Hold its rising companies or cut up them

Enterprise: Harmonic supplies video supply software program, merchandise, system options, and providers worldwide. Its merchandise allow prospects to create, put together, retailer, playout, and ship a variety of broadcast and streaming video providers to shopper gadgets, together with televisions, private computer systems, laptops, tablets, and sensible telephones. The corporate has two enterprise segments – Video and Cable Entry. The Video phase supplies video processing, manufacturing and playout options and providers worldwide to cable operators and satellite tv for pc and telco service suppliers and to broadcast and media firms, together with streaming media firms. The Video enterprise infrastructure options are delivered by way of cargo of merchandise, software program licenses or as SaaS subscriptions.  The Cable Entry enterprise supplies cable entry options and associated providers primarily to cable operators globally.

Inventory Market Worth: $782M ($7.76 per share)

Share Possession:  9.61%

Common Value: $5.72

Activist Commentary: Scopia isn’t traditionally an activist investor. Nonetheless, activist investor Jerome Lande (of Coppersmith Capital and previous to that, MMI Buyers) folded his operations into Scopia for the aim of working an activist portfolio throughout the agency and giving activist recommendation and assist on Scopia’s bigger portfolio, which is a conventional long-short fund.

On April 9, 2021, Scopia and the corporate entered right into a Cooperation Settlement, pursuant to which so long as Scopia owns 5% of the corporate’s widespread inventory, they’ve the proper to nominate two administrators to the board, one among whom is Jerome Lande, head of particular conditions for Scopia, and the opposite to be an unbiased director. This appointment could also be made at any time previous to the sooner of (x) 15 days previous to the deadline for the submission of stockholder nominations of administrators for the corporate’s 2022 Annual Assembly and (y) 75 days previous to the primary anniversary of the 2021 Annual Assembly. Scopia agreed to abide by customary voting and standstill provisions.  

Scopia has been a shareholder within the firm for the previous two years, watching and inspiring the corporate to develop bigger companies and larger sophistication throughout each of its segments. Whereas the corporate has begun to meet that prophecy and achieve market share, the method has been sluggish and the corporate has been off on its projections. Nonetheless, over the previous few months there was new development initiatives on the video facet, progress on the SaaS facet, some restoration from Covid and incremental progress within the Cable Entry phase. Because of this, these companies are nearer to crucial mass and at a degree the place they may very well be separated.

There was a substantial amount of consolidation within the Video enterprise. Ericsson divested its MediaKind enterprise to One Fairness, Cisco bought its Service Supplier Video Software program Options enterprise to Permira Funds and Amazon purchased an analogous kind of enterprise. There may very well be many firms on the market who could be enthusiastic about Harmonic’s Video enterprise, and this has additionally been an space that has seen PE curiosity. Harmonic might doubtlessly get north of $450 million for this enterprise and be left with its Cable Entry enterprise, which has been taking market share with excessive margins and is predicted to proceed to develop at 30%+. The can be a chance for the Cable Entry enterprise to proceed as a standalone enterprise or it might doubtlessly be taken out additionally.

So, the corporate is approaching an inflection level and Scopia needs to verify they’re taking these alternatives significantly. Scopia is in a novel place to observe the corporate’s progress and can be watching to verify administration is exploring a separation of the companies whereas effectively working them. If Scopia must step in, they’ve a name possibility on two board seats. The truth that Scopia structured the settlement in such a approach reveals that they’ve confidence within the board but additionally wish to have an insurance coverage coverage in case issues don’t progress like they hope. 

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.