Riley Investment questions Zilog's rationale in refusing offer from Universal Electronics

By Lisa Kerner

Charlotte, N.C., Feb. 6 - Riley Investment Management LLC said it was disappointed that Zilog, Inc. rejected Universal Electronics Inc.'s bid to acquire the company in a deal that Riley, a 6.2% shareholder, would finance.

Zilog turned down Universal Electronics' unsolicited Jan. 18 offer of $4.50 cash per share.

Riley, in a letter to Zilog, noted that Universal Electronics' offer would value Zilog at 8 times EV/EBITDA and 45 times earnings per share. The letter was included in a schedule 13D filing with the Securities and Exchange Commission.

Riley said the company's performance has been disappointing and noted that nearly 50% of Zilog's revenue is generated from "legacy products that have an uncertain outlook" including "a universal remote business that has significant customer concentration, a situation where flash growth has slowed to a crawl."

The investor also cited the more than $80 million in GAAP net losses generated for shareholders since Zilog emerged from bankruptcy.

In addition, Riley noted that Zilog's sales have declined five out of six years with "the one year of 4% revenue growth expected to be followed by a year of over 17% revenue decline."

Riley also questioned the board members' rationale in granting themselves raises and boosting meeting fees by 50% (after the first four meetings of the year).

"To put Zilog's board fees in perspective, if just the fees paid to the board members were eliminated (not all other expenses associated with the board) it would add $0.02 per share to earnings, which is worth $0.90 per share in the stock price at the Universal Electronics' valuation and apparently even more per share at your valuation," Riley's letter said.

Cutting board fees in half would add more than $0.45 per share in stock value, according to the investor.

Zilog previously announced it was considering alternatives with the assistance of LRG Capital Corporate Advisory Group, LLC.

Based in San Jose, Calif., Zilog is a supplier of eight-, 16- and 32-bit microcontroller and microprocessor system-on-a-chip products.

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