Buoyant SeaChange May Set Sale

04/11/2012 11:39 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The hedge fund pressing AOL for change has already shaken up a promising video-on-demand software supplier, writes MoneyShow.com senior editor Igor Greenwald.

Most shareholders would be satisfied with a 43% overnight gain from the sale of a non-core asset. But Starboard Value is not like most shareholders.

The day after AOL (AOL) announced it would net slightly more than $1 billion from the sale of 800 patents to Microsoft (MSFT), the activist hedge fund renewed its push for the amputation of AOL’s unprofitable content empire, threatening a fight for control of AOL’s board.

Starboard contends AOL could realize much more value if it stopped pouring money into projects like Patch.com and concentrated on monetizing the millions of subscribers who, out of sheer inertia, continue to pay AOL good money to serve as their Internet portal.

This fight could take a while, but Starboard has already profited from AOL, which is larger than most of its targets. Typically, the fund takes stakes in smaller companies and prods them to cut overhead and unprofitable business lines, with an eye on selling the streamlined result to private equity or other interested buyers.

Because many of its targets are relatively puny, Starboard needs to turn a lot of them around as quickly as possible to boost return on capital. And that means that as soon as it gains control the clock starts ticking—this is not a business model predicated on patience.

Case in point is SeaChange (SEAC), a Massachusetts-based provider of video-on-demand software and services to the cable industry, in which Starboard disclosed an 8.4% stake a year ago.

Late last year, the founder stepped aside in favor of a new CEO who’d helmed another publicly traded company in which Seaboard had invested, and which was subsequently sold. The recently hired SeaChange CFO also last worked for a company guided by Starboard. Starboard also has ties to two board members besides the CEO.
The newcomers have wasted no time. In January, two weeks into the new CFO’s tenure, the company unveiled a $5 million cost-saving initiative. Last month it sold its broadcast server and storage business, ditching the unwanted hardware to focus on software sold at a 50% gross margin.

Even within the software space, SeaChange is exiting unprofitable markets. In the company’s recent earnings report the CEO pledged cost cutting beyond the $5 million in previously identified savings.

Software from SeaChange manages on-demand offerings for Comcast (CMCSA) as well as UK’s Virgin Media (VMED), which together account for 31% of the company’s revenue.

The company also specializes in software delivering targeted advertising to a variety of consumer screens, notably in the feverishly growing mobile space. And while its core business has been somewhat stagnant lately, it’s supplemented it with media services, which involve obtaining and streaming content for pay-TV operators as far afield as South America, South Africa, Dubai, and Serbia.

On-demand video and cross-platform advertising are growth fields, and it may well prove that, once it’s whipped into shape, SeaChange will seek a buyer to scale and leverage its technology. Its market cap stands at a modest $265 million, with $94 million in cash and no debt. The business is currently generating approximately $20 million in annual cash flow.

Broadband equipment maker Arris (ARRS) kicked the tires at SeaChange last year, but ultimately opted not to proceed, and the stock still hasn’t recovered from that disappointment. But it did perk up notably last month, just before Cisco Systems (CSCO) spent $5 billion on NDS, a UK-based developer of content streaming software.

The rationale behind that deal could just as easily cover SeaChange for a lot less scratch, and I’m not the first one to infer that.

The stock barely got wet during the market’s recent dunking, consolidating March gains along the downwardly sloping 200-day moving average. Investors seem to be in no hurry to sell while Starboard charts its exit strategy.

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