Video streaming company faces an inflection point: Keep its growing businesses or split them

Business: Harmonic provides video delivery software, products, system solutions, and services worldwide. Its products enable customers to create, prepare, store, playout, and deliver a range of broadcast and streaming video services to consumer devices, including televisions, personal computers, laptops, tablets, and smart phones. The company has two business segments – Video and Cable Access. The Video segment provides video processing, production and playout solutions and services worldwide to cable operators and satellite and telco service providers and to broadcast and media companies, including streaming media companies. The Video business infrastructure solutions are delivered through shipment of products, software licenses or as SaaS subscriptions.  The Cable Access business provides cable access solutions and related services primarily to cable operators globally.

Stock Market Value: $782M ($7.76 per share)

Activist: Scopia Capital Management

Percentage Ownership:  9.61%

Average Cost: $5.72

Activist Commentary: Scopia is not historically an activist investor. However, activist investor Jerome Lande (of Coppersmith Capital and prior to that, MMI Investors) folded his operations into Scopia for the purpose of operating an activist portfolio within the firm and giving activist advice and support on Scopia's larger portfolio, which is a traditional long-short fund.

What's Happening:

On April 9, 2021, Scopia and the company entered into a Cooperation Agreement, pursuant to which as long as Scopia owns 5% of the company's common stock, they have the right to appoint two directors to the board, one of whom is Jerome Lande, head of special situations for Scopia, and the other to be an independent director. This appointment may be made at any time prior to the earlier of (x) 15 days prior to the deadline for the submission of stockholder nominations of directors for the company's 2022 Annual Meeting and (y) 75 days prior to the first anniversary of the 2021 Annual Meeting. Scopia agreed to abide by customary voting and standstill provisions.  

Behind the Scenes:

Scopia has been a shareholder in the company for the past two years, watching and encouraging the company to develop larger businesses and greater sophistication across both of its segments. While the company has begun to fulfill that prophecy and gain market share, the process has been slow and the company has been off on its projections. However, over the past few months there has been new growth initiatives on the video side, progress on the SaaS side, some recovery from Covid and incremental progress in the Cable Access segment. As a result, these businesses are closer to critical mass and at a point where they could be separated.

There has been a great deal of consolidation in the Video business. Ericsson divested its MediaKind business to One Equity, Cisco sold its Service Provider Video Software Solutions business to Permira Funds and Amazon bought a similar type of business. There could be many companies out there who might be interested in Harmonic's Video business, and this has also been an area that has seen PE interest. Harmonic could potentially get north of $450 million for this business and be left with its Cable Access business, which has been taking market share with high margins and is expected to continue to grow at 30%+. The would be an opportunity for the Cable Access business to continue as a standalone business or it could potentially be taken out also.

So, the company is approaching an inflection point and Scopia wants to make sure they are taking these opportunities seriously. Scopia is in a unique position to monitor the company's progress and will be watching to make sure management is exploring a separation of the businesses while efficiently operating them. If Scopia needs to step in, they have a call option on two board seats. The fact that Scopia structured the agreement in such a way shows that they have confidence in the board but also want to have an insurance policy in case things do not progress like they hope. 

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

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