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Navarre Corporation: Activist Investor as Catalyst (NAVR)

March 11, 2011 | About:
Navarre Corporation (NAVR) publishes computer software and multimedia products such as Mavis Beacon Teaches Typing and Hoyle PC Gaming. In addition to its publishing business, more than 90% of its revenues come from distributing software and multimedia for other companies, such as Symantec , Kaspersky Lab, Roxio, Webroot, McAfee, Corel, and LucasArts. It is currently trading at a P/E of just 6, but on peak earnings (more like 15x on more normal earnings). More important than its P/E is the company’s strong history of free cash flow, which it has been using for the last four years to reduce its debt load by ~80%. Using its 4-year average FCF, the company is trading at around 19% FCF yield.

It appears that NAVR’s free cash flow generating capabilities has attracted an activist investor. In November, Becker Drapkin Management, LP of Dallas, Texas, filed a Form 13D indicating that it had purchased 15% of the company. An exhibit to that filing includes a letter that was sent to NAVR’s management demanding, under the Minnesota Business Corporation Act, the release of a slew of information.

A Star-Tribune article on Becker Drapkin described the firm in this manner:

Becker Drapkin is an activist firm that focuses on beaten-down, small-cap companies. It has recently taken significant stakes in Physicians Formula Holdings, a California cosmetics company whose shares have plunged from $22 in 2007 to $3.90; Hot Topic, a once-hot teen retailer that has experienced 21 consecutive months of same-store sales declines; and Glu Mobile, a Silicon Valley mobile game developer that also has struggled. In the last two cases, the firm’s partners, Matthew Drapkin and Steven Becker, have joined the boards.



Still, things start happening once Becker Drapkin shows up. Incentive compensation formulas are tweaked, and long-tenured executives often make way for new hires. Companies that ignore Becker Drapkin usually pay a price. Becker mounted a months-long campaign that ultimately forced Kintera, a San Diego tech company, to dump its founder and CEO.

In the case of Plato, less than a year after Becker and Drapkin joined the board the company was sold to a private equity group for $5.60 per share.
Not a lot of information was made public for a few months until mid-February, when NAVR announced a Standstill Agreement had been arrived at between the parties whereby two representatives of Becker Drapkin would be added to its Board of Directors. In connection with these appointments, Becker Drapkin would retract its demands. The appointees are impressive additions to the Board:

Mr. Willis, age 50, is currently the Executive Chairman of Charlotte Russe, a mall-based specialty retailer of fashionable, value-priced apparel and accessories. Previously, Mr. Willis served as President of Shoes for Crews, a seller of slip resistant footwear, from 2009 to 2011. From 2003 to 2007 Mr. Willis served as Chief Executive Officer of Baker & Taylor, the world’s largest distributor of books as well as a global distributor of DVDs and music. Previous to Baker & Taylor, Mr. Willis was Chairman, President and CEO of Troll communications and President and CEO of Bell Sports. Prior to Bell Sports he was CFO of several magazine companies, including Petersen Publishing which he took public in 1997. Mr. Willis has both a B.B.A. (1981) and an MBA (1982) from Baylor University where he currently serves as a Regent.
Mr. Shisler, age 40, currently serves as a director at RealManage Holdings, Inc., a community association management company, and a member of the advisory board of Blue River PetCare, L.L.C., a veterinary hospital consolidator. Previously, Mr. Shisler served as a partner in Blue River Partners, L.L.C. from September 2007 until December 2008. Prior to that time, Mr. Shisler was a principal of Willis Stein & Partners, a Chicago-based private equity fund with nearly $3 billion of equity capital under management, where he initiated investment opportunities, structured acquisitions, coordinated due diligence, negotiated debt financings, and worked with portfolio company management teams and arranged for the disposition of investments. While at Willis Stein, Mr. Shisler served on the boards of directors of Baker & Taylor Corporation, a leading national distributor of books, DVDs and music; CompuPay, Inc., a provider of outsourced payroll processing, tax filing and other related services; National Veterinary Associates, Inc., an owner and operator of 96 companion animal veterinary hospitals throughout the U.S.; and Ziff Davis Media Inc., an integrated media company focused on the technology and video game markets. Mr. Shisler has an M.B.A., with distinction, from the Kellogg School of Management at Northwestern University, as well as both a B.S. degree in chemical engineering and a B.A. degree in political science from Rice University.
Additionally, Willis will be placed on the Strategic Transactions Committee of the Board, which signals that the company and new Board additions are agreed on a value-unlocking transaction in the near term. In addition to the appointments, Becker Drapkin cannot purchase more than 15% of the company’s stock for two years.

The Star-Tribune article mentioned above lists the following as reasons Becker Drapkin might be interested in NAVR:

The company remains one of the largest distributors of physical software products to retailers, and it owns some well-known titles itself, including Hoyle PC Gaming and Mavis Beacon Teaches Typing. But some of Navarre’s biggest customers — Musicland, CompUSA and Circuit City — have disappeared in recent years, so more than half of its sales are to two customers: Best Buy and Wal-Mart. Many of its software titles are PC-based, and PC sales are in decline. Navarre got out of the music distribution business in 2007 because of electronic downloads, and this method of purchasing software is also becoming more common.
The two new board members bring much more experience directly related to the distribution business. Bradley Shisler, formerly a principal of Willis Stein & Partners, a private equity fund with nearly $3 billion under management, also served on the board of Baker & Taylor Corp., the largest distributor of books. Richard Willis is the former CEO of Baker & Taylor and currently the executive chairman of Charlotte Russe, a mall-based specialty retailer.
It will be interesting to see how this plays out. In the meantime, it is notable that, unlike in many cases where an activist investor has emerged, the stock is currently trading below where it was when the position was announced!

Author Disclosure: No Position.

Talk to Frank about Navarre Corporation

About the author:

Frank Voisin
Frank is an entrepreneur who owned four restaurants by the time he was twenty. He sold his businesses and returned to school, completing a concurrent Law / MBA degree. At the same time, he successfully completed all three levels of the CFA exams. He now invests full time with a focus on value investing. Frank Voisin writes about value investing topics at http://www.frankvoisin.com.

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