Oaktree Capital Management LP’s contentious battle for control of Jakks Pacific Inc. is turning even nastier.
In a sharply worded letter last week, Oaktree said it has lost confidence in the board and management of Jakks after being repeatedly spurned in its efforts to buy the Malibu toymaker. Oaktree, an asset management firm in downtown Los Angeles that owns about 5 percent of Jakks’ shares, said it is “deeply concerned by the company’s financial performance and strategic direction,” and reiterated its desire to acquire the company.
“Oaktree has no confidence in the capability and credibility of the current board and management team,” Oaktree said in the letter. “Immediate change is required to preserve and protect the interest of public shareholders.”
The investment firm made an unsolicited bid of $20 a share in September, or about $670 million, a 25 percent premium over Jakks’ share price at the time. The toy company called the offer inadequate and has resisted subsequent acquisition attempts by Oaktree.
Immediately after Oaktree’s letter last week, Jakks Chief Executive Stephen Berman shot back in his own letter, suggesting that Oaktree was unfairly maligning the company. He pointed out that Oaktree’s latest overtures did not state a specific purchase price, and they remain contingent on several factors, including due diligence and financing.
“(The) letter is replete with mischaracterizations and misstatements, which we will address and correct at the appropriate time,” Berman said.
Jakks declined further comment. Oaktree did not respond to requests for comment.
Jakks is known for a range of licensed toy products featuring characters such as the Smurfs, Hello Kitty and Batman. Founded in 1995, the company has grown into one of the nation’s largest toy companies through a series of 17 acquisitions.
But its performance has fallen off in recent years. Annual revenue has declined each year from a high of $903 million in 2008 to $678 million last year. Net income for all of 2011 was $8.5 million.
The struggles have continued this year. Shares fell as low as $13.39 in January after disappointing holiday sales. The price has since rebounded and was trading last week at about $18. However, the company last week announced a loss of $16 million in the first quarter, compared with a $10.6 million loss a year earlier.
The company is hopeful that a new product line will turn things around. Jakks recently unveiled Monsuno, an original toy line and television series similar to Pokemon, and it was one of the bright spots in the first quarter. The show started airing in February.
“The Monsuno launch has exceeded expectations at retail, with many retailers sold out of the product, and the TV show continues to build upon the successful launch,” said Scott Hamann, an analyst at KeyBanc Capital Markets Inc. in Cleveland, in a client note.
Hamann rates the company’s stock a “buy” and said he is hopeful for the rest of the year.
Oaktree has tried to negotiate a take-private offer with the company for more than a year, but went public with its offer in September after it said it was rebuffed by the board. The original offer represented a roughly 25 percent premium over Jakks’ share price.
The latest tussle with Jakks capped a rocky week for Oaktree, which is run by billionaires Howard Marks and Bruce Karsh. The 17-year-old firm, best known for its distressed-debt investing, went public April 11 in an offering that fell short of expectations. Oaktree cut the number of shares and priced its initial public offering at $43 a share, the low end of its proposed range.
Shares closed April 18 at $39.95, falling 7 percent in the first week of trading. It was one of the biggest losers on the LABJ Stock Index. (See page 32.)
In its latest letter, signed by Managing Directors B. James Ford and Matthew Wilson, Oaktree said it is “ready to proceed immediately” with an acquisition after hiring Guggenheim Securities LLC as its financial adviser, MacKenzie Partners Inc. as a proxy solicitor and Kirkland & Ellis LLP as legal counsel. Oaktree, which has $75 billion under management, plans to use a combination of equity and debt financing.
But analysts said it does not appear that Jakks is interested in selling regardless of the price.
“My initial inclination is that they’re not interested because if they were they probably would be doing more negotiation with Oaktree,” said Edward Woo, an analyst with Ascendiant Capital Markets LLC in Irvine. “On the other hand, at the right price any public company is for sale.”
Last month, Jakks’ board adopted a so-called poison pill provision to prevent Oaktree from taking control of the company. The poison pill, also known as a shareholder rights plan, allows investors to purchase additional stock at a discount if an aggressive shareholder acquires 10 percent of Jakks’ stock. The company acknowledged it was a specific response to Oaktree’s overtures and that the plan was “designed to protect against any potential coercive or abusive takeover techniques.”
The move drew criticism – and not just from Oaktree.
Clinton Group Inc., a New York investment firm that owns 2.4 percent of Jakks’ shares, spoke out against the poison pill in a recent letter to Jakks’ board and requested that “the directors embark on a sale process of the company.”
Woo said he expects Oaktree to make a formal offer above its original bid.
“They need to (offer) something that excites investors,” he said. “At this current price, $20 is not a big enough premium to get people excited.”
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