Open Letter from Dark Horse Capital Management to the Board of Directors of LASTMINUTE.com (LMN SW)
 

To

Mr. Laurent Foata, Chairman
Board of Directors
lastminute.com N.V.
Basisweg 10, 1043 AP
Amsterdam – Netherlands

We are writing to you and the rest of the Board of Directors (“Board”) to express our deep concern with the current direction of lastminute.com N.V. (the “Company”).  Operationally, the Company is enjoying one of its best years in terms of growth, profitability, and cash generation.  The Company’s multi-year repositioning seems to be taking shape and the future looks bright.  The Company’s slogan on its 2021 Annual Report was, “Ready to Break Away from the Pack.”  We couldn’t have agreed more, which is why we, via funds we manage, have accumulated a ~1% position in the Company.  However, certain managerial decisions have superseded the excellent operating results and it has become clear that drastic change is necessary.  We hope you agree. 

In June, the Company attempted to buy out insiders in a non-arm’s length, private transaction.  We understood the rationale for the transaction and didn’t necessarily disagree; however, the structure shows extremely poor judgement given what could clearly be misconstrued as insider dealings with a board member, not to mention one of the newest board members.  Further, the Company is not known for open disclosure and communication, which typically results in more angst among minority shareholders.  This seemingly questionable transaction was a distraction and, on its face, acted to position the Company against its minority shareholders.  A simple explanation of why this transaction was to the benefit of all shareholders in the press release would have gone a long way to ease tension, but, unfortunately management did not do so.  Given the relative illiquid nature of the shares, a modified Dutch tender offer open to all shareholders would have likely been possible and would have generated a more favorable result while maintaining a shareholder friendly approach. 

Less than a month after the ill-conceived insider buyback ploy, the Company’s CEO, Fabio Cannavale, and COO, Andrea Bertoli, were detained by the Swiss authorities for suspected fraud related to certain COVID benefit funds.  The Company issued a five-sentence press release offering very little information, but did include the following quote from you, Mr. Laurent Foata:

“We are confident that management behaved respectfully vis-à-vis institutions and employees throughout the dramatic and unprecedented circumstances of the pandemic. The Company will work alongside the Swiss authority to quickly clarify the matters.”

Over the subsequent week, the Company issued three more press releases, each shorter than the previous release, and containing little of substance.  As time went on, it became clear that your confidence in the situation changed. 

Poor decisions were made while the Board’s attention was elsewhere.  However, calling out questionable managerial oversight that occurred in the past is of little value to us now or in the future.  The immediate focus should be on what the Board has done to fix the problems of yesterday in order to improve the value for today. 

Let’s recap the actions of the Board subsequent to the detainment of the CEO & COO.

1. Fast-tracked the release of 1H22 operating results.  This was well received and showed that the Company continued to generate significant levels of free cash flow.  Thank you for being proactive.  We hope that this is the beginning of faster and a more robust financial disclosure effort in the future. 
2. Held a conference call to seemingly assure shareholders that the Board had the situation under control.  Nothing could have been further from reality.  Many good and legitimate questions were asked; very few answers were provided.  No tangible steps to contain what was potentially a massive managerial oversight were given.  It was clear that you, the chairman, neither had basic knowledge or control of the situation nor wanted to be on the call at all.  This was an opportunity to showcase your leadership in a crisis.  However, this was an opportunity lost. 
3. Named an interim-CEO and retained a search firm to find a new CEO.  However, the Company would not confirm that Mr. Fabio Cannavale had been fired or was even to be fired, casting uncertainty onto the availability of the role and the Company’s ability to attract qualified candidates. 
4. Suspended the share buyback due to “advice of counsel.”  On the conference call and subsequent to the conference call, it was stated that given the fluidity of the situation that the Company could receive material news that would compromise the disclosure requirements surrounding the buyback.  We agree with the potential disclosure issue, but disclosure issues are easy to remedy.  Disclose it.  How is this any different than typical operating conditions whereby the Company could receive material news during an active buyback period?  Further, it is a very standard process for Swiss-listed companies to enter into a trading plan with the executing broker whereby the broker will act independently from the issuer to execute the buyback.  This enables the buyback to continue even if the issuer is in receipt of material non-public information.  Ironically, the Company also said, numerous times, that they did not have much information from the Swiss authorities, but what little information they did have, had been shared publicly.  This negates the rationale for suspending the buyback. 

In summary, the Board has not done much to fix the problems, which is both highly questionable and highly disappointing.  The stock price reflects this inaction.  The Company has initiated two highly generous employee stock purchase programs over the past two years.  Many of the thresholds were struck at CHF 60/share, which were viewed at time to be a slam dunk valuation.  Further, we were told that upwards of 70% of rank-and-file employees bought in to the latest share purchase program and were more than happy to take the Company’s offer to provide leverage for even more exposure at a time when the stock was at a “highly discounted” ~CHF 35/share.  The stock is currently at CHF17/share.  CHF 60 is a long way away from CHF 17.  Change is needed before there is a mutiny and further value is destroyed.

We propose the following actions that the Board should immediately consider -- all of which will be well received by the market. 

1. Engage a reputable investment bank to advise the Board on strategic alternatives.  The CEO is in jail.  The COO is in jail.  The Board has failed to exercise oversight.  The Company has always desired to achieve a sale.  Now is the perfect time to explore that outcome. 
2. Concurrent with the strategic alternatives review, implement a modified Dutch tender offer of at least EUR20 million.  Given cash on hand and incorporating the expected change in working capital in 2H22, EUR20 million is easily justifiable and would be approximately 10% of the current market capitalization.  Given the illiquidity of the stock, this transaction would allow those shareholders that see real value to benefit at the expensive of those that will trade current liquidity for a significant discount to intrinsic value. 
3. Assuming Ms. Laura Amoretti will not be detained, allow her to navigate the Company through the strategic alternatives and tender offer process.  The Company should pause the CEO search process pending the results of the strategic alternatives process, otherwise the new CEO would clearly be conflicted.
4. Mr. Cannavale and Mr. Bertoli should be given due process.  However, should it be deemed that they acted inappropriately, they should be immediately terminated, and all unvested shares and shares vested since the date of impropriety should be clawed back and cancelled.  The Company should also seek civil damages against both individuals as the Company has clearly been harmed and subject to incremental expenses and potential fines relating to the impropriety of Mr. Cannavale and Mr. Bertoli. 
5. Ask KPMG to publicly stand by their audit during the periods under investigation.  As an alternative, the Company should publicly state that the audit is still valid.  We question why there has been little focus on the audit of a highly reputable firm such as KPMG when in fact, the Swiss government is directly challenging the legitimacy of such audit. 
6. Increase the level of public communication.  This has been asked for years to no avail.. 

This list is not exhaustive but would be a step in the right direction.  

The Company is currently trading for ~2.5x EBITDA, with a free cash flow yield over 20%, and is in a net cash position.  You are well positioned with dominating technology in an attractive market over the medium to long term.  Yes, the current geopolitical situation is a headwind for the entire on-line travel agent industry, but your closest European-focused peers are trading at an almost 2x higher valuation.  The valuation discrepancy demands action at the Board level. 

To put a finer point on the valuation discrepancy vis-à-vis a company sale to one of your larger European-focused peers, the Company could command a premium in excess of 200% while still being over 30% accretive to EPS and 15% accretive to free cash flow to the acquiror.  Structuring the deal as 100% stock would enable legacy shareholder to participate in a market rebound and provide a deleveraging impact to the acquirer.  It would also increase the float and create greater liquidity so that larger legacy shareholders could more easily exit the position should they so desire.  Further, it solves for the Company’s current issue of having a great horse, but no jockey.  Finally, the metrics would be even more attractive should the Company execute the modified Dutch tender offer discussed above. 

Your shareholders have been patient over the past few years given the business repositioning and COVID-related obstacles.  We remain a large and constructive shareholder, but our patience is exhausted due to what appears to be chronic inaction at the Board level.  This is a good company with good bones and great prospects.  It has clearly deviated from its path and now is the time to get it back to where it deserves to be.  We ask that the Board review the points above and work constructively to remedy the clear managerial deficiencies for the benefit of all shareholders.  We ask that you show leadership in this troubled time. 

Kind Regards,

C.J. Martin
Managing Partner

Dark Horse Capital Management
285 Wilmington West Chester Pike, Floor 2
Chadds Ford, PA, 19317

Letter dated 12 October 2022