In a letter to board members of Orange 21 the Carlsbad-based parent company of Spy Optic, Thesis Capital LLC (a New York City-based “institutional investor and beneficial shareholder in the company”) suggested that the company should be put up for sale because if sold its would be worth much more than the $4.96 at which the stock currently trades.
“We believe that through a sale process, the Company would be valued in excess of $7.00 per share conservatively assuming the median price-to-sales of recent optics transactions.”
Follow the link for the entire letter and maybe you can help us figure out if this is anything more than a simple ploy to run up the stock price.
[Link: Trading Markets]
Dear Orange 21 Board Member:
As you are probably aware Thesis Capital has had ongoing discussions with current and former management regarding the future of the Company. These discussions have been wide-ranging and have included everything from a business combination with No Fear, Inc. to realizing value from the Company’s brand through profitable licensing deals. The Company’s owners have yet to receive a strategic plan for the business. In the absence of an articulated plan we are calling on management to initiate a formal process to explore a sale of the Company and let Shareholders decide if the current private market value is acceptable.
We understand that the company is deep into a fundamental turnaround and applaud the efforts of Mark Simo and John Pound to bring the Company back to its previous glory. It is unfortunate that their efforts are hindered by cleaning up, what is in our view, the mess left by the former management team while goodwill and focus were squandered on low-return, high-risk growth projects. This included the ill-fated attempt to grow a Pacific Rim business in the face of failed domestic execution. It also included tying up working capital and increasing inventory risk in the pursuit of a fashion business even though the Company’s manufacturing partner couldn’t fulfill orders for the Company’s core product lines. A conversation on questionable management wouldn’t be complete without mentioning the acquisition of LEM Srl, the Company’s primary manufacturer, for $4.2 million plus an earn-out (most consumer products companies seek to manage the brand and to exit, not enter, the manufacturing process).
It is only the recent efforts of John Pound, as Co-Chairman and Mark Simo, as CEO that have given us any comfort with regards to the current state of the Company. Unfortunately for the Company, even with their efforts, Orange 21 remains a subscale business in an industry dominated by global brands and competitors with deeper pockets. When the Company opened the door to a substantive discussion about a potential transaction with No Fear, the former parent company of Orange 21, we hoped that the Board would fulfill its fiduciary obligation and pursue any and all possible transactions. By allowing No Fear, which is owned by Mark, to pursue a potential non arms-length transaction, we feel strongly that the Board and the Special Committee also had an obligation to formally open up the possibility of a transaction to another unrelated strategic buyer.
The stated goal for pursuing the transaction with No Fear was to give the Company better access to capital and a larger platform from which to operate. Assuming these objectives are still true, it has become abundantly clear to us that the best course of action is the pursuit of a sale. We believe that through a sale process, the Company would be valued in excess of $7.00 per share conservatively assuming the median price-to-sales of recent optics transactions. The following table of comparable optics transactions supports this contention.
SELECTED OPTICS COMPARABLE TRANSACTIONS Effective Acquirer Target Date ———————————————————————- Luxottica Group S.p.A. Oakley, Inc. Pending Oakley, Inc. Eye Safety Systems, Inc. 12-Jan-07 Luxottica Group S.p.A. Cole National Corporation 4-Oct-04 Luxottica Group S.p.A. OPSM Group PTY Limited 2-Sep-03 Luxottica Group S.p.A. Sunglass Hut International, Inc. 6-Apr-01 Worldwide Sports, Inc. Serengeti Eyewear, Inc. 14-Jul-00 Worldwide Sports, Inc. Bolle Inc. 2-Feb-00 Luxottica Group S.p.A. Bausch & Lomb Inc. – Ray-Ban Sun 28-Feb-99 Optics, Inc. ———————————————————————-
EV as Multiple of: Low High Median ———————————————————— LTM Revenue 0.6x 2.8x 1.3x LTM EBITDA 2.7x 13.3x 8.4x
We feel that Orange 21 would be most appropriately valued on a multiple of revenue as the Company has artificially depressed margins from its lack of scale and previous mismanagement. Discussions with the Company suggest that public company costs alone total in excess of $1 million dollars or 2% of sales. With scale and sufficient infrastructure, the branded eyeglass business should generate gross margins in excess of 50% versus 41% at the Company today (it generated gross margins in excess of 50% as recently as 2002-2004). Clearly this business would generate meaningfully better economics as part of a much larger organization.
We have spoken to dozens of the Company’s customers and the number one complaint that we have heard is that they don’t see a salesperson frequently enough. The latent demand for the brand is staggering in light of the sales results of the last few years. Spy Optic is a great brand that needs a real sales force behind it and has phenomenal growth opportunities. With sufficient resources, the Company could pursue opening territories outside of your California stronghold which would create enormous value.
In a perfect world, it would be interesting to watch Orange 21 continue its growth effort as an independent company but given the consolidating competitive landscape punctuated most recently by Luxottica Group’s crowning acquisition of Oakley, Inc. we are holding the Board responsible to, at a minimum, pursue all possible avenues for maximizing shareholder value.
We are available for further discussion.
Stephen Roseman Thesis Capital Management, LLC 60 East 42d St- 12th Floor New York, NY 10165
SOURCE: Thesis Capital Management, LLC
Thesis Capital Management, LLC Duncan Huyler, 212-585-0100 x803