Ancora Advisors Shows New ~5% Stake in Autobytel (ABTL), Wants Sale of Company

Ancora Advisors attached the following letter in its 13-D, which it sent to Autobytel’s board of directors:

“Autobytel Inc. Board of Directors:

Ancora Advisors LLC owns 428,394 shares, or approximately 4.74% of the outstanding shares of Autobytel Inc. (“ABTL” or “the Company”).  We are writing to express our conviction that it would be in the best interest of Autobytel’s shareholders for the Board of Directors to immediately retain an investment banker in order to explore a sale of the Company.

We question the Company’s ability to drive meaningful value for its shareholders on a standalone basis given its current competitive position and strategic direction.  Underpinning our assessment that remaining an independent public company places far too much risk on ABTL shareholders are the following factors:

1. Persistent valuation discount

2. Scale disadvantage

3. Lack of management credibility

4. Poor corporate governance

Persistent valuation discount:

Regardless of the valuation methodology analyzed (i.e. discounted cash flow analysis, publicly traded comparable companies, M&A transaction comparables, etc.), Autobytel’s shares trade at a significant discount to fair value, as the following comparison to TrueCar, Inc. illustrates:

Despite both companies having relatively similar share within the U.S. light vehicle market and Autobytel’s sales leads resulting in more vehicles sold in 2013, TrueCar is valued at nearly 10.0x higher per dollar of revenue generated.

Recent M&A transactions and public comps also highlight the valuation disparity:

Applying the valuation data above, even after assigning a significant discount to peer valuation mutliples, yields a current value of approximately $15 – $22 per ABTL share, implying a ~70% – 145% premium to today’s share price.

We believe the significant under-valuation of the Company is driven by the factors discussed below, and that a sale of the Company can materially close the gap between the current public valuation and the valuation framework presented.

Scale disadvantage:

The following chart highlights the lack of resources at Autobytel to effectively compete against its automotive marketing service peers (and other internet service businesses):

Autobytel’s competitors are spending multiples more (as a % of revenue) on sales & marketing than the Company.  TrueCar is expected to generate $200 million of revenues by the end of 2014, and if its sales & marketing spend remains above 50% of revenue, TrueCar will then be spending more in sales and marketing than Autobytel generates annually in revenues.  TrueCar has the balance sheet to aggressively spend marketing dollars to drive revenue growth and capture market share, even if that results in negative cash flows near term.  For Autobytel to materially grow its leads-based business, the Company would need to drive significantly higher levels of unique visitors to its website.  However, the Company does not have the resources today to make this type of growth investment.

Autobytel’s top line growth and free cash flow improvement have coincided with a robust recovery of the U.S. light vehicle market.  However, as growth in the light vehicle market moderates or levels off, Autobytel’s limited capital resources will make incremental top line growth more challenging.  In a slowing U.S. light vehicle environment, the Company’s management will need to consider riskier alternatives to deliver growth.  Any equity capital raise would cause significant dilution given the current valuation and we believe there would be limited support from the investment community for any equity or debt raise; and we have recently witnessed the integration risks and disruption that can result from acquisitions.  When evaluating Autobytel’s deal history under CEO Jeffrey Coats, the acquisitions have come with a significant cost to the equity holders, compounded by a lack of execution on integration.  Additionally, financing acquisitions by issuing convertible notes while the stock is trading at a wide discount to fair value is and would be an extremely expensive way to build scale.

Lack of management credibility:

Autobytel’s current CEO and President Jeffrey Coats, along with fellow directors Michael Fuchs (Chairman of ABTL) and Mark Kaplan, all board members since the IPO, have witnessed a wholesale destruction of shareholder value as fiduciaries, driven by the long-term relative under-performance of the Company’s shares and the incurrence of significant operating losses over that time.

We believe management’s general lack of credibility among investors is part and parcel to under-valuation of the Company’s shares.  Specific to credibility, since Mr. Coats became CEO in December 2008, the Company has missed consensus earnings or revenue expectations seven times in eighteen quarters where estimates were available.

Autobytel’s recent acquisition of AutoUSA further widened management’s credibility gap with investors.  When the deal was announced in January 2014, management disclosed that AutoUSA generated $30 million of annual revenues with a modest amount of overlap with Autobytel.  Upon announcement of Q2 results, investors were informed that the anticipated $30 million of revenues was now ~$16-20 million, and that some of the leads contributed by AutoUSA had quality issues, were lower margin, and its dealer network had higher churn than Company average.  Despite an otherwise attractive relative valuation, the share price plummeted again, as weary investors “threw in the towel” on management and the strategic direction of the Company.

Poor Corporate Governance:  

An overlay of shareholder-unfriendly corporate governance exacerbates management’s credibility issues.  Autobytel’s adoption in 2010 of a “Tax Benefit Preservation Plan” was essentially a poison pill, insulating management and the Board from shareholder intervention, and also dissuading motivated (uninvited) buyers from potentially tendering for the shares.  As the preservation plan has been in place since 2010, which is longer than the 3 year look back window referenced in Section 382 of the U.S. Tax Code, the Company is at extremely low risk of triggering a change of control which would impair its NOL and should have no hesitation, beyond trying to insulate the board, from letting shareholders cross the 5% level.

Additionally, we believe there is a significant conflict between shareholders and the Board and senior management as a result of minimal board-level ownership of Autobytel’s shares. As the table below illustrates, since Jeffrey Coats became CEO in December 2008, board-level ownership of ABTL shares has remained at miniscule levels, quite unlike the total compensation received by Mr. Coats.  Our definition of ownership is based on actual shares purchased by Board members, not option grants or shares attributable to convertible notes.   When taking both the length of time a number of the Board members have served the Company and the lack of material ownership into account, it can be reasonably perceived that ABTL’s Board cares more about its own longevity than the Company’s share price.

Specific to CEO Jeffrey Coats, his bio included in the Company’s proxy statement details that he is not only the full-time CEO and President of Autobytel, but also a Managing Director of Maverick Associates LLC (since 2001), a partner with Southgate Alternative Investments, Inc. (since 2007), and the Executive Chairman of Mikronite Technologies Group Inc. (since 2007).  With respect to Mikronite, two of Mr. Coats’ fellow ABTL board members are/were also board members of Mikronite.  The addition of Michael Carpenter to Autobytel’s Board in 2012 brought in another director that Mr. Coats has a long term association with, and in this case, is (was) a business partner with at Southgate Alternative Investments, Inc.  As noted in the Company’s most recent proxy statement, although the board deems Mr. Carpenter an independent director, he must recuse himself from either employment or compensation decisions that could impact Mr. Coats.  This is due to an outstanding loan Mr. Coats owes to Mr. Carpenter specific to investments executed by Southgate Alternative Investments, Inc.

In addition to the issues mentioned above, Autobytel’s governance is rife with structural governance provisions that further disenfranchise the shareholder base.  In addition to the previously detailed “poison pill,” these hostile provisions include:

·A staggered board

·No cumulative voting

·Inability for shareholders to call special meetings

·No written consent

Conclusion:

As we have detailed in this letter, we believe now is the time for Autobytel’s Board of Directors to immediately explore the sale of the Company.  The industry is consolidating at attractive valuations, and auto industry fundamentals remain healthy.  Delaying a sale of the Company creates further risk for shareholders and will prolong the under-valuation of ABTL’s shares.  We believe there would be numerous strategic and financial buyers interested in acquiring Autobytel.  Potential acquirors include Autobytel’s better capitalized automotive marketing services peers or other internet services consolidators, which have shown a willingness to acquire internet-based service and marketing businesses at premium valuations due to their ability to drive website traffic and maximize monetization potential.  Autobytel represents an attractive acquisition target with its mix of both dealer and OEM relationships, as well as the platform and business model’s compatibility with both new and used car sales.  The full potential of the Company and maximum shareholder value will never be realized in its current configuration as a stand-alone public company.

Although Autobytel’s Board has done all that it can to disempower its shareholder base, we are an experienced engaged investor, and, if necessary, will pursue all remedies available to us to insure an optimal outcome is attained.  These remedies may include seeking board representation or even majority board representation if a multi-year campaign is warranted.  We request that Autobytel’s Board of Directors immediately grant Ancora Advisors LLC an exemption to the “Tax Benefit Preservation Plan” and allow our firm to accumulate additional shares above the 5% trigger.  If the Board is confident that it has sufficiently satisfied its fiduciary obligations to its shareholders, then Ancora’s increased ownership in the Company should represent little threat to the existing composition of the Board.  We believe a decision to deny this request will be further demonstrative proof that the Board is entrenching itself, under the guise of protecting Autobytel’s NOLs and at the expense of its shareholders.  The value of these deferred tax assets pales in comparison to the present value of an immediate sale of the Company.”

Source: Filing