A needed wake-up call for Navarre
- Article by: ERIC WIEFFERING
- Star Tribune
- February 15, 2011 - 10:49 PM
Long-suffering shareholders of Navarre Corp., the New Hope-based distributor and publisher of electronic media, found themselves in the rare situation of having to respond to good news this week.
On Monday, Navarre bowed to outside pressure from its largest shareholder, Dallas-based Becker Drapkin Management, and added two outside directors to its board. This concession is a small but meaningful step for a company that has often shrugged off the complaints of shareholders, even as it seemed to lurch from one strategic initiative to the next.
Navarre did not respond to a request for an interview, and Becker Drapkin declined to comment. A spokesman for Punch & Associates Investment Management, an Edina firm that owns 289,000 Navarre shares, said it was pleased with the addition of the new board members. "Public companies have a duty to their shareholders, and hopefully this announcement signals more accountability in the future."
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.
Closer to home, in 2009 Becker Drapkin became the largest shareholder in Bloomington-based Plato Learning. It paid less than $1.50 a share for most of its holdings. In return for two board seats the firm signed a standstill agreement, which essentially required it to play nice with existing board members.
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.
Navarre certainly qualifies as a company in need of a jolt. The company's roots are in the distribution of music, DVDs and software to retailers, but it spent much of the last decade trying to reposition itself as a media and entertainment company through the acquisition of software titles and publishers.
One of its biggest gambles was the $100 million-plus purchase of a Funimation, a company that licenses and brands Japanese anime and children's animation. That hasn't worked so well. In 2004, the year before Navarre purchased the company, Funimation had net sales of $72 million and pre-tax income of $29.8 million. In the current fiscal year, which ends in March, Funimation is on track to do $35 million in revenue and, at best, $10 million in pretax income.
Navarre put Funimation up for sale last year, but no buyers appear to have emerged. At the same time, the company paid Funimation's CEO, Gen Fukunaga, a bonus of $213,536. If Funimation is sold, Fukunaga is also entitled to a "transaction success fee" of $250,000 or 5 percent of the sale price, whichever is larger.
Navarre's most recent annual report dropped much of the language about its being a media and entertainment company to emphasize its distribution and logistics business. Still, its book value per share has gone from $3.53 in March of 2006 to $1.67 as of March 31, 2010. Shareholders' equity has declined around 40 percent and the stock is down 75 percent since the Funimation purchase.
So, what does Becker Drapkin see in Navarre?
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.
Navarre's future may be uncertain, but things are likely to get much more interesting.
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