NEW YORK--(BUSINESS WIRE)--Sandell Asset Management Corp. (“Sandell”), a significant shareholder of JDS Uniphase Corporation (NASDAQ: JDSU) (“JDSU” or the “Company”), released the following letter to the shareholders of JDS Uniphase.
November 17, 2014
Dear Fellow JDS Uniphase Shareholders:
We are shareholders of JDS Uniphase Corporation (“JDSU” or the “Company”). We, like you, have an interest in seeing the price of JDSU shares reflect the significant value associated with the Company’s underlying assets, which include the Company’s three disparate business units (CCOP, NSE, and OSP) as well as JDSU’s vast quantity of tax assets, which have a tax-effected book value in excess of $2.3 billion. While the Company’s recently announced proposed spin-off of its CCOP business was a positive development, we believe that JDSU must do much more to deliver value to the shareholders, who are the true owners of the Company. It was for this reason that we had sought by way of a precatory proposal to empower the shareholders to directly voice their desire to see the Company’s Board of Directors (the “Board”) take further steps to enhance shareholder value in a timely manner.
Unfortunately, the Company has chosen to exclude our proposal from its Proxy Statement. Furthermore, in what we believe was a blatant entrenchment maneuver on the part of the Company, JDSU timed the notice of its 2014 Annual Meeting of Stockholders (the “Annual Meeting”) in a manner that rendered it effectively impossible for us to submit Director nominations in time (1). While we had hoped that our good faith discussions with CEO and Director Thomas Waechter would result in a change to the Company’s posture, we have seen no indication of further action on the part of JDSU and have heard nothing more than vague platitudes from Mr. Waechter. Given Mr. Waechter’s intransigence, coupled with the Company’s apparent contempt for the shareholder franchise, we are voting “AGAINST” the election of existing Director nominees Thomas Waechter and Martin Kaplan, who is Chairman of JDSU’s Governance Committee, at the Company’s upcoming Annual Meeting and we are encouraging other shareholders to vote “AGAINST” the election of Mr. Waechter and Mr. Kaplan.
(1) JDS Uniphase provided notice of its Annual Meeting exactly 60 days prior to the Annual Meeting date and the Company’s Bylaws state that notice of Director nominations are due not less than 60 days prior to the Annual Meeting.
It is our belief that the separation of the CCOP business, a logical but wholly-insufficient first step, was approved by the Board in an attempt to ward off mounting shareholder pressure. The stock price of JDS Uniphase on September 9, 2014, the day prior to the announcement of the proposed CCOP spin-off, was $11.71, less than half its price of 10 years ago. (JDSU stock closed at $26.16 on September 9, 2004.) By any measure, this performance is abominable and based on discussions that we have had with investors, there has been growing frustration with the Company’s poor stock price performance, which in our opinion is a direct result of JDSU’s byzantine complexity and operational failings.
Unfortunately, the Company’s recent actions have not been fully embraced by investors, as is evidenced by JDSU’s relatively muted stock price reaction. We believe that shareholders are upset that the Company did not pursue a more expansive process to unlock value, particularly as it relates to the CCOP business unit, a sentiment that has been relayed by many members of the analytical community. Moreover, a number of industry analysts have indicated the need for industry consolidation in the optical components space and many have specifically noted that the CCOP business itself should be sold, as the following comments demonstrate:
“Selling off the optical unit [CCOP] to Finisar or Avago can help optical industry profits” – RBC Capital Markets, September 8, 2014
“We would like to see CCOP merge with another top tier Optical components company” – MKM, September 11, 2014
“CCOP may never see daylight as a standalone entity and optical communications industry consolidation could be poised for acceleration.” – Stifel, September 11, 2014
“We believe the JDSU split is the first step to unlocking value, and only enhances opportunities for overall industry consolidation.” – UBS, September 11, 2014
“Last month JDSU announced plans to split into separate companies in the 3QCY15 time frame. We have a positive view of this plan because it likely accelerates industry consolidation, particularly on the Optical/CCOP side. We think there is a meaningful chance that Finisar and CCOP will merge. JDSU management suggested there are potential tax benefits if such a deal were to occur prior to the Spin versus post-Spin.” – MKM, October 30, 2014
“We also view the statement as supportive of our analysis that shareholder value would be maximized if CCOP were to be sold prior to being spun, with our research continuing to indicate a sale is the most likely outcome for the CCOP assets.” – Stifel, October 29, 2014
“We believe both the Optical components and T&M segments would benefit from further consolidation, with our preferred outcome being a Finisar-JDSU CCOP combo (via a JDSU CCOP sale) and JDSU NSE rolling up the T&M industry while utilizing its almost $9b in NOLs.” – UBS, October 29, 2014
“It is becoming increasingly clear that if a buyer emerges before the CCOP spinoff takes place it would be a double blessing – shareholders reap the benefit of an accelerated liquidity event, almost all of which would be sheltered by JDSU’s $9 billion NOLs, while a buyer gets the asset with a tax redistribution” – William Blair, October 30, 2014
We believe that the Company must task its existing financial advisors to pursue a parallel process in which JDSU seeks the sale of the CCOP business through a formal auction while it continues preparations for the proposed spin-off. It is our belief that there are several potential buyers who would be interested in an outright acquisition of the CCOP business, and we believe that a sale could be consummated far sooner than the 3rd quarter of 2015, which is the date of the proposed CCOP spin-off. Giving heed to the time value of money is a fundamental precept of responsible corporate finance and shareholders should not be forced to wait for upwards of one year to realize value for CCOP. Furthermore, a sale of CCOP may offer the certainty of cash consideration much sooner than the 3rd quarter of next year. While the Company has seemed to suggest their willingness to consider a sale of CCOP prior to its spin-off and Mr. Waechter in the Company’s Fiscal First Quarter 2015 earnings teleconference stated that “if we find another option or alternative…that brings better or greater value to the shareholders, we would definitely pursue that,” the fact that we have yet to see the Company initiate any actual process makes these comments from Mr. Waechter appear to us disingenuous. By voting “AGAINST” the election of Thomas Waechter, you would be sending a strong message that he must affirmatively back up his statements with action and cause the Company to conduct a formal sale process for the CCOP business without delay.
Along with the need to explore alternatives other than the proposed spin-off of CCOP is the corresponding need to maximize the value of the Company’s vast quantity of tax assets. We note that JDSU has federal, state, and foreign tax net operating loss carryforwards (NOLs) of approximately $6.1 billion, $1.8 billion, and $1.0 billion, respectively, which constitutes a tax-effected book value in excess of $2.3 billion, or over $10 per share. While the treatment of NOLs is a highly-complex topic, we are confident that several avenues exist for the Company to extract value from this effectively unrecognized asset. We note that several analysts who cover JDSU utilize a sum-of-parts valuation methodology for determining a price target, and while many have acknowledged the presence of the vast quantity of NOLs, few have factored in any value for the Company’s tax assets, as is illustrated by the following table:
|
Sum-of-the Parts Value |
Value Includes NOLs? |
Sum-of-the-Parts Value (ex-NOLs) |
|||||
| Goldman Sachs (9/12/14) | $17.50 | NO | $17.50 | ||||
| Jefferies (9/11/14) | $15.00 | NO | $15.00 | ||||
| MKM (10/30/14) | $17.00 | NO | $17.00 | ||||
| RBC (10/30/14) | $18.00 | NO | $18.00 | ||||
| Stifel (10/1/14) | $16.00 | Yes ($1.05) | $14.95 | ||||
| UBS (10/29/14) | $17.00 | Yes ($3.50) | $13.50 | ||||
| William Blair (10/30/14) | $15.00 | NO | $15.00 | ||||
|
Average |
$15.85 |
||||||
As can be seen, according to various analyst estimates, the average sum-of-the-parts value without ascribing any value to the Company’s tax assets is $15.85 per share. Applying a factor of between 50% and 100% to the $2.35 billion book value of the Company’s NOLs yields an incremental value of between $1.17 billion and $2.35 billion, or between approximately $5.05 and $10.14 per share, which when added to the aforementioned $15.85 ex-NOL value yields a potential value of between $20.90 per share and $25.99 per share, which is between 58% and 96% higher than the Company’s November 12, 2014 closing stock price of $13.23. Astonishingly, however, the Company has not advanced a concrete plan to unlock this value. By voting “AGAINST” the election of Thomas Waechter, you will be indicating your desire to see the Company take substantive steps to unlock the value associated with the Company’s substantial tax assets.
Sandell had previously submitted a shareholder proposal requesting that the Board of Directors task its financial advisors to evaluate further strategic alternatives, in addition to the previously announced proposed spin-off of its CCOP business, to maximize the value of the Company’s various business segments as well as its substantial tax assets in a timely manner. In an affront to shareholders, and contrary to the actions of other well-established technology companies who have recently included precatory proposals in their proxy materials (e.g. Apple, EBay), JDS Uniphase refused to include Sandell’s proposal in its Proxy Statement. While Sandell considered filing its own proxy statement to solicit shareholder support for its proposal, shareholders voting on Sandell’s proxy card would have been greatly disadvantaged, as they would not have been able to vote for any candidates for the Board of Directors due to what Sandell believes was a blatant entrenchment maneuver on the part of the Company. Specifically, JDS Uniphase provided notice of its Annual Meeting after the close of trading on October 6, exactly 60 days prior to the December 5 Annual Meeting date; because of Bylaws recently amended by the Company, notice of Director nominations were due “not less than 60 days” prior to the date of the Annual meeting, which rendered it effectively impossible for Sandell to submit Director nominations in compliance with this Bylaw.
We are troubled that the Board of Directors has taken these steps to impinge on the shareholder franchise and deny the rights of shareholders to directly voice their desire to the Board of Directors. Furthermore, we are shocked that, in this day and age of supposedly enlightened corporate governance, a board of directors would so brazenly adopt a Bylaw that has the potential to effectively eliminate the ability for shareholders to nominate Directors. Considering the poor stock price performance demonstrated by the Company over the last decade, we suspect it was no coincidence that the Company recently amended its Bylaws in a manner timed to frustrate shareholders who would desire greater accountability at the Board level. By voting “AGAINST” the election of Martin Kaplan, who in addition to being Chairman of the Company’s Governance Committee is, at 77 years of age, the longest-serving Director on the Board, you will be voicing your disapproval of the Company’s attempts to manipulate the governing documents of the Company in order to disenfranchise shareholders.
We look forward to engaging in further dialogue with interested shareholders of JDSU in advance of the Company’s December 5 Annual Meeting.
VOTE “AGAINST” THE ELECTION OF THOMAS WAECHETR AND MARTIN KAPLAN
Sincerely,
Thomas Sandell
Chief Executive Officer
About Sandell Asset Management Corp.
Sandell Asset Management Corp. is a leading private, alternative asset management firm specializing in global corporate event-driven, multi-strategy investing with a strong focus on equity special situations and credit opportunities. Sandell Asset Management Corp. was founded in 1998 by Thomas E. Sandell and has offices in New York and London, including a global staff of investment professionals, traders and infrastructure specialists.
