NEW YORK (The Deal) -- More than a quarter of Rosetta Stone's (RST - Get Report) shareholders are agitating for change and for the do-it-yourself language-learning company that could mean a sale of the company or a proxy contest if a deal isn't forthcoming.
Earlier this week, Arlington, Va.-based Rosetta Stone announced it had retained outside legal and financial advisers to help the company's board with an "ongoing comprehensive review to analyze potential options to improve financial performance and enhance shareholder value." Rosetta Stone declined to clarify whether any of that meant executives were considering an auction process, but some activist investors familiar with the situation suggest that the unnamed advisers are helping the company evaluate whether to sell itself.
At the very least, the board must consider a hostile bid made in May by ex-Carl Icahn lieutenant Russell Glass and his RDG Capital Fund Management. At the time, Rosetta Stone said it was evaluating "an expression of interest" by RDG Capital.
The offer, considered a stalking-horse bid intended to generate an auction process, was not disclosed, but people familiar with it note that it was in the range of $9 to $10 a share and that Glass has private-equity partners with roughly $800 million of invested capital. The figure is substantially more than Rosetta Stone's current trading level of about $8 a share, but it may not be enough for some activists.
Another insurgent, 10% holder Osmium Partners, wrote to Rosetta's board earlier this month suggesting that a strategic acquirer should pay at least $16 a share, or roughly $350 million. The language company agreed in November to add an Osmium nominee to its board. That director, Arthur John Hass, who was a senior Osmium adviser, later was installed as Rosetta Stone's interim CEO.
In fact there are already two dissident-backed directors on the company's nine-person board. In April, David Nierenberg of activist fund Nierenberg Investment Management was installed as a director. Nierenberg owns an 8% stake and has threatened four companies with proxy contests in the past. He launched a successful withhold vote campaign at Pediatric Services of America Inc. in 2003. The company went private in 2007.
Nierenberg has been actively involved at Rosetta Stone for over a year. Shortly before being appointed to the board, he said in a filing that he supported the company's March move to realign resources in its Global Enterprises & Education segment to focus on improving shareholder value. FactSet notes that Nierenberg has written 11 publicly disclosed letters to management and Osmium has submitted three.
Other activist funds in the company include Ancora Advisors and Roumell Asset Management, a 5.5% holder which has seven public letters to management under its belt. Roumell issued a letter on June 22 to Rosetta's board suggesting that private-equity firms have been "reaching out" to the company and that it would back a buyout only if "fairly represents the value of the company," which Roumell thinks is a substantial premium to the current price.
Finally, a person familiar with the situation noted that Ariel Investments, an 18% passive Rosetta shareholder, would likely support a sale at the right price. In an April letter to "friends," Ariel CEO John Rogers noted that activists have driven "constructive change ... most clearly at Rosetta Stone." Ariel did not return calls. Its backing would bring the total of investors pushing for change up to over 40% of the shares outstanding.
Although the activists don't appear to all be on the same page in terms of what valuation they would accept, it may not matter. If a significant offer emerges and Rosetta Stone rejects it, watch for a minority-slate proxy fight in advance of the March 14 deadline to nominate dissident director candidates.
All the major insurgents at Rosetta Stone have either launched or threatened proxy contests in the past. An activist involved in the situation said he expects a director contest if no major deal-related action takes place.
Rosetta Stone was described by one activist defense counsel as having "worst-in-class" shareholder rights, something that would only embolden any insurgent fund seeking to install dissident directors. The lawyer added that with two dissidents on the board and activists holding roughly 25% of the shares, the company would likely lose any contest.
According to an ISS QuickScore report obtained by The Deal, Rosetta Stone has an eight out of 10 rating for shareholder rights, with 10 being the worst.
A key negative from a shareholder point of view: The board is classified, which means an activist could only install at most a minority slate of three dissident directors at the company's annual meeting.
Also, shareholders can't call a special shareholder meeting or act by written consent, both mechanisms that if they were available could have expedited a potential contest. Rosetta Stone also requires a supermajority vote to approve bylaw amendments.
Osmium Partners listed seven potential suitors in a recent statement, noting that both strategic and private-equity buyers in recent years have found "significant value" when making acquisitions of companies with similar characteristics. One potential buyer on Osmium's list, Hougton Mifflin Harcourt (HMHC - Get Report), acquired Scholastic's Educational Technology and Services business earlier this year for $575 million. Houghton Mifflin -- which was itself recently the target of activists -- said in May that it is interested in entering the "$2.2 billion self-study language learning" market.
Other bidders could include Pearson (PSO), EF Education First, Benesse Holdings, IAC/InterActive (IAC - Get Report), Graham Holdings (GHC - Get Report) and Disney (DIS - Get Report). Pearson, IAC/Interactive and Graham Holdings all declined to comment. The other companies didn't immediately return a request for comment.
With shareholders pushing to sell and buyers willing to pay up, a deal seems all but inevitable.