I wrote about takeover expert Kyle Wescoat coming on board as CFO and how Skullcandy is potentially positioning themselves to be a takeover target. Recent events have strengthened my opinion of this actually happening. On January 28th, without any fanfare, Skullcandy filed an 8-K which reported on an amendment to their credit facility that is now permitting the company to buy back up to $28 million in outstanding common stock. When reaffirming his buy rating on Skullcandy stock on Friday, Andrew Burns from DA Davidson wrote that this available share buyback is a potential catalyst to propel the stock price higher. This of course came on the heels of an after-market announcement the day before that the CEO Jeremy Andrus has resigned to take a vague role with a private equity firm and that company founder Rick Alden has stepped in as interim CEO. Like Kyle Wescoat, I don't believe that Rick Alden plans to be an executive very long. He strikes me as a guy that would rather be on a ski slope somewhere or dreaming up his next big entrepreneurial idea, than sitting in a board room and running the day-to-day activities of the company.
Furthermore, based on an updated 13G filing on Thursday, investment company Waddell & Reed owns 8% of the common shares. I would speculate that Jeremy Andrus was pushed out by the board (possibly under pressure from the large institutional shareholders) to make way for a takeover or private equity bid. This has likely been going on a few months now, beginning with the time he registered his share sale plan which was ironically disclosed the day after the Morgan Stanley downgrade in September. At this time of the downgrade and share registration by Andrus, the stock was priced at more than double today's value and if Skullcandy was a target at that point, you can bet it is on everybody's radar right now. Really nothing in the fundamental and growth story has changed since then, but the value of this play has been exponentially enhanced as a mere result of a deteriorated share price. I would like to point out that absent the rather excessive executive share-based compensation, Skullcandy earnings would be reflected significantly higher in past quarters. I expect all of this to change as the institutions and board flex their muscles. Clearly they have spoken about leadership and Andrus is out and investors like myself anxiously await a clearer and fairer direction for protecting shareholder value.
The majority of the rest of the common shares is controlled by insiders, with Jeremy Andrus and Rick Alden owning 40%, and with the ability now of the company to buy back nearly 17% of the shares at current prices, the actual float can rapidly shrink in a hurry. It is very rare that investors have an opportunity to buy into a true growth story with proprietary technology and killer branding that is trading at a multiple of 6, with zero long-term debt, no scandals or class action suits or even any SEC inquiries. The product pipeline runs deep and I haven't even scratched the surface into the new opportunities in gaming which was a big focus of the last earnings call and is barely ever mentioned as a catalyst by the analysts who cover this stock. International distribution and even domestic distribution in stores like GameStop (GME) and Wal-Mart (WMT) can materially increase sales overnight and are virgin territory at the moment.