Magic Jack Investor Calls for Activism

 | Aug 31, 2016 | 11:00 AM EDT
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The pressure is mounting on Magic Jack VocalTec  (CALL) , the small VoIP company best known for its heavily advertised plug-in device that lets consumers make "free" phone calls via the Internet. That business is drying up, and shareholder Kanen Wealth Management has taken notice.

Kanen, which owns 5.26% of CALL, last week sent a letter to Magic Jack's board expressing disappointment with the stock's performance and calling for a $50 million stock buyback over three years. That equals the amount of free cash flow that Kanen expects CALL to generate over the next 36 months. The firm also wants Magic Jack to add two new members "with proven track records of delivering high returns for shareholders" to the board.

Magic Jack did not immediately respond to a request for comment, but the company's latest initiatives -- including a recent $40 million acquisition of UCaaS company Broadsmart -- have yet to deliver on management projections.

In fact, the Broadsmart deal has been a double whammy for Magic Jack so far. First, Wall Street hammered CALL's stock when the company announced the unpopular deal in March. That put the onus on management to prove the acquisition's benefits to investors -- but so far, that hasn't happened.

CALL's share price has languished, off 32% year to date as of yesterday's close. That's way below the Russell Microcap Index's 6.9% YTD gain. Investor interest in the stock seems to have dried up despite the fact that Magic Jack actually beat analysts' earnings expectations in recent quarters.

The company also looks somewhat compelling from a balance-sheet perspective, having ended its latest quarter with zero debt and $46.7 million in cash and cash equivalents, or some $3 per share. That's not bad for a stock that closed at $6.27 yesterday. In fact, Magic Jack actually finished 2015 with nearly $80 million in cash and equivalents, but used $38 million of that to buy Broadsmart.

And now, the possibility of a proxy fight with Kanen looks like another positive in my view. It'll be interesting to see if other investors join Kanen's quest to right the Magic Jack ship via activism, as the stock has more than 50% institutional ownership. By my count, nine firms own in excess of 2% of shares outstanding each.

Investors clearly have little faith in the company right now. After all, CALL shares trade at just 7x next year's consensus earnings estimates (although that "consensus" consists of just two analysts). The stock also sells for a mere 5x free cash flow per share on a trailing-twelve-month basis.

Still, only time will tell if activist pressure is just the "call" that Magic Jack needs to turn things around.

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