Jeffrey Smith wants to take RealD (NYSE:RLD) private as he said in a letter addressed to the company’s CEO, Michael Lewis. Starboard Value, the fund led by Mr. Smith, offers to acquire the company for $12.00 per share, which represents a significant premium above the yesterday’s closing price of $9.27. On the back of the news, the stock of RealD surged by over 24% and currently trades at around $11.50.
Starboard owns around 4.95 million shares of RealD (NYSE:RLD), the stake being increased slightly from 4.55 million disclosed in an earlier filing. In this way, the investor currently owns around 10% of the company. The fund initiated a stake in the company during the first quarter, initially holding 2.25 million shares.
The deal has a big chance to succeed, taking into account that the stock of the company declined by 52% since the IPO. Moreover, as Mr. Smith pointed out in his letter, the stock of RealD (NYSE:RLD) was outperformed by many of its peers from the industry, such as Cinemark Holdings, AMC Entertainment Holdings and IMAX Corporation, among others.
RealD (NYSE:RLD) has already provided a response to Starboard’s offer, by saying that its Board of Directors will examine this unsolicited bid. Taking into account the poor performance of the stock, despite the company’s relatively strong financial results, if the board will act in the interest of stakeholders then it most likely will let the deal go through.
Among the reasons presented by Starboard, RealD (NYSE:RLD) requires a vast amount of capital to support its growth initiatives and being a public company, it won’t be able to acquire these resources. In this way, if the company fails to undertake some of its growth strategies in a highly competitive market with a high rate of growth, its financial results will suffer, which will affect the stock price as a result.
Investors probably anticipated the possibility of such a development, with many increasing their positions in the company. Brian Bares‘ Bares Capital Management owns around 8.16 million shares of the company, the position amassing over 8% of the fund’s equity portfolio. Other two investors that boosted their stakes in RealD are David E. Shaw and Israel Englander, holding 122,800 and 232,600 shares respectively. Even though these two investors did not allocate a very significant amount from their multi-billion equity portfolios, they still will be happy to cash in some good returns in case the deal is approved by the board.
With the board stating that it will take into consideration Starboard’s proposal, rather than rejecting it at the beginning, the market seems to be optimistic about the prospects of the deal. And knowing Starboard’s latest activist moves in companies like Yahoo! Inc. (NASDAQ:YHOO), or Darden Restaurants, Inc. (NYSE:DRI), it would be a good idea for the board to accept the proposal.
See the full letter here:
Disclosure: none
Let Warren Buffett, David Einhorn, George Soros, and David Tepper WORK FOR YOU. If you want to beat the low cost index funds by an average of 6 percentage points per year look no further than Warren Buffett’s stock picks. That’s the margin Buffett’s stock picks outperformed the market since 2008. In this free report, Insider Monkey’s market beating research team identified 7 stocks Warren Buffett and 12 other billionaires are crazy about. CLICK HERE NOW for all the details.
