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ADW Capital Suggests Buyout of IDW Media

In an open letter to management on December 8, ADW Capital has requested that Connecticut-based IDW Media Holdings, Inc. (IDWM) seek a buyout of its entire publishing business. The management letter is based upon concerns that the company lacks the liquidity and scale needed to remain competitive under its current operating structure. A shareholder since the firm’s spinoff from IDT Corporation (IDT), ADW Capital has now accumulated an 8% ownership stake in the firm’s outstanding shares. As a large majority shareholder and activist hedge fund manager, IDW Media may likely be amenable to ADW Capital’s recommendation which could potentially lead to a buyout in the near-term.

IDW Media’s investor relations

IDW Media has yet to disclose its fourth quarter and full year earnings which should be due for release around December 11. While awaiting full detail on the firm’s earnings results for the final quarter and full year of 2015, ADW Capital notes in its management letter a number of issues it has with the firm’s reporting transparency as an independent OTC publicly traded firm. ADW Capital reports in its management letter the firm’s unwillingness to disclose financial information for the investing public through reporting and regular investor relations communication. ADW Capital finds the lack of communication questionable for a firm with reported interest in up listing its stock to a major exchange and thus calls into question the firm’s motive for the lack of market transparency.

While a number of factors could be behind the lack of transparency, ADW Capital recognizes two major motivations, both of which lead the company down the path of a buyout. First, IDW Media’s concentrated shareholder position among internal executives and the board. This concentrated position has likely led to a lack of urgency around shareholder reporting. Second, the competitive industry the company faces may be holding the company back from greater transparency due to its desire for market share capture. Despite some significant factors, it seems the lack of public transparency is unusual for this OTC traded stock and has portrayed a mixed message to the investing public.

IDW Media’s reporting as an OTC traded company

Operating under a complicated business structure, the firm is vulnerable to industry competition as noted by ADW Capital and according to ADW Capital the lack of investor communication combined with heightened industry competitiveness have positioned IDW Media as a strong buyout target in the current market environment.

IDW Media, the product of a 2009 spinoff from IDT, is composed of eight holding companies providing various media products worldwide. Its media products range from television shows to comic books and art collectibles. Its revenue is reported in two segments: IDW and CTM.

In its most recent third quarter report, the company posted total revenue of $13.5 million. IDW accounted for 52% of revenue while CTM accounted for 48%.

Key initiatives for the company in 2015 have included integration of its Top Shelf Productions business as well as expansion in its brochure distribution network. In December 2014 the company bought Top Shelf Productions, a leading comic book publisher. In February 2015 the firm also acquired a New England company leading in brochure distribution for the region.

Integration of the newly acquired businesses and expansion in its current offerings has led to significantly increased expenses for the firm in 2015. For the third quarter the firm reported net income of $1.2 million down 72% from the comparable quarter’s $4.3 million. For the first nine months of the year the firm’s net income is down 74% at $1.1 million compared to $4.3 million in 2014.

IDW’s buyout potential

ADW Capital’s call for a buyout could come at an opportune time for IDW Media. It seems ADW Capital’s suggestions for increased investor relations communication and improved financial reporting are on target. With equity investments concentrated in illiquid shareholder positions and minimal trading on the OTC exchange a buyout from a public company, as suggested by ADW Capital, could greatly help the firm improve its overall operating structure while also gaining the capital it needs to help its businesses grow in a competitive media industry.

It seems the buyout potential for IDW Media is high. The firm’s product offerings are competitive in the market. Total revenue for the firm grew 5% in the third quarter from the comparable quarter. For the first nine months of the year the firm’s revenue is up 9% from 2014. ADW’s suggestion of a buyout from a publicly traded company would be a good fit for IDW given its current needs.

Steps toward a buyout

ADW’s suggestion for the immediate hire of an advisor to solicit bidders for sale of the business also appears to be on target for IDW. A near-term buyout seems appropriate given the firm’s needs and market’s current environment. A strategic partner and publicly traded firm could likely pay a premium for the company’s current shares while also providing numerous cost synergies and resources also relieving the company of reporting burdens. Given IDW’s status as the fourth largest comic book publisher combined with its ability to constantly produce market leading publications it seems the firm would be an ideal investment for many large publicly traded media distribution companies including such bidders as DreamWorks Animation (DWA), Disney (DIS) or Amazon (AMZN).

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