Audible.com Shareholder Red Oak Partners, LLC Opposes Proposed Acquisition of Company for $11.50/Share by Amazon.com

  
    
  
  
    
      Red Oak Partners, LLC, a shareholder of Audible.com stock (ticker ADBL), 
      has disclosed today that it sent a letter to the Chairman of Audible.com 
      as well as the Chairman of Amazon.com (ticker AMZN) criticizing the 
      proposed acquisition of Audible at $11.50./share as representing an 
      unfair price. David Sandberg, the portfolio manager of the Red Oak Fund, 
      LP, stated, “We analyzed this offer in great 
      detail and believe the board ignored important factors in recommending 
      the deal. The basis of our opinion is described in our letter.” 
      The letter Red Oak Partners, LLC sent reads as follows:
    
    
      
        
          March 6th, 2008
        
      
      
        
           
        
      
      
        
           
        
      
      
        
          Mr. Donald Katz
        
      
      
        
          Audible Inc.
        
      
      
        
          1 Washington Park
        
      
      
        
          Newark, NJ 07102
        
      
    
    
      Dear Mr. Katz,
    
    
      We are writing to express our criticism of Audible.com’s 
      acceptance of Amazon.com’s $11.50/share offer, 
      an offer which we believe to be inadequate and below fair value. Red Oak 
      Partners owns 364,400 shares of Audible (approximately 1.4% of Audible) 
      and - as noted below - we do not intend to accept this price. This 
      letter is being submitted now because Audible took (what we believe to 
      be) an unacceptably long period of time to report its Q4 2007 results. 
      We are especially concerned because Audible released its earnings just 
      one week before the expiration of the Amazon tender offer. In our 
      opinion this does not give holders adequate time to consider those 
      earnings and evaluate the offer properly. Our concerns are highlighted 
      below:
    
    
      
        1. We contend that Audible’s board relied on 
        analysis about price premiums provided by Allen & Company (as noted in 
        Audible’s Schedule 14D-9 dated 2/11/08, page 
        18, bullet 1) that was flawed, because the December 6th, 
        2007 filing of Form S-3 (which registered nearly 6 million shares of 
        Audible stock for resale in the public markets by Audible’s 
        largest shareholder, APAX managers, Inc.) created a clear “overhang” 
        of stock, pushing Audible stock down more than 20% over the ensuing 
        two weeks. We submit that rather than analyzing the price premium over 
        the closing price of Audible stock the day before the $11.50/share 
        Amazon offer was announced, Allen & Company should have evaluated 
        price premiums vs. Audible’s stock price 
        before the S3 filing. In our opinion, Audible’s 
        strong Q4 2007 would have pushed its stock price higher – 
        not lower – than pre-S3 filing levels.
      
      
        2. Audible states in its 14D9 (dated 2/11/08, page 5) that “From 
        March 2007 through the end of July 2007, Allen & Company approached 12 
        potential acquirers” and that “Allen & 
        Company informed these potential acquirers that an offer of $12.50 per 
        share to purchase all the outstanding shares of Company Common Stock 
        would likely represent an acceptable offer price.” 
        We request that Audible make Allen & Company’s 
        analysis public so that shareholders may compare the analysis 
        performed in March 2007 vs. Allen & Company’s 
        more recent analysis which has resulted in a lower price ($11.50/share 
        vs. $12.50/share) than originally sought, despite a year in which 
        Audible grew its revenues by 34% and added $0.50/share in cash to its 
        balance sheet. Audible should require Amazon to extend its offer until 
        that analysis is available and considered.
      
      
        3. According to the 2/11/08 14D-9, Allen & Co’s 
        more recent financial analysis included numbers through December 7th, 
        2007. We question why Allen & Co. was not given estimates of the 
        quarterly results, and why the directors did not wait until those 
        results were available.
      
      
        4. On page 18 of Audible’s 2/11/08 14D-9, 
        it is stated that Allen & Company utilized “(1) comparable 
        company premiums analysis; (2) discounted cash flow analysis (“ 
        DCF ”); (3) comparable precedent 
        transactions analysis and (4) comparable company multiples analysis” 
        to reach their $11.50/share price. We submit the following regarding 
        each of these:
      
    
    
      
        
           
        
        
           
        
        
           
        
        
           
        
        
           
        
        
           
        
        
           
        
        
          1. Audible is the only public digital audiobook company and as such 
          we contend that there are no direct comparables. We request that 
          Allen & Company provide comparable companies which a) have recurring 
          business models; b) have stable, growing end-user bases focused on 
          the consumer media side; c) have no significant direct competitors; 
          d) have grown revenues consistently (nine straight years for 
          Audible), and have generated positive operating and free cash flow 
          (four straight years for Audible).
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
          2. The 2/11/08 Schedule 14D-9 states that "Allen & Company 
          determined that the Offer Price of $11.50 fell below the range of 
          calculated DCF equity values of $15.38 to $21.99 per share of 
          Company Common Stock based on Audible management estimates." We 
          question why the board accepted an offer 25-47% below the value 
          calculated by its own advisor and using estimates coming directly 
          from its own management team. We believe that the Board's decision 
          to sell the company at such a large discount to its own estimates 
          should be thoroughly questioned and possibly reflects a material 
          breach of fiduciary responsibility.
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
          3. We do not believe that the "comparable precedent transactions" 
          listed by Allen & Company are of comparable companies. Our analysis 
          shows that none of these businesses have material amounts of 
          recurring revenues (as Audible does) nor do they resemble Audible in 
          any other meaningful way other than being "dot-coms." We contend 
          that the "dot-com" moniker is not in and of itself sufficient to 
          qualify a company as a "comparable" and that - today - almost all 
          businesses interact in some manner via the internet. As such, 
          comparisons of ticket resellers (Stubhub.com) or online comparison 
          shopping sites (Shopping.com) are not relevant. Instead, Audible.com 
          should be compared to similar companies. If there are no similar 
          companies with similar end markets, growth drivers, and business 
          models (recurring revenue, operating leverage), then "comparable 
          precedent transaction" analysis should not be viewed as relevant and 
          should not be incorporated into any analysis relied upon by 
          Audible's board. Additionally, Allen & Company compared trailing 
          twelve month and forward twelve month EBITDA multiples vs. Audible's 
          "comparable companies." We believe this is also flawed analysis as 
          Audible has only recently become EBITDA positive and expects its 
          EBITDA growth rate to be significant. Comparing Audible with larger 
          and more established companies which have lower projected EBITDA 
          growth rates is not an apples-to-apples analysis. Lastly, because of 
          the magnitude of deferred revenue which comes in as cash but is not 
          yet booked as revenue (nor included in standard EBITDA 
          calculations), we believe that an adjustment should be made to 
          EBITDA to include deferred and that this inclusion would have a 
          material impact on all comparative analysis, in Audible's favor.
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
          4. We believe that Allen & Company's usage of "comparable" companies 
          (per page 19 of the 2/11/08 14D-9) is flawed. We do not believe that 
          any of the companies mentioned - Netflix, Blue Nile, RealNetworks, 
          1-800-Flowers.com, drugstore.com, or overstock.com - are comparable. 
          In fact, we are confused as to how sites which sell diamonds, 
          flowers, drugs, and excess inventory correlate to a site which 
          offers a digital audiobook download subscription service - they are 
          entirely different markets and businesses. We believe that this 
          analysis should not have been relied upon by Audible's board.
        
      
    
    
      
        5. We question Allen & Company’s $2.62 
        million fee. According to the 14D9, “over 
        the past several years, Audible and Amazon have from time to time 
        engaged in discussions concerning Amazon’s 
        potential acquisition of, investment in or commercial relationship 
        with Audible.” Thus, discussions between 
        the two companies “pre-existed” 
        Audible retaining Allen & Company as its financial advisor. Permitting 
        fees to be paid for relationships which pre-existed a service provider 
        is not in the best interests of shareholders and we believe 
        is inappropriate. Further, according to the Schedule 14D-9A filed on 
        3/3/08, Allen & Company is to “be paid 
        a fee equal to 1.2% of the price per share paid by any acquirer times 
        the number of shares acquired minus the net cash, cash equivalents and 
        short-term investments on Audible’s books.” 
        We see no reference to additional retainer amounts and as such believe 
        that Allen & Company will earn substantially less in fees if a deal is 
        not completed. As such, there is an incentive for Allen & Company to 
        get a deal done “at any cost,” 
        creating a potential conflict of interest which calls into question 
        all of their analysis and recommendations to Audible’s 
        board.
      
      
        6. I submit that the $10 million break-up fee plus up to $3.5 million 
        in expenses is a breach of fiduciary responsibility and not in the 
        best interests of shareholders, as it provides incentive not to shop 
        the deal elsewhere. To reject this deal in favor of another 
        potentially higher deal would cost Audible shareholders approximately 
        $0.54/share in break-up fees and expenses.
      
      
        7. In our opinion, Audible.com’s 
        biggest risk lies in the expiration of its contract with Apple’s 
        Itunes in 2010. We have accounted for this risk in our modeling and – 
        through its increased deferred revenues stemming from continued growth 
        in Audible.com’s subscription site – 
        we project a materially higher value than the $11.50/share offer made 
        by Amazon. Our estimates are in-line with the DCF value calculated by 
        Allen & Company using estimates provided by Audible’s 
        management (again, page 18 of Schedule 14d-9 filed on 2/11/08). 
        Further, we believe it would be difficult for Apple to entirely walk 
        away from its deal with Audible as it would require significant cost 
        to create the systems, publisher relationships, and content creation 
        and management required to provide a similar audiobook offering (for 
        2007, Audible reported over $48 million in “cost 
        of content and services revenue: royalties and other content charges” 
        and an additional $18 million in “Technology 
        and Development” spending). We believe 
        Apple would want a best of breed product and further believe that this 
        would best be achieved by a continued partnership with the market 
        leader - Audible.com (with nearly 15,000 Audiobooks and over 127,000 
        hours of audio content). Further, we believe Audible’s 
        digital audiobook end market is highly stable as audiobooks are 
        consistently used by commuters, those with sight impairment, those who 
        frequent the gym/fitness train, and for a wide variety of other 
        reasons. With a continued increase in consumer penetration and 
        distribution of devices which play Audible’s 
        digital audiobooks (currently over 570 devices are “AudibleReady”) 
        and expected growth in smart mobile devices, we believe a continued 
        increase in the availability and usage of Audible’s 
        products to end markets can be expected. We believe commensurate 
        revenue and profitability growth will continue.
      
      
        8. In what is becoming a “war” 
        over end consumers, we believe that Audible is a small yet important 
        piece in a comprehensive consumer product offering, and therefore 
        strategic value should be priced into any acquisition. We do not 
        believe any such value was priced into this deal.
      
      
        9. According to the 14D9, Allen & Company began its search for an 
        acquirer In March 2007. Audible’s cash 
        balance as of its most recent 12/31/06 reporting date was 
        approximately $2.60/share. Additionally, Audible had approximately 
        $120 million in usable net operating losses (NOLs) to offset future 
        tax payments –NOLS which are now relevant 
        as Audible has become earnings positive. Conservatively valuing these 
        NOLs at twenty cents on the dollar, we value these NOLs at 
        approximately $0.95/share. Coupled with the cash on the balance sheet, 
        we believe that in March 2007 there was roughly $3.55/share in 
        non-enterprise value, which further implies that at the March 2007 
        $12.50/share target or “list” 
        price, Allen & Company was valuing Audible’s 
        “enterprise” at 
        approximately $8.95/share. Since then, Audible grew its reported and 
        deferred revenues each by 34% while generating over $0.50/share in 
        additional free cash. In now recommending an $11.50/share acquisition 
        price, Allen & Company is implying that since March 2007, Audible’s 
        enterprise value has declined nearly 20% to approximately $7.35/share 
        ($11.50 offer price less current $3.20/share in cash less $0.95 in our 
        estimated value of the NOLs). Contrary to this, we believe Audible’s 
        enterprise is more valuable today and that any accepted offer should 
        reflect this. We again request that Audible make Allen & Company’s 
        financial analysis public to investors to explain this apparent 
        inconsistency and explain why the company’s 
        board concluded that this sale (at this price) was in the best 
        interests of all shareholders.
      
      
        10. We believe that the operating cash flows - net of any changes in 
        the assets and liabilities but inclusive of deferred revenue – 
        should be analyzed when assessing the value of Audible’s 
        business. Upon review of Audible’s recently 
        announced Q4 2007, we believe that approximately $9.3 million of these 
        cash flows were “good” 
        and repeatable. Less $0.9 million interest income and $1.2 million in 
        capital expenditures, we reach “adjusted 
        free cash flow” of approximately $7.1 
        million. Although deferred revenue has increased for at least eleven 
        straight quarters, we offset a Q4 seasonal effect by removing ½ 
        of the Q4 sequential deferred revenue increase. Lastly, we remove 
        approximately $1.5 million of taxes, which gets us to $0.82/share in 
        after-tax adjusted free cash flow/year. By recommending the sale of 
        Audible at $11.50/share (and therefore valuing the enterprise at 
        $7.10/share), Allen & Company is suggesting that Audible’s 
        enterprise is worth less than 9x adjusted free cash flow. Again, this 
        assumes Audible does not further grow its business, and disregards 
        Audible’s significant growth in revenues, 
        adjusted EBITDA, and cash flow. Again, we believe the board's action 
        in accepting this offer is a material breach in fiduciary 
        responsibility.
      
    
    
      We oppose this offer and do not intend to tender. Further, we would 
      consider exercising our right to dissent from the merger should the 
      offer go forward and would consider participating in the stockholder 
      litigation which has been filed – including 
      asking the judge to have the plaintiffs justify the price of the 
      currently proposed settlement.
    
    
      
        
          We await your response.
        
      
      
        
           
        
      
      
        
           
        
      
      
        
          David Sandberg
        
      
      
        
          Portfolio Manager
        
      
      
        
          Red Oak Partners, LLC