streaming company is facing a turning point: keep the growing business or split it up
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Company: Harmonic Inc. (HLIT)
Companies: Harmonic offers software, products, system solutions and services for video delivery worldwide. Its products enable customers to create, prepare, store, play, and deliver a range of broadcast and streaming video services to consumer devices such as televisions, PCs, laptops, tablets, and smartphones. The company has two businesses – video and cable access. The Video segment provides cable operators, satellite and telecommunications service providers as well as broadcasting and media companies, including streaming media companies, solutions and services for video processing, production and playback worldwide. The video business infrastructure solutions are delivered by shipping products, software licenses or as SaaS subscriptions. The cable access business provides cable access solutions and related services primarily to cable operators worldwide.
Market value: $ 782 million ($ 7.76 per share)
Activist: Scopia Capital Management
Percentage ownership: 9.61%
Average cost: $ 5.72
Activist Comment: Scopia has historically not been an activist investor. However, activist investor Jerome Lande (of Coppersmith Capital and previously MMI Investors) has pooled its operations in Scopia to run an activist portfolio within the company and to advise and support activists in relation to Scopia’s larger portfolio -short funds.
On April 9, 2021, Scopia and the company entered into a cooperation agreement under which, as long as Scopia owns 5% of the company’s common stock, they have the right to appoint two directors to the Board of Directors, one of whom is Jerome Lande, head of the department for special situations at Scopia and the other as an independent director. Such appointment may be made at any time prior to the earlier date of (x) 15 days prior to the deadline for directors’ submission of shareholder proposals for the Company’s 2022 Annual Meeting and (y) 75 days prior to the first anniversary of the 2021 Annual Meeting. Scopia agreed to comply with standard voting and standstill rules.
Scopia has been a shareholder in the company for the past two years and has watched and encouraged the company to grow bigger companies and more sophistication in both segments. While the company has started to fulfill this prophecy and gain market share, the process has been slow and the company has failed to deliver on its predictions. However, in recent months there have been new growth initiatives on the video side, advances on the SaaS side, some recovery from Covid, and gradual advances in the cable access segment. As a result, these companies are closer to critical mass and at a point where they could be separated.
The video business has consolidated considerably. Ericsson sold its MediaKind business to One Equity, Cisco sold its video software solutions business to Permira Funds, and Amazon bought a similar business. There could be many companies that might be interested in Harmonic’s video business, and this was an area of PE interest as well. Harmonic could potentially reach more than $ 450 million for this business, leaving the cable access business which has gained high margin market share and is expected to continue growing by over 30%. This would be an opportunity for the cable access business to continue as a stand-alone business, or it could potentially be taken out.
So the company is approaching a tipping point and Scopia wants to make sure these opportunities are taken seriously. Scopia is in a unique position to monitor the progress of the business and will monitor to ensure that management is investigating a business separation and operating it efficiently. If Scopia has to step in, they have a two-seat call option. The fact that Scopia has structured the agreement in this way shows that they have confidence in the board of directors but also want an insurance policy in case things don’t go as they hope they will.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.