I’ve painfully been an investor in Cambium Learning (ticker symbol: ABCD) for the last few years. I was a legacy shareholder of Voyager Learning in 2009 before it merged with Cambium. Due to the small size of the company and the very small float, luckily this was only a small PA investment.
Cambium is a publisher of educational materials for the K-12 education market.
I first got interested in the stock of Voyager as a special situation when the proposed merger with Cambium created an interesting dynamic: overcapitalized Voyager had the majority of its market cap in cash (~$60 MM on a $100 MM mkt cap) while privately-held, debt-laden Cambium had $170 MM in net debt equivalent to seven times its EBITDA.
Both businesses were of similar size with ~$100 MM in revenues each and with complementary business lines and overlapping markets. The sales synergies and Op-Ex savings of the combined company would, in theory, make the pro-forma numbers look great — around $200 MM in revenues and close to $50 MM in EBITDA.
The plan after the merger was to keep the capital structure somewhat levered with pro-forma net debt of ~$150 MM (around 3 times EBITDA of the combined company) which meant the deal had excess cash that would be paid out as a dividend to existing Voyager shareholders.
The interesting parts of the story, however, were the merger terms and structure: Voyager shareholders were given an offer of $6.50 per share (total shares outstanding of ~30 MM) to be paid in cash or in NewCo shares on a 1:1 basis. The stock, post-announcement, remained trading at $3.60 — a discount reflecting the fact that the cash offer was limited to $65 MM equivalent to a maximum of $2.20 per share with the remainder to be paid in fractional shares of NewCo.
The math worked beautifully for Voyager holders like myself — shareholders who elected the cash offer got 2/3 of their investment back in cash, a security for contingent value rights on tax refunds that were estimated to be worth $0.90 per share, and 2/3 NewCo shares per Voyager share for a business that would be generating on a pro-forma / per-share basis around $0.64 cents in cash earnings when considering NOLs and synergies.
The thesis for the combined business, was that the K-12 education market, composed mainly of public local school districts, was a very fragmented 5-billion-dollar a year business with no clear market leader — ripe for growth and consolidation. Management was planning on rolling up the industry with bite size bolt-on acquisitions.
The hair on the story was that districts across the country were facing severe fiscal shortfalls due to the economic crisis; this was somewhat offset by generous federal programs that were put in place to aid strained state and local budgets.
The event / special sit thesis played out as expected and turned out to be very profitable — I received $2.20 in cash, a CVR with value and new shares that weeks and months later traded between $3.00 and $4.00 post merger. All in all, it turned out to be around $5.40 in realized value off a $3.60 investment. Nothing earth shattering, but reasonable return with very good IRR.
I wish my involvement had stopped there. I unfortunately met with management and fell in love with the business plan / story; a sad victim of thesis creep.
The idea sounded so compelling: post-merger ABCD was trading at $3.00 and it didn’t seem that far fetched that management could execute their growth plan and drive profitability to the $1.00+ in cash EPS over the next few years. They had just made a small acquisition in the $5 MM range that would have a 18 month payback. So they had already started…
Fast forward 4 years. Long story short, state and local budgets continued deteriorating and federal programs got cut. The education publishing market has essentially shrunk, hasn’t consolidated and new competition has emerged. Structural and technological changes have impacted the legacy print / publishing assets permanently impairing them; somewhat offset by growth in their high-margin, digital divisions. The forecasted pro-forma economics they touted happened, but they held for about 18 months and then plummeted as revenues fell of a cliff.
Management got really lucky and refinanced debt maturities way out to February of 2017 — although debt isn’t cheap at 10%. Despite the deteriorating fundamentals, the business has remained marginally profitable through cost-cuts.
It has not been a fun process to watch given that the business is an extremely seasonal and lumpy with contracts that need to be renewed on a regular basis (dynamics are changing, however, as a larger proportion of the business transitions into digital).
It has been hard to judge to what extent the deterioration is permanent vs. transitional. The stock has gone from the 3.00 dollar level to trade all the way down to 70 cents as a defacto long-term option on the survival of the company. The bonds in the meantime have held steady as cash on the balance sheet has been growing and also a sign that somewhere in the middle of this whole mess a few investors still believe there are some good assets that are profitable and growing.
The company’s largest shareholder with close to 70% of the stock is a private equity shop called Veronis Suhler Stevenson (VSS). Since the merger, they have twice made fresh equity infusions at much higher prices — demonstrating commitment to the company, albeit with very bad timing.
The company recently replaced the entire management team, and has reset option grants at much lower strike prices ~$1.40 for the people who were “promoted” from within, and is continuing with the restructuring of its cost structure.
Cambium has been buying back stock instead of retiring debt and a former director of the board that manages a small fund, Foxhill Capital Partners, has resigned citing his belief that VSS is taking advantage of minority shareholders by slowly acquiring the company in a stealth fashion (resignation letter below). I do see his point, and I would be very upset if VSS — who needs to soon harvest and return capital for the fund that holds Cambium shares — attempts to screw shareholders, like myself, who would rather see the company achieve anything resembling a turnaround before selling.
I figure that if the company can stabilize EBITDA at $25 MM with a reasonable rate of growth going forward — which seems doable — the stock can recover above $2.00 closer to $3.00.
Either way, I think the recent market action on the stock could be a sign that something big is on the horizon. I wish I had the emotional wherewithal to actually increase my position and take advantage of this speculation. I feel the odds are pretty good that ABCD gets bought out sometime soon.
I would love to hear people’s thoughts. Am I being stubborn here? I am sure I’ve fallen victim to dozens of behavioral pitfalls, it’d be fun to try to identify all of them.
c/o Foxhill Capital Partners, LLC
12 Roszel Road, Suite C101
Princeton, NJ 08540
August 14, 2013
Board of Directors
Cambium Learning Group, Inc.
17855 North Dallas Parkway, Suite 400 Dallas, Texas 75287
I hereby submit my resignation as a director of Cambium Learning Group, Inc. (the “Company”), effective immediately, as a result of my fundamental disagreement with the actions (or lack thereof) taken by members of the Board of Directors (the “Board”), that I believe are designed to benefit the Company’s largest stockholder, Veronis Suhler Stevenson (“Veronis”), at the expense of the Company’s minority stockholders.
As you are aware, I was appointed to this Board in 2009 in connection with the merger between the Company and Voyager Learning Company. As one of three specifically designated independent directors on the board of directors of a company with a majority stockholder, I viewed my role as a director with added importance. During my tenure, I invested a significant amount of time and effort establishing a turnaround plan for the Company and was a dedicated Audit Committee Chairman and member of the Compensation Committee. I also advocated for better capital allocation in order to maximize stockholder value. For example, given the Company’s sizable cash balance, a more prudent strategy would have been to de-leverage the Company and retire high interest debt trading at a discount, thereby benefiting all stockholders equally. However, the Board chose to continue to pursue a share buyback program, the primary benefit of which was to increase Veronis’ ownership stake to approximately 68% of the Company. I am concerned that Veronis may take advantage of the Company’s share repurchase program and the Company’s depressed stock price as a way to acquire the Company at a significant discount. I believe the Company’s current market price does not represent the “fair” value of the Company and, I am opposed to an attempt by any party to acquire the Company at less than fair value.
It is my strong belief that the directors of any public company should be receptive to and welcome other points of view on the board. This ensures a system of checks and balances that prevents any individual or group of directors from taking action that is contrary to the best interests of all stockholders. As the second largest minority stockholder of the Company and the only independent director on the Board with a significant ownership interest, I believe I was able to uniquely represent and protect the interests of the Company’s minority stockholders during my tenure. Unfortunately, in light of the actions taken by this Board that I believe are designed to benefit the Company’s majority stockholder while ignoring the Company’s minority stockholders, I believeI am now powerless to continue to serve as a steward for the interests of stockholders in accordance with my fiduciary duties. My decision to tender my resignation is not an easy one. But, I am left with no choice. I cannot in good conscience remain a part of a board of directors that appears to be failing to protect the interests of minority stockholders.
I believe this Board needs truly independent directors with “skin in the game” so that the interests of all stockholders are adequately represented. With my resignation, it is my hope that I have impressed upon stockholders an urgent need to question whose interests this Board is truly looking out for. It is therefore with great reluctance that I must now step down from the Board. Notwithstanding my resignation from the Board, I will remain a significant stockholder of the Company and will continue to advocate for the best interest of all stockholders.
/s/ Neil Weiner