AREX Demands Update on Strategic Alternatives from ZAGG, Inc. Board of Directors

NEW YORK, Feb. 7, 2020 /PRNewswire/ -- AREX Capital Management, LP ("AREX"), which manages funds that collectively own 7.5% of the common stock of ZAGG, Inc. (NASDAQ: ZAGG) ("ZAGG" or the "Company") today released a letter delivered to the Board of Directors of ZAGG in which AREX demanded that ZAGG's Board of Directors provide shareholders with an update on the strategic alternatives process the Company announced six months ago. AREX emphasized that a sale of ZAGG is the best outcome for all shareholders on a risk-adjusted basis. AREX also expressed concern that the Board may be rejecting bids in hopes of achieving an unrealistic sale price.

The full text of the letter follows:

February 5, 2020

The Board of Directors
ZAGG, Inc.
910 West Legacy Center Way, Suite 500
Midvale, UT 84047

Dear Members of the Board of Directors:

We appreciated CEO Chris Ahern and CFO Taylor Smith taking the time to speak with us a few weeks ago.  AREX Capital Management, LP ("AREX" or "we") is one of ZAGG, Inc.'s ("ZAGG" or the "Company") largest shareholders, and we now wish to address the full Board of Directors (the "Board") more formally.

The market is waiting.  It has been six months since ZAGG announced the Board's review of strategic alternatives.  We are surprised by how long this process has taken, and we hope that the delay is due to bidders' requests for final confirmation of the Company's year-end results.  However, we remain concerned that the Board may be deterring or rejecting bona fide offers to acquire ZAGG in hopes of achieving an unrealistic sale price. We further believe that such action would be a clear failure by the Board to do what is in the best interests of shareholders.  Accordingly, we feel it is essential to reiterate our position.   

A sale of ZAGG is the best outcome for all shareholders on a risk-adjusted basis.  We expect that ZAGG's business performed well in the fourth quarter, and we believe that the market shares this view given favorable handset sales data and multiple sell-side analysts providing positive commentary for investors.  Despite these positive indications and the market's general optimism about the potential for the upcoming 5G rollout, ZAGG's shares continue to languish.  If the Board fails to act, one can only infer what will happen to ZAGG's shares in softer periods for the handset market or the overall economy.

The stark reality is that ZAGG has been consistently unable to garner a strong multiple or sustained enthusiasm from investors for many years.  ZAGG has no evident cost of capital advantage from being public.  Yet, as a public company, ZAGG is forced to endure both material public-company costs and the scrutiny of quarterly reporting, which is a bad match for the cadence of its business.  We believe that the market has been clear in communicating its view that ZAGG is not well-suited to be a publicly traded company.  ZAGG's full and fair value can best, and likely only, be realized through a sale to a financial or strategic acquirer that can value ZAGG based on its cash flow generation.

Any optimistic view of ZAGG's future must be balanced against the Company's repeated failure to deliver on its forecasts and the many risks that are inherent to its business.  It is worth remembering that management's projections have proven overly rosy twice in the past 14 months alone.^[1],[2] While rehashing more of the past is not our intention today, we do not see how the Board could credibly rely on the output of a highly subjective discounted cash flow model or multiples-based analysis that would justify staying public over the real-world result of a robust, publicly-announced sale process with multiple bidders.

An acquirer will factor in their own assumptions, including the impact of 5G on overall handset volumes, when assessing the Company's prospects and value. It would be highly unreasonable for this Board, which owns a de minimis amount of stock, to reject the well-informed bids of acquirers who can deliver immediate, compelling, fair value for shareholders in favor of unfounded optimism based on management projections, which have proven to be highly unreliable in the past.

We hope that the successful conclusion of the strategic alternatives process is imminent, and we ask that the Board immediately update shareholders on its progress. But let us be clear – we will consider all options available to protect our rights as shareholders, and we will hold the Board accountable should it pass on a value-maximizing opportunity for shareholders in favor of a highly risky standalone plan.

Best regards,

Andrew Rechtschaffen
Managing Partner

James T. Corcoran
Partner

^[1] ZAGG Conference Call, November 6, 2018.

^[2] ZAGG Conference Call, August 6, 2019.

About AREX

AREX Capital Management, LP is a value-oriented investment firm based in New York City.  AREX takes a long-term, opportunistic approach to investing and focuses primarily on publicly-traded companies with significant, unrealized potential.  After intensive research and rigorous fundamental analysis, AREX interacts both privately and publicly with companies to actively create value.

Media Contact

Valerie Toomey
AREX Capital Management, LP
(646) 679-4000
[email protected]

SOURCE AREX Capital Management, LP

Related Links

arexcapital.com