NEW YORK--(BUSINESS WIRE)--Sandell Asset Management Corp. (“Sandell”), a long-time shareholder of Viavi Solutions Inc. (“Viavi” or the “Company”, and formerly JDS Uniphase Corporation) (NASDAQ:VIAV), today released the following letter to Oleg Khaykin, the CEO and President of Viavi:
August 16, 2016
Mr. Oleg Khaykin
CEO and President
Viavi Solutions Inc.
430
North McCarthy Blvd
Milpitas, CA 95035
Dear Oleg:
We have been a shareholder of Viavi Solutions Inc. (“Viavi” or the “Company”) for quite some time and have enjoyed our recent dialogue with you and other members of the management team and Board of Directors (the “Board”) of the Company. Based on the discussions that my colleague Richard Mansouri and I have had with you, it should be obvious that we believe the value of the unique assets that comprise Viavi is far in excess of the current stock price.
In recent weeks we have heard from a number of shareholders, as well as other interested third-parties including industry analysts, investment bankers, and private equity professionals. The overwhelming majority of these individuals have articulated thoughts similar to ours, substantiating our view that the value of Viavi may be materially higher than the current stock price. We believe that the shareholders of Viavi and the broader investment community would be highly supportive, and would in fact strongly encourage the Company to take certain immediate steps to increase shareholder value. The following sets forth a number of these steps, all of which the Company can pursue without delay:
(1) Sale of Service Enablement (SE) Business Segment – While Viavi stopped reporting individual Network Enablement (“NE”) and Service Enablement (“SE”) segment operating income in Fiscal 2016, the SE segment generated operating losses of -$3.9 million, -$25.6 million, and -$18.0 million in Fiscal 2013, 2014, and 2015, respectively. Based on the entire Network and Service Enablement (NSE) business unit (NE + SE) operating income of $12.7 million in Fiscal 2016, it is our belief that the SE segment may have generated operating losses in the vicinity of -$48.0 million in Fiscal 2016 (Note: This assumes that the NE segment, which reported $504.6 million of revenue in Fiscal 2016, generated an estimated 12% operating margin).
By all measures, the SE segment has been a tremendous drag on the Company’s overall profitability, and the entire NSE business unit reported a truly abysmal operating margin of 1.9% in Fiscal 2016 due to the damage wrought by the SE segment. Assembled primarily through acquisitions over the last few years, Viavi has spent close to $500 million on the purchase of Agilent’s network solutions business, Arieso, Trendium, and Network Instruments, which effectively constitute the SE business segment. Based on our discussions, there is the strong opinion that the Company should immediately seek the sale of this business segment, either as individual sub-segments or as a whole, and end this perennial hemorrhaging of cash.
(2) Share Repurchase – Given the progress that Viavi has made in monetizing its equity stake in Lumentum, the Company now has close to $1 billion of Cash, Cash Equivalents, and Short-Term Investments, the vast majority consisting of highly-liquid marketable securities. As we have mentioned on numerous occasions, it is implicit that every share of stock repurchased at a discount to intrinsic value increases the per share intrinsic value of every remaining share. It is our opinion that the intrinsic value of Viavi may range from between $10.46 and $14.90 per share, as is illustrated in the matrix below:
| ($ in millions) |
Multiple |
Base Case |
Multiple |
Upside Case |
||||||||||||||
| NSE | $658.2 | MM FY2016 Revenue | 1.50 | $987.3 | 2.00 | $1,316.4 | ||||||||||||
|
|
||||||||||||||||||
| OSP | $102.9 | MM FY2016 Operating Income | 8.00 | 823.2 | 10.00 | 1,029.0 | ||||||||||||
| Intellectual Property (1,970 U.S. and foreign patents and patents pending) | 90.0 |
(Est.) |
180.0 | (Est.) | ||||||||||||||
| Add: | ||||||||||||||||||
| Cash, Equivalents, and Short-Term Investments | 979.8 | 979.8 | ||||||||||||||||
| Less: | ||||||||||||||||||
| Long-Term Debt |
(588.3) |
(588.3) | ||||||||||||||||
| Value of Viavi (ex-NOLs Value) | 2,292.0 | 2,916.9 | ||||||||||||||||
| Value of NOLs (Estimated) |
190.4 |
(Sec. 382 Change-of-Control) | 619.9 | |||||||||||||||
| Implied Equity Value of Viavi |
$2,482.4 |
$3,536.8 | ||||||||||||||||
| Shares Outstanding | 237.3 | 237.3 | ||||||||||||||||
| Estimated Intrinsic Value per Share of Viavi | $10.46 | $14.90 | ||||||||||||||||
| Current Viavi Stock Price (8/12/16) | $7.30 | $7.30 | ||||||||||||||||
| % Increase/Decrease | 43.3% | 104.1% | ||||||||||||||||
As such, we believe that the Company should allocate a meaningful amount of available funds towards an accelerated share repurchase program to be implemented as soon as possible. We believe that the $100 million share repurchase program that the Company put in place in February was more cosmetic than substantive given the relatively small authorization, and we are concerned by the considerable lack of progress in executing such repurchases, considering that a mere 1 million shares have been repurchased since February.
(3) Optimization of Capital Structure – We believe that Viavi’s 0.625% Senior Convertible Notes due 2033 (the “Notes”) may be a complicating presence. Notwithstanding the fact that these deeply out-of-the-money securities may not be “put” to the Company for more than two years, we believe that Viavi has the ability to negotiate an agreement that optimizes its capital structure in a manner that would deliver more value to holders of both the Notes and shares of common stock.
(4) Enhancement of Board and Financial Advisors – It is our opinion, which is shared by many other shareholders, that the current Board has not demonstrated the requisite sense of urgency needed to address many of the issues that have been plaguing the Company. It is our belief that the Company would benefit from having additional members on the Board of Directors who are financially sophisticated and who have a true understanding of the public markets, as well as highly-motivated to create shareholder value. In related matters, while the Company’s Corporate Development Committee was charged last year with retaining an independent investment banking firm to aid in a review of strategies to enhance value, including the value associated with Viavi’s multi-billion-dollar balance of net operating losses (NOLs), we are highly troubled by the lack of any apparent progress made by the Company’s current financial advisors. Absent a timely demonstration of significant progress, such as the announcement and execution of a proper value-enhancing strategy, we believe that the Board should retain a nationally-recognized investment banking firm to serve as a new financial advisor as soon as possible.
(5) Private Equity Sponsorship – We believe that there may be substantial private equity interest in the Company, and while a take-private transaction with a reputable equity sponsor may be one path to consider, there may be alternative paths involving an equity sponsor (e.g. a preferred investment in the Company that contemplates Viavi remaining a public company) that may deliver significant value that we believe should be considered. Indeed, such a path may allow Viavi to function as an acquisition vehicle and maintain the full benefit of its NOL balances without incurring a Section 382 ownership change that would place limitations on the use of the NOLs.
Needless to say, the above list is not meant to be exhaustive but is representative of a number of issues that are deemed critical by us and other shareholders. As we hope was clear in our recent dialogue, we have many additional ideas that, if implemented, have the potential to deliver substantial value to all the shareholders of Viavi. We hope to continue our dialogue in the immediate future in order to refine and see the implementation of these ideas.
Sincerely,
Thomas E. 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.
