Outerwall Inc. (OUTR:US), operator of the Redbox movie kiosks, surged after activist investor Jana Partners LLC reported a 13.5 percent stake and said it will seek a sale of some or all of the company’s businesses.
Outerwall, with a market value (OUTR:US) of about $1.67 billion, rose 4 percent to $59.36 at the close in New York. Jana disclosed its position in a regulatory filing on Oct. 4.
Jana, run by co-founder Barry Rosenstein, is targeting Bellevue, Washington-based Outerwall after the company disappointed (OUTR:US) investors for two straight quarters. Jana seeks the sale, spinoff or shutdown of the Redbox Instant by Verizon film-streaming venture, which has failed to develop into a credible threat to Netflix Inc. (NFLX:US), as well as the Rubi coffee-vending kiosks that made their debut in 2012, a person with knowledge of the matter said on Oct. 4.
“The most likely outcome is that JANA Partners will be joined by several other shareholders, and the group will succeed in convincing management to focus on cash generation,” Michael Pachter, an analyst with Wedbush Securities in Los Angeles, said in research note yesterday. “Outerwall’s balance sheet can support some level of debt that would permit the company to buy back a significant percentage of its stock.”
Outerwall has taken too long to develop new initiatives, Pachter said. There is room to cut costs and sell the company’s mature coin-counting business for a significant sum, Pachter said. The analyst, who rates the stock outperform, projects Outerwall could generate $300 million in annual free cash flow, and may reach $78 in the next 12 months.
“While we believe that the company’s coffee and ecoATM ventures have some potential, we have been uniformly skeptical about its other initiatives,” Pachter said. “Many of our clients have shared our skepticism.”
Free cash flow (OUTR:US) totaled $140.3 million in the past 12 months, according to data compiled by Bloomberg. Long-term debt was $524 million as of June 30.
Executives of Jana met last week with Outerwall management to discuss options including a breakup, according to the person, who sought anonymity because the talks are private. Cost cuts and buybacks were also discussed, the person said.
Outerwall said it hired Morgan Stanley (MS:US) as financial adviser and Perkins Coie LLP for legal advice. The stock rose 9.4 percent to $57.10 at the close in New York on Oct. 4 after Dow Jones reported the Jana stake.
“Outerwall welcomes the opinions of its shareholders and is always open to constructive input,” the company, which changed its name from Coinstar Inc. in July, said in a statement. “We are committed to driving value for all Outerwall shareholders and will continue to take actions to achieve this important objective.”
With 3.78 million shares, Jana Partners is now Outerwall’s biggest investor (OUTR:US), based on data compiled by Bloomberg. Jennifer Fanjiang, general counsel for Jana, declined to comment beyond the filing. Jennifer St. Clair, a spokeswoman for Redbox Instant, didn’t respond to requests for comment. Verizon Communications Inc. (VZ:US) owns 65 percent of Redbox Instant, which began service in March.
Outerwall has added the vending machines that sell coffee and recycle electronics, as well as starting the Redbox Instant venture, to lessen dependence on Redbox DVD kiosks, which provided 87 percent of 2012 revenue (OUTR:US), based on data compiled by Bloomberg. The company also operates coin-counting machines.
The shares fell 12 percent on Sept. 17 after the company cut its forecast for third-quarter and full-year sales and profit, citing discounting and shorter rental periods for DVDs. The shares also dropped on July 26 after the company reported second-quarter sales that missed analysts’ estimates.
Jana, with $7 billion under management, paid about $204.9 million for its shares, according to the filing. The sides will probably meet again soon, the person said. The New York-based firm, co-founded by Rosenstein in 2001, is pressing for a strategy review that could lead to a sale of Outerwall or some of its businesses, according to the filing.
Jana also is pressing for changes at Safeway Inc. (SWY:US), the second-largest U.S. grocery chain. The group said last month it may seek further discussions with the Pleasanton, California-based retailer about ways to boost returns to shareholders after buying a 6.2 percent stake.
Options may include returning capital to Safeway shareholders and replacing management, Jana said in a filing in September. Ashland Inc. (ASH:US), the U.S. chemical maker that’s climbed 11 percent since Jana disclosed a stake in April, said last month its board voted in favor of ending staggered three-year terms for directors.
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