As JDS Uniphase prepares to split into two companies, it is facing pushback from an activist hedge fund shareholder on its plan for the split as well as some of its basic governance rules.
Sandell Asset Management has been publicly prodding the board to pursue the sale of JDSU’s communications and commercial optical products unit since shortly after the board laid out plans last September to split the company into two publicly traded businesses. JDSU is expected to be divided into a CCOP business – referred to in the interim as SpinCo – and a so-called RemainCo or NewCo, which will focus on network and service enablement, including testing.
“The timing is right for both SpinCo and NewCo to sharpen their focus on growth opportunities as networks scale to higher transmission speeds – 40G in data centers and enterprise, 100G in long-haul and metro – and move toward software-based architectural changes including software-defined networks and network functions virtualization,” CEO Tom Waechter told investors in the company’s most recent quarterly call.
He also said that JDSU planned to split the business so that the new CCOP company would “emerge with the clean balance sheet, a No. 1 position in optical telecom and share growth in data [communications].”
Sandell wants the board to pursue both a formal auction process and spin-off prep simultaneously and believes that the CCOP unit could be sold – and profit realized – more quickly than the third quarter of 2015, which is the timeline in which JDSU expects to complete the split.
“While we believe that the proposed spin-off of the company’s CCOP business is a positive development, we believe that much more must be done to unlock value,” Sandell wrote in an open letter to the board. “To wit, we believe that there are several strategic buyers who would be interested in an outright acquisition of the CCOP business.”
Sandell cited a number of analysts who think the split could accelerate consolidation in the CCOP space.
“I think it’s a matter of a buyer emerging,” said Richard Shannon, senior research analyst at Craig Hallum, who covers JDSU. “I think a buyer certainly understands that JDS benefits if they sell it vs. spin it off and [can] use that to negotiate a purchase price.”
Shannon said that the potential pool of buyers for the CCOP business is small – five or fewer – but does exist. He noted that the optical space has already been seeing consolidation over the past few years, with transactions including the sale of Emcore’s tunable laser and transceiver business to Neophotonics, which closed earlier this month. Too many suppliers have “made margins less attractive,” Shannon said.
“I think overall, it’s a positive thing for the industry – but I think most companies would prefer someone else to do the consolidation,” Shannon added.
Tax implications are a major facet of the transaction as well, with JDSU carrying approximately $9 billion in net operating loss carryforwards. During the Barclays 2014 Global Technology Conference in December, JDSU CFO Rex Jackson explained that JDSU plans to use those tax assets as part of the transaction to both shelter gains from the spin-off as well as drive down the tax rate to the single digits for the new SpinCo for several years.
“It’s a great asset to have that can help us go in any number of different directions as things develop,” Jackson said, adding that the board explored “every scenario we could think of” in how to move the companies forward, and concluded that “by far, the best answer for shareholders” is the split into two public companies.
Jackson said that while JDSU is open to whatever path will maximize shareholder value and will deal with “inbound interest” if the company is approached, he also noted that JDSU “is not actively marketing anything in the portfolio.” That’s exactly what Sandell wants the company to do, and said that “the formal communication of this sale process is paramount, as we believe most legitimate strategic acquirers will not dedicate the time and effort required to conduct due diligence and compose a credible offer for CCOP without the express consent from the company and the opening of a comprehensive data room.”
Both JDSU and Sandell declined to comment beyond their published statements.
The sale vs. spin-off argument carried over into the most recent annual meeting and board election. Sandell protested that its proposal for the auction of the CCOP business was not included in JDSU’s proxy statement ahead of the company’s annual meeting in December. It also wanted to nominate its own candidate for the board of directors, but said that it was unable to, due to board rules being revamped earlier last year regarding a 60-day notice for both the shareholder meeting and candidates for the board.
“While Sandell considered filing its own proxy statement to solicit shareholder support for its proposal, shareholders voting on Sandell’s proxy card would have been greatly disadvantaged, as they would not have been able to vote for any candidates for the Board of Directors due to what Sandell believes was a blatant entrenchment maneuver on the part of the Company. Specifically, JDS Uniphase provided notice of its Annual Meeting after the close of trading on October 6, exactly 60 days prior to the December 5 annual meeting date; because of bylaws recently amended by the Company, notice of Director nominations were due ‘not less than 60 days’ prior to the date of the Annual meeting, which rendered it effectively impossible for Sandell to submit director nominations in compliance with this bylaw,” Sandell said in an open letter to fellow shareholders. The company followed that letter up with one claiming widespread support coming out of the annual meeting, due to the fact that more than 34% of the voting shares at the meeting went against the election of board member Martin Kaplan, who was still elected with 47% of the vote.
In Sandell’s view, the vote results “speaks in our view to the profound frustration of the investor base to the entrenchment actions taken by this company’s board of directors … and its refusal to conduct a more fulsome process to unlock stockholder value.”
The board responded to Sandell in a statement released last week with: “The JDSU Board of Directors remains committed to acting in the best interest of all shareholders and to strong corporate governance. Consistent with the board’s historical approach of regularly reviewing corporate governance best practices, and after discussions with many of the company’s shareholders both before and after the December 2014 Annual Meeting, the company undertook an evaluation of potential changes to the advance notice provisions of the Company’s bylaws. The board expects to finalize its decision on any such changes in this calendar quarter following additional shareholder outreach.”
