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Market Musings - June 23, 2018

We continue our blog series: Market Musings, Volume 2, Edition 19, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present "Start of Summer Activist Plays".

1. ICON Activist - recently we have witnessed some activist SEC filings by Sports Direct International (SEC filings here) with respect to Iconix Brands (ICON) (SECs here). Sports Direct is headed by the relatively reclusive British billionaire Mike Ashley:

Suffice it to say that ICON, a brand licensing vehicle (chief current licenses held are for Candie’s ®, Bongo ®, Joe Boxer ® , Rampage ® , Mudd ® , London Fog ® , Mossimo ® , Ocean Pacific/OP ® , Danskin/Danskin Now ® and Rocawear ® /Roc Nation ®), has been an absolute disaster for investors in recent years, with a once nearly $3 billion market cap shriveled to just under $50MM currently:

The problem? The ICON business model just doesn't seem to be sustainable. Unless a company reinvests in a brand, the brand stagnates and then slowly dies. ICON seems to have been guilty of such underinvestment, relying on retail partners to pay for promotional costs; however, this gravy train has apparently petered out. The other problem? ICON bought most of its licenses using borrowed money and now staggers under a mountain of debt (as of March 31, 2018: $711.8 million in long-term and $46.5 million of currently-due debt to be exact, versus $95.7 million of cash and CE). Below we present the end of Q1 2018 balance sheet:

Meanwhile, the company generated just $12.9 million in cash from continuing operations in FY 2017, versus $134.8 million in cash from continuing operations in FY 2016 and $188.7 million in cash from continuing operations in FY 2015. So things have gone seriously downhill on the operating cash front. And to add insult to injury, stockholders' equity is negative and numerous licensing deals with large retailers are set to expire shortly (Target Corporation is not renewing the existing Mossimo license agreement following its expiration in October 2018 and Walmart, Inc. is not renewing the existing Danskin Now license agreement following its expiration in January 2019).

Sports Direct has launched a proxy fight regarding ICON, as per the following PR from the beginning of this month (source):


- Iconix’s Current Board has Overseen Drastic Drops in Company’s Share Price – With the Stock Currently Trading Below $0.70 – and an Increasingly Unsustainable Debt Load, along with Alarming Losses of Significant Licensing Agreements –

- Sports Direct’s Four Highly-Qualified Nominees – Ron McPherson, Howard Moher, Mark Hunter and Daniel Dienst – Possess Extensive Operational Expertise and Industry Experience and Will Help Reverse Trend of Underperformance and Value Destruction at Iconix –

Shirebrook, England – June 1, 2018 – Sports Direct International plc (LON: SPD) (“Sports Direct”), one of the United Kingdom's largest sports-goods retailers which holds 9% of Iconix Brand Group, Inc. (Nasdaq: ICON) ("Iconix" or the “Company”), today announced that it has nominated four highly-qualified individuals – Ron McPherson, Howard Moher, Mark Hunter and Daniel Dienst – for election to the Iconix Board of Directors (the “Board”) at the Company’s 2018 Annual Meeting. This is in line with Sports Direct’s commitment to actively participate in its strategic investments.

Sports Direct issued the following statement:

“As significant and long-term Iconix stockholders, we have seen first-hand how the numerous operational and strategic decisions initiated by the Company have resulted in severe value destruction for its investors. The Company’s stark drop in share price (currently trading at under $0.701), substantial debt load relative to revenues (with more than $800 million in outstanding principal obligations as of Q1 20182) and the loss of major direct-to-retail licensing agreements with major retailers all demonstrate the failures of the current Board and management.”

“Given these serious concerns, we have made a number of attempts to engage constructively with Iconix, but this has unfortunately led nowhere. We can no longer stand by while Iconix’s Board and management continue along this unsustainable path. We have nominated four highly-qualified individuals for election as directors. These nominees have an in-depth understanding of the operational challenges facing the Company – three of the four are seasoned executives affiliated with Sports Direct and all four of our nominees are veterans of the retail and brand licensing industries. We believe that reorganizing the Board with highly-qualified experts is a critical first step to unlocking the Company’s latent value.”

“Our nominees are fully committed to undertaking a strategic evaluation of the current business and opportunities that exist with the goal of driving significant value for all stockholders and improving governance and transparency – which the incumbent Board has failed to do over a number of years. Iconix’s history of underperformance and its lack of a coherent strategy to reverse this recent unacceptable loss of stockholder value illustrates the need for significant change at the Board level.”

Sports Direct’s nominees for Iconix’s Board of Directors are:

· Ronald McPherson, President and CEO of The Antigua Group, Inc., an affiliate of Sports Direct International plc. Mr. McPherson has been an employee of Antigua for nearly four decades as it has grown into a leading designer and marketer of men’s, women’s and children’s lifestyle apparel and sportswear. He has also served as a board member for the Golf Manufacturers and Distributors Association, and for The Samaritan Foundation/Banner Health Foundation.

· Howard Moher, CEO of SDI USA LLC, SDI Stores USA LLC, Mountain Sports LLC and Bobs Stores USA LLC, ultimate subsidiaries of Sports Direct International plc and operators of the Bobs Stores and Eastern Mountain Sports retail and web businesses. Mr. Moher took on the role of CEO after leading the successful transaction by Sports Direct International plc to purchase the Bobs Stores and Eastern Mountain Sports from Versa Capital in 2017. Under his leadership, Mr. Moher is successfully managing their restructuring and turnaround. Prior to taking on his role as CEO, Mr. Moher worked in various capacities for Sports Direct International plc for over a decade. He is also the Chairman of the Board of Leisurewear International Ltd., owners of the Minoti brand. Mr. Moher is a non-executive director of Technology Rentals Ltd, a leading UK leaser of IT equipment to the education sector.

· Mark Hunter, Acting CEO and CFO of Everlast Worldwide, Inc., an affiliate of Sport Direct International plc. Everlast is the world’s leading manufacturer, marketer and licensor of boxing, MMA and fitness equipment. Prior to taking on this role in 2017, Mr. Hunter served as Executive Vice President of Finance, Supply Chain, Planning & Ecommerce at Everlast from 2012 to 2017. Mr. Hunter is also an officer of both SDI Holdings USA Inc. and SDI Sports Group America, Inc., affiliates of Sport Direct International plc.

· Daniel Dienst, founder and managing member of D2Quared LLC and former director and CEO of Martha Stewart Living Omnimedia Inc., where he led the turnaround of the famous brand and orchestrated its successful sale in 2015 to Sequential Brands, Inc. for $353 million. Mr. Dienst is a Director of Knoll, Inc. (NYSE: KNL) and Matlin & Partners Acquisition Corporation (NASDAQ: MPACU). He was the Group CEO of Sims Metal Management, Ltd., having founded and served as the Chairman and CEO of Metal Management, Inc. before the company was sold to Sims for $1.7 billion in 2008. Mr. Dienst is experienced in the financial markets, having served as a Managing Director of Corporate and Leveraged Finance at CIBC World Markets Corp. He also was recently a Director of 1st Dibs, Inc., a venture-backed e-commerce business, from 2014 to 2015.

In response, ICON has shaken up its C-suite, appointing a "turnaround expert" as the new CEO (source):

Iconix Brand Group Announces Leadership Transition

Peter Cuneo Named Interim Chief Executive Officer Effective Immediately;

John Haugh Resigns as Chief Executive Officer and President

Board Search for Permanent CEO Underway

NEW YORK – June 15, 2018 – Iconix Brand Group, Inc. (Nasdaq: ICON) (“Iconix” or the “Company”) today announced that Peter Cuneo, Executive Chairman of the Board of Directors, will serve as Interim CEO, effective immediately. John Haugh has resigned as Chief Executive Officer, President and a member of the Board to pursue other opportunities, also effective immediately.

The Board has retained an executive search firm to assist with the process to identify a permanent CEO.

Drew Cohen, Lead Independent Director of the Iconix Board, said, “The Iconix Board regularly evaluates leadership to ensure that we have the right mix of skills and experience in place to drive growth and value creation for all of our stockholders. Iconix has made steady progress on a range of financial initiatives, including strengthening our balance sheet and addressing near-term debt obligations. As we continue to work diligently to build a platform for sustainable growth that fully capitalizes on the strength of our global brand portfolio, the Board is committed to putting in place a strong leadership team that is able to successfully execute on these goals.

“We are fortunate to have someone of Peter’s caliber, with an extensive track record of revitalizing leading consumer brands and direct experience leading Iconix as Interim CEO from August 2015 to April 2016, to step in as Interim CEO while we identify a permanent successor. We are grateful to John for his service to Iconix during his years as CEO and for the contributions he has made in positioning the Company for the future. We wish him well in his future endeavors,” Mr. Cohen continued.

Mr. Cuneo, said, “I am committed to helping Iconix as Interim CEO at this important time in the Company’s history. We are addressing the challenges facing the Company head on, and are moving forward with focus and a sense of urgency. I look forward to working closely with the Board and management team as we search for a permanent CEO and best position Iconix to deliver growth and stockholder value creation.”

About Peter Cuneo - Peter Cuneo is a recognized leader in business turnarounds. Since 1983, he has completed seven turnarounds of distressed branded businesses in the global media and consumer products sectors. From 1999 to 2009, Peter played a lead role in the turnaround of Marvel Entertainment Inc. (MVL). As President and CEO, he led Marvel, post-bankruptcy, to a prominent position in the entertainment industry. He then served as Vice Chairman of the Board, providing active strategic leadership as Marvel continues to grow into one of the world’s leading entertainment brands. This culminated in its $4.4 billion sale to Disney at the end of 2009. Previously, Peter was President and CEO of Remington Products Company. He joined the company as it was near bankruptcy and, in less than four years, executed a successful turnaround of the business and facilitated its sale to private equity investors. Peter has also served as President of the Security Hardware Group of the Black & Decker Corporation, President of Bristol-Myers Squibb Pharmaceutical Group in Canada and President of the Clairol Personal Care Division. Peter is currently the Managing Principal of Cuneo & Company, LLC, a private investment and management company.

Peter currently sits on the Board of the Foundation for the National Archives in Washington, DC as Co-Head of the Development Committee. Peter served two tours as a Lieutenant in the U.S. Navy in the Vietnam War. He received his MBA from Harvard Business School and holds a Bachelor of Science in Glass Science (Ceramic Engineering) from Alfred University, where he has served on the Board of Trustees since 1990. Peter recently completed six years as Chairman of Alfred’s Board and was awarded an honorary doctorate degree in 2013.

It will be interesting indeed to see if this seemingly impossible turnaround actually can turn. As Buffett is fond of remarking, "Turnarounds seldom do." ICON has been a battleground stock on the message boards, with a recent SA article garnering over 1,300 comments:

Below are major holders of ICON stock as of April 20, 2018, the date of filing of the form of 2018 Proxy Statement:

In all, it seems as though either ICON equity is a value trap with assets the value of which can never repay ICON's accumulated debt (as the bears argue) or possibly a mispriced option with massive potential upside if the company can somehow reignite growth within its license portfolio (as the bulls contest). Anecdotally, we saw a teenager in Soho several days ago sporting a Pony T-shirt, so perhaps this is a small clue that ICON is on the comeback trail.

2. DFIN Activist - similar to ICON, Donnelly Financial Solutions (DFIN) (SECs here) has come under activist pressure recently. In this case, the activists want the company to put itself up for sale. Denali Investors sent out the following PR on June 6, 2018 with respect to DFIN:

Denali Investors Sends Letter to the Donnelley Financial Solutions (DFIN) Board of Directors Urging Formation of Special Committee to Pursue Strategic Alternatives

NEW YORK, June 6, 2018 /PRNewswire/ -- The following is a letter from Denali Investors to the Donnelley Financial Solutions (DFIN) Board of Directors urging the formation of a special committee to pursue strategic alternatives.

June 5, 2018

The Board of Directors Donnelley Financial Solutions, Inc. 35 West Wacker Drive Chicago, IL 60601

RE: Shareholder request for special committee to seek strategic alternatives for Donnelley Financial Solutions (the "Company")

Dear Members of the Board:

We appreciate the recent investor day you held in New York. However, as evident in the continued decline of your stock, the market and shareholders are not impressed with the progress or management's ability to communicate a clear path forward. The Board must be proactive in evaluating management and holding them accountable on their ability to navigate this valuable business and communicate effectively with the investment community.

The two year mark for the Company's spinoff is rapidly approaching, and the stock is now down more than 47% over this period during which time the S&P 500 Index is up over 26%. The stock is valued at approximately 5x EV/EBITDA and 0.5x Price to Revenue, which is a massive disconnect from your competitors that range from 11x to 17x EV/EBITDA and 3.3x - 5x Price to Revenue. We believe the Board must consider next steps for unlocking value, as the current plan is clearly not working.

As we have stated before, we believe Donnelley is worth considerably more than the current price and multiples imply, and that additional steps are needed to surface this value. As such, we urge the Board to voluntarily form a special committee to seek strategic alternatives and commence a formal solicitation process that includes all potential strategic and financial suitors.

Sincerely, H. Kevin Byun Denali Investors, LLC

DFIN shareholders have indeed very little to show for the nearly two years that the company has been publicly traded:

DFIN's business model is to help create, manage and deliver financial communications to investors and regulators. DFIN provides capital market and investment market clients with communication tools and services to allow them to comply with their ongoing regulatory filings. In addition, DFIN's U.S. segment provides clients with communications services to create, manage and deliver registration statements, prospectuses, proxies and other communications to regulators and investors. The U.S. segment also includes language solutions and commercial printing capabilities. DFIN's International segment includes operations in Asia, Europe, Canada and Latin America. The international business is primarily focused on working with international capital markets clients on capital markets offerings and regulatory compliance related activities within the United States. In addition, the International segment provides services to international investment market clients to allow them to comply with applicable SEC regulations, as well as language solutions to international clients.

Below we reproduce DFIN's 2013 to 2017 financial results from DFIN's 2017 Form 10-K filing; revenues and earnings have trended down, while debt levels are up (not a good combo):

First quarter 2018 earnings were uninspiring as well, as shown by the following summary from the Q1 2018 DFIN earnings PR:

DFIN's large holders as of March 29, 2018 were as follows (from the 2018 DFIN Proxy Statement):

The jury is out right now on DFIN, however activists tend to light a fire under the behinds of underperforming management teams (losing one's job tends to focus the mind on getting results), so perhaps the financials are due for a turn to the better.


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