CLEVELAND, Feb. 10, 2015 /CNW/ -- Ancora Advisors LLC, a shareholder which owns over 10% of Axia NetMedia Corporation ("Axia" or the "Company") (TSX:AXX.TO - News) announced today that it has delivered a letter to the Chairman and Chief Executive Officer of the Company. In the letter, Ancora recommended that Axia should explore strategic options to address the discount between the current stock price and the intrinsic value of the Company's assets.
The full text of the letter is as follows:
February 10, 2015
Sent via email
Arthur Price
Chairman and Chief Executive Officer
Axia NetMedia Corporation
3300, 450 – 1st Street S.W.
Calgary, Alberta T2P 5H1
Dear Art:
Ancora Advisors LLC ("Ancora") is a long-term shareholder that controls over 10% of the shares of Axia NetMedia Corporation ("Axia" or "Company"). After multiple detailed discussions with Axia's senior management team, Ancora believes that the Company should explore strategic options for closing the significant discount between the current stock price and the underlying value of the Company's assets. Neither the current corporate structure, which obscures the value of the Company's French asset Covage, nor management's investment process, which looks at lengthy return timelines of over 10 years, are properly suited to drive risk-adjusted returns for public shareholders over an acceptable investment timeframe.
While there are multiple paths for Axia to drive shareholder value, we believe the Company, led by management, should pursue a take-private transaction. Ancora would consider rolling some or all of its equity into a deal if the opportunity were made available. This transaction would both crystalize value for current public shareholders and better align the subsequent owners with management's return horizon. The option to participate in the deal should also be extended to all shareholders to allow those aligned with the return timeframe to maintain their investment.
Ancora also intends to engage management with respect to board representation. Ancora is the largest shareholder in Axia and has a larger economic stake in the Company today than the cumulative ownership of all board members. The Company's board lacks involvement from large institutional shareholders, and as a long-term shareholder in Axia with significant experience working constructively with corporate board members, Ancora will request at least one seat on the Company's board.
Complex corporate structure
Axia's Covage investment represents a unique and valuable growth asset, which benefits from secular tailwinds, high barriers to entry, and significant operating leverage. The Company's current corporate structure, with the 50% ownership stake in Covage accounted for under the equity method, masks the recent performance and potential growth opportunity for the French asset in the Company's reported financials. Additionally, a Canadian listing attracts primarily a North American shareholder base, while a material portion of the Company's value is derived from European assets, further contributing to the current trading discount. There are limited operational synergies from ownership of the assets in North America and France, and those benefits are certainly outweighed by the Company's convoluted corporate structure.
Investment framework sub-optimal for public equity investors
As evidenced by Axia's recent Seine-et-Marne fiber-to-the-home ("FTTH") contract announcement, management operates within a very long term return framework. While we were encouraged by the announcement and believe it is a positive step towards Covage being one of the principal FTTH providers in rural France, we think the stock price is unlikely to reflect the long term value created by this contract, or could even be adversely impacted by a project that requires multiple years of investment and negative free cash flow. In the long run, it may be a prudent allocation of capital to invest in FTTH in France; however, exemplified by the material discount of the Company's stock price today, even after Covage has begun to generate free cash flow (following many years of investment during which the stock languished), the public equity markets do not optimize value for a company with long-tailed investment processes.
Multiple ways to drive value
After our conversations with management regarding Axia's strategic alternatives and capital allocation, we conclude that management shares our sentiment that the stock is undervalued and may not be properly suited for public equity markets. Moreover, we believe management would actively look to take the company private should the shares fail to reflect fair value over the next 12-24 months. Commencing that process now would be an optimal outcome for all stakeholders. However, should an MBO of Axia prove challenging, there are multiple ways for the Company to close the material discount to intrinsic value, including:
- Take-private of Canadian business with subsequent dividend/tender and listing of Company (primarily Covage stake) on European exchange
- Separation of the North American and French assets (spin or IPO of Covage)
- Sale of Axia to a strategic acquirer
- Sale of Covage
Axia should immediately conduct a strategic review process, focusing in the near term on a management-led buyout of the Company while simultaneously exploring value creating alternatives including those we have outlined in this letter. Axia's corporate structure prohibits shareholders from realizing full value on their investment; an issue we believe requires immediate correction for the Company's shares to reflect the operational value created over the last few years. We look forward to continuing our dialogue with management to achieve the optimal outcome for all shareholders.
Sincerely,
Fred DiSanto
Chief Executive Officer and Executive Chairman
Ancora Advisors LLC
cc: Axia NetMedia Corporation's Board of Directors
About Ancora Advisors:
Ancora Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States. Ancora offers comprehensive investment solutions for institutions and individuals in the areas of fixed income, equities, global asset allocation, alternative investments and retirement plans. A more detailed description of the company, its management and practices are contained in its "Firm Brochure" (Form ADV, Part 2A). A copy of this form may be received by contacting the company at: 6060 Parkland Boulevard, Suite 200 Cleveland, Ohio 44124, Phone: 216-825-4000, or by visiting the website, www.ancora.net/adv