September 19, 2013
Dear Fellow Common Shareholders of TheStreet, Inc., (NASDAQ:TST)
The purpose of this letter is to inform Shareholders of certain current developments with TheStreet, Inc. ("the Company"), to discuss some scenarios as to why some parties may be acting as they are, and what we think the next steps should be toward our goal of maximizing value for the Common Shareholders.
On August 20, 2013, Spear Point LLC ("Spear Point," or "we," "us" or "our") made a proposal to take the Company private in a transaction that, if consummated, would have resulted in the Company's Common Shareholders receiving $2.80/share for their Common Shares and the Preferred Shareholders (Technology Crossover Ventures or "TCV") receiving $15,000,000 in cash for their shares of the Company's Series B Preferred Stock (the "Preferred Shares"). This proposal was designed to serve as a "floor value" for a deal, and the Company would have been able to seek higher offers over a certain period of time. Should a higher offer have been forthcoming, the Preferred Shareholders would have received a majority of the additional value up to $32,000,000. Our letter to the Company and the Company's response are available on Seeking Alpha.
Our proposal was rejected by the Company. Noting that the Preferred Shares have a $55,000,000 liquidation preference, the Company reported that its Board of Directors (the "Board") was not willing to discuss a possible acquisition transaction because TCV has consistently maintained that it will not consider any transaction in which it would receive less than the full liquidation preference(1). The Company also stated that the Board did not consider it in the best interest of stockholders to spend $55,000,000 of the Company's money to buy the Preferred Shares from TCV.
We understand the Board's predicament and were encouraged by both its professional, timely response and the fact that it did not push back on valuation. We also agree with the Board that the Company should not use $55,000,000 of its cash to purchase the Preferred Shares from TCV.
The Preferred Shareholders' position, however, remains somewhat of a mystery to us. We, of course, recognize the liquidation preference and other rights TCV has under the terms of the Series B Preferred Stock. But given their investment expertise we find it difficult to believe they do not accept our view that the market value of their Preferred Shares is substantially less than $55,000,000.
First, a little history. In hindsight, TCV clearly made a bad investment, or at least a poorly timed one. On November 15, 2007, in exchange for the Preferred Shares, TCV invested $55,000,000 in the Company to allow the Company to pursue acquisitions. The Company then experienced problems and the broader market collapsed. The Common Stock plunged from $14.26/share on the date immediately prior to the investment to close at an all-time low of $1.34/share on August 8, 2012, after trading on an intra-day basis as low as $1.20/share on August 3, 2012. At the time of their investment, TheStreet had a market capitalization of $420,304,830 and the as-converted value of the Preferred Shares (the market value of the Common Shares into which the Preferred Shares could have been converted) would have been $55,000,000. On September 17, 2013, the Company's market capitalization stood at $72,528,940 and TCV's as-converted value would have equaled $7,410,531.(2)
Not only has the value of the equity collapsed, but if you factor in an expected rate of return, TCV's investment in the Company seems even worse. For example, many private investment funds like TCV have a hurdle rate, which is an assumed rate of return fund investors expect to receive before the fund manager or general partner receives any performance incentive or carried interest. While we don't know the terms of TCV's funds, if an investment fund had an 8% hurdle rate (a not uncommon rate for funds investing in 2007), an investment of $55,000,000 in November 2007 would have had to appreciate to more than $86,000,000 today in order to clear that hurdle. If this were the yardstick against which TCV's performance is measured, it would not have fared well with its investment in the Company. While the Company has declared some dividends on its Common Stock in which the Preferred Shares participate (the Preferred Shares have no separate, stated dividend), the total dividends TCV has received leave it far short of this level of return.(3) And again, based on the decline in the Common Stock price, and the lack of redemption rights or other means to compel the Company to repurchase the Preferred Shares, we don't believe the market value of the Preferred Shares is close to the $55,000,000 TCV wants to receive, let alone $86,000,000 which a well-performing investment could have realized over this time period.
In our view, any way you slice it this appears to have been a lousy investment for TCV. So, why won't they sell their Preferred Shares for a fair price and redeploy their capital into ventures with a higher chance of success or return the funds to their investors?
Assuming TCV is acting as a rational investor, there are a number of possible scenarios under which refusing to sell the Preferred Shares for a discount to the liquidation preference could make sense. We do not know whether any of these possibilities have been considered by TCV, or what, if any, criteria TCV has considered in deciding to insist on the full liquidation preference for its Preferred Shares at this time. It may be useful to discuss these possibilities nonetheless.
Scenario #1 - Faith in the Company's Strategy
One possibility could be that TCV believes the Company's stated strategy of pursuing accretive acquisitions will lead to circumstances or an event where TCV realizes the full liquidation preference amount for its Preferred Shares. We suppose this could happen through successfully executed and integrated acquisitions that generate significant cash and organic growth for the Company so the Board would consider it in the best interests of the Company's stockholders to use $55,000,000 of the Company's cash to repurchase the Preferred Shares from TCV. While at some point it may be in the best interest of the Common Stockholders to have the Company buy out TCV in order to be rid of the liquidation preference, and the tension between the interests of the holders of Preferred Shares and the interests of the Common Shareholders, including the TCV Board seat, the Company has stated it does not think that time has come. Therefore, it seems that the Board would not consider this course unless and until the Company has significantly more cash on hand. That won't happen overnight, and an acquisition strategy is always subject to transaction risks, integration risks and general business uncertainty.(4) Accordingly, it does not appear to us that this scenario is a likely basis for TCV's current position.
Another possibility is that TCV believes that the Company's strategy will result in an increasing market price for the Common Stock, thereby setting the stage for a secondary offering, the proceeds of which could be used to retire the Preferred Shares at the full liquidation preference amount. If the Company's stock price, however, increased dramatically in a short timeframe, why do a secondary at all unless the Company desired to raise capital for its strategic purposes, rather than to buy out TCV? Again, we suppose there could be circumstances under which the Board would determine it to be in the best interests of the Common Shareholders to retire the Preferred Shares and to use proceeds from a secondary offering to do so. But it doesn't appear to us that this will occur in the near future, since the Company's strategy, assuming it succeeds, will take time to implement and to be judged successful by the market. If this is correct, it does not seem that this route is a likely basis for TCV's position, either.
Scenario #2 - Anticipated Acquisition of TheStreet
Another possibility for TCV's position is that TCV anticipates the Company will be acquired in the near term, and believes the price will be such that it will receive its full $55,000,000 liquidation preference in the transaction.
If this is TCV's view, it would go a long way to explaining why TCV's representative, Christopher "Woody" Marshall, resigned from the Board earlier this year. Under the terms of its investment, TCV has the right to elect one person to the Board, as long as it continues to hold at least 40% of the Preferred Shares.(5) When Mr. Marshall resigned, TCV informed the Company that it did not intend to fill this board vacancy then, but may do so in the future.(6)
If TCV anticipates the Company will be moving toward a sale process, TCV may have decided not to elect a representative to the Board to try to eliminate any conflict of interest between a Board Member's fiduciary duty to the Company's Common Shareholders, and a TCV representative's responsibilities to TCV and its investors. This would make it easier for TCV to negotiate the best deal with respect to its Preferred Shares in the event of a sale of the Company, without having to balance a Board duty to achieve the best result for the Common Shareholders in the same transaction.
TCV may also have been comfortable making this change because it believes that the Company's Chairman, CEO Elisabeth DeMarse, will be watching out for its interests at the Board level. TCV's Mr. Marshall helped bring Ms. DeMarse to the Company, and she and Mr. Marshall have known each other for years.(7)
If, however, this sale scenario is what TCV views as likely, it doesn't make sense that they are unwilling to engage in discussions regarding the transaction we proposed to the Company, if for no other reason than to directly state their position rather than to have the Company do it for them. We asked TCV to meet and discuss our proposal, but they declined.
Scenario #3 - TCV Plans to Acquire the Company after November 15, 2014
A further possible explanation for TCV's position is that TCV intends to make an offer to acquire the Company itself when the terms of its investment permit. Under the agreement pursuant to which TCV acquired the Preferred Shares, TCV agreed it would not acquire beneficial ownership of more than 35% of the Company's Common stock before November 15, 2014 without the prior consent of the Board.(8) Perhaps this could also explain why TCV decided to relinquish its Board seat - conceivably to distance itself from the attendant fiduciary responsibilities in preparation for a potential acquisition of the Company next year.
Of course in the event the Company is put up for sale after November 15, 2014, TCV's advantage over other bidders is that it doesn't have to worry about getting approval from the Preferred Shareholders. Once TCV can participate in a sale process, the share price offered to Common Shareholders by other bidders is going to have to take into account paying TCV $55,000,000 for its Preferred Shares. If not, such a bidder runs the risk that TCV will refuse to consent to the proposal(9) and offer a higher price for the Common stock itself.
To Common stockholders, the outcome detailed above - a competitive sale process in which TCV is allowed to participate - is preferable to the current no action posture of the Company. We believe the Board should consent to TCV acquiring the Company in a negotiated transaction at the conclusion of an organized sale process, and the Board should invite TCV to bid. Since TCV can do that in a year anyway, why wait?
Scenario #4 - Hope that an Activist like Spear Point pushes the Company into a Strategic Transaction
This scenario is also a possible basis for TCV's position, although TCV has not indicated any receptiveness to our proposal thus far.
We have been asked if we are working with the Preferred Shareholders to effect change at the Company. We are not, although we have asked them to engage in a discussion about selling us their Preferred Shares as part of a Spear Point-led acquisition of the Company.
That being said, our efforts to orient the Company toward a strategic transaction should only be viewed positively by the Preferred Shareholders unless they were planning to work toward acquiring the Company themselves.
Although we do not know whether any of these scenarios, or any scenario at all, have been considered or are being pursued by TCV, as we see it, the bottom line is that the Common stockholders are being hindered by the rights of the Preferred Shares and the uncertainty over the ability of the Company to work through those issues. The Preferred Shareholders insist on full payment of the liquidation preference in any sale transaction, and the Company is not willing to engage in acquisition discussions due to the Preferred Shareholders' stance. Meanwhile, the best interests of Common stockholders are not advanced by this stalemate. It is our opinion that the Company's embarking on a sale process could result in a transaction acceptable to TCV while increasing value to the Common stockholders much more rapidly than pursuing the Company's current strategy of growth through acquisition.
We continue to believe the Company should engage an investment bank to seek strategic alternatives for the Company, including a sale of part or all of the assets of the Company. We strongly believe this is in the best interest of the Preferred and Common Shareholders. Whether the result of that process is an acquisition by a financial buyer like Spear Point or TCV, or a strategic buyer such as CNBC (which, of course, makes sense due to Jim Cramer's role at both the Company and CNBC), AOL, Yahoo, Bloomberg and/or News Corp., we feel that such a process could produce better results more quickly than the Company's current course.
Spear Point intends to continue urging the Company to move toward a strategic transaction in order to maximize value for the Company's Common Shareholders.
Co-Chief Executive Officer
Spear Point LLC
1 A liquidation preference is a term of the Series B Preferred Stock, which provides that in a "Liquidation Event" (as defined in the Company's Certificate of Designation of Series B Preferred Stock) the Company is obligated to pay an amount to the holders of the Series B Preferred Stock prior to any payment to the Common Shareholders. A Liquidation Event includes not only a liquidation of the Company, but a merger, sale of assets or other transaction that results in a "Change in Control" (as defined in the Certificate of Designation). The total liquidation preference for all the shares of the Company's Series B Preferred Stock is $55,000,000. Accordingly, in the event the Company is acquired, the liquidation preference of the Preferred Shares is triggered and the Company is obligated to pay the Preferred Shareholders $55,000,000 - unless the Preferred Shareholders have approved the transaction and agreed to accept a lesser amount or alternative consideration. Under the Certificate of Designation, there is no redemption right or other obligation to pay the liquidation preference absent a Change in Control transaction or other Liquidation Event. The Certificate of Designation was filed as an exhibit to the Company's 8-K filed on November 20, 2007.
2 Calculation based on 33,892,028 shares of Common Stock outstanding (see Company's latest 10-Q). TCV's Preferred Shares are convertible into 3,856,942 shares of Common Stock (see Company's 2012 10-K).
3 According to the Company's 10-Ks for 2012 and prior years, TCV has received a total of $1,832,056 in cash dividends from 2007 through the end of 2012. The Company has not declared any dividend since the second quarter of 2012.
4 The Company outlines these risks in its latest 10-K, which include risks associated with strategic acquisitions (see, the Company's 2012 Form 10-K, p. 12).
5 See, the Certificate of Designation of Series B Preferred Stock at Section 5(b).
6 See, the Company's 2012 Form 10-K, Item 9B., p. 43.
7 See the Company's 1st Quarter 2013 Earnings call transcript. CEO DeMarse: "Now, for a few leadership updates. I would like to thank the two Board members for their dedicated service to TheStreet over the years. Woody Marshall previously served as our Chairman and helped bring me to TheStreet. I've known Woody for many years and I appreciate the confidence that Woody and TCV have in the leadership and strategic direction of the company."
8 See, Section 4.2(a) of Securities Purchase Agreement dated November 15, 2007 filed as an exhibit to the Company's 8-K filed on November 20, 2007.
9 Pursuant to sections 3(c) and 3(f) of the Certificate of Designation, absent TCV's consent, the Common Shareholders are not entitled to receive any consideration in a sale of the Company, which results in TCV receiving less than the full liquidation preference.
Disclosure: I am long TST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.