Outerwall Said Targeted by Activist Welling's Engaged Capital

  • Redbox and Coinstar owner said to have rebuffed buyout offers
  • Activist has amassed a more-than 14 percent stake in company

Outerwall Inc., the owner of Redbox DVD rentals and Coinstar cash exchange kiosks, is being targeted by activist investor Engaged Capital LLC, which is urging overhauls including pursuing a sale to private equity suitors.

Engaged, founded by Glenn Welling, has amassed a stake of about 14 percent of the company, according to a filing Monday. Outerwall has rebuffed at least three buyout firms that approached the company in the past two years, seeking to negotiate taking it private, according to two people people with knowledge of the situation, who asked not to be named discussing private information.

Outerwall’s shares have fallen about 59 percent in the past 12 months through Friday, as investors fret over declining rentals of movies and games at its self-service kiosks across retailers. More than half its stock is shorted -- meaning many are betting on profiting from further declines. Outerwall rose 4.1 percent to $28.14 at 10:08 a.m. in New York Monday, after touching as high as $29.96, giving the company a market value of about $474 million.

The activist’s stake comes after a string of executive departures and changes. Chief Executive Officer Erik Prusch took over at the end of July, replacing J. Scott Di Valerio who left in January 2015. Mark Horak, president of Redbox, left in December after less than two years. Redbox Instant, Outerwall’s movie-streaming venture with Verizon Communications Inc., was shuttered in October 2014 after disappointing sales.

Former CEO Di Valerio clashed with Chairman Nelson Chan over pursuing a potential sale to interested buyout firms, the people familiar with the situation said. The board didn’t engage with incoming offers as high as $90 a share before the stock crashed, the people said.

The company was targeted by Barry Rosenstein’s Jana Partners LLC in October 2013, which filed as an activist and urged a sale of the company, or some of its assets. After Outerwall initiated share buybacks, Jana reduced its stake below the 5 percent required for a 13D filing by April 2014 and, shortly afterward, sold out its holdings entirely, according to regulatory filings.

Outerwall welcomes the opinions of its shareholders and is always open to constructive input toward the goal of enhancing shareholder value, according to an e-mailed statement from a company representative. The board and management team regularly review strategic priorities and opportunities, according to the statement, which added that the company will continue to take actions to drive value for all shareholders.

Cash-flow Focus

Bellevue, Washington-based Outerwall’s stock fell Friday after the company said in its fourth-quarter earnings report that it wouldn’t provide revenue guidance for 2016 because of “the difficulty in forecasting as a result of the content release schedule, accelerating secular decline, and the company’s focus on profitability and cash flow.”

Still, Redbox rentals contributed almost $1.8 billion to Outerwall’s $2.2 billion in revenue last year, according to its earnings statement. Strong cash flows can be appealing to private equity suitors, which typically use the money to pay down debt while cutting costs.

Engaged believes the company could pay a higher dividend, cut costs by outsourcing services, and shutter its ecoATM kiosks that recycle consumer electronics devices and gain tax advantages from those losses, the people said. It could also increase revenue by marketing its data and expanding a trial of gift-card exchanges at existing retailers that already use Coinstar to swap change for such cards, one of the people said.

Engaged’s Tactics

Engaged Capital typically seeks private talks before beginning a public campaign. The firm has successfully helped agitate for the sale of targeted companies, including Boulder Brands Inc., the maker of gluten-free baked goods and dairy-free spreads, which was sold to Pinnacle Foods Inc. for $710 million, and Silicon Image Inc., the creator of HDMI transmission technology, which was bought by Lattice Semiconductor Corp. in a $600 million deal.

Welling, a former partner at Relational Investors, formed Newport Beach, California-based Engaged Capital with other Relational managers in 2012, backed by Grosvenor Capital Management. The firm typically wages activist campaigns at small- and mid-sized companies, including juice chain Jamba Inc., television guide data licensor Rovi Corp. and clothing retailer Abercrombie & Fitch Co.