An Open Letter to Coinstar, Inc. Stockholders
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May 13, 2008
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Fellow Coinstar Stockholders:
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The Shamrock Activist Value Fund ("SAVF") has been an investor in
Coinstar, Inc. ("Coinstar" or the "Company") since October 2005. Our
economic interests are directly aligned with those of all other
Coinstar stockholders as we are the Company's largest stockholder,
owning approximately 13.3% of the outstanding shares. We believe
that now is the time for very important changes to be made at
Coinstar.
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We have nominated Eugene I. Krieger, John M. Panettiere and Arik
Ahitov as our three candidates for election to the Coinstar Board
at the 2008 Annual Meeting of Stockholders. We believe that
Coinstar is at a critical inflection point in its business and it
is time for direct investor representation in the Boardroom.
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If elected, our three nominees will focus on improving operational
performance, strengthening Coinstar's corporate governance
standards, optimizing Coinstar's compensation plans and improving
transparency and clarity in Coinstar's communications with its
stockholders. Coinstar has the potential, with the right Board
leadership, to generate significant value for all Coinstar
stakeholders. We believe that our nominees will bring an objective
and unbiased stockholder perspective to the Board that will benefit
Coinstar and its stockholders.
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If elected, our nominees intend to pursue the following priorities:
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Priority: Improve Operational
Performance and Capital Allocation Policies
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Despite spending over $550 million on acquisitions and capital
expenditures during the past 5 years, the Company's Return on
Invested Capital ("ROIC"), a metric that we believe correlates
strongly to long-term stockholder value, has plummeted by over 50%,
from 12.7% in 2002 to 5.7% by the end of 2007. In addition, between
December 31, 2002 and April 4, 2008 (the date we nominated our three
Board candidates), the annualized return on Coinstar's shares has
been 6% compared to 11% for S&P 500 (dividends reinvested) - a 38%
cumulative total return underperformance.
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Our nominees will seek to ensure that the Company's primary focus
over the next 24 months is on improving operations and performance
in Coinstar's core business lines. We believe a prudent capital
allocation strategy is paramount until management is able to
demonstrate that it has successfully integrated the Company's recent
acquisitions, significantly improved operations in Coinstar's core
business segments and produced an acceptable ROIC from those
investments. In the interim, we believe Coinstar's stockholders
would be better served if Coinstar returned excess cash to its
stockholders in the form of dividends or share buybacks.
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Priority: Improve Corporate
Governance and Compensation Practices
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After years of inaction, Coinstar has only recently taken a few
steps to improve its corporate governance practices. We believe
these changes were only made in response to our direct
discussions with Coinstar regarding its corporate governance
deficiencies and the public disclosure of our recommendations for
corporate governance changes. Stockholders should question whether
Coinstar would have made any of these changes in the absence of
our pressure and stockholder scrutiny. Do you think the Coinstar
Board has now truly embraced the idea that appropriate governance
and accountability matters? If so, why has the Coinstar Board
continued to reject our call to declassify the Company's staggered
Board and immediately implement annual elections of Directors?
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Accountability is a fundamental tenet of sound corporate
governance, and therefore it is about time that all
Coinstar directors be held accountable to Coinstar stockholders
through annual elections. If elected, our nominees will seek to
promptly declassify the Board and allow stockholders the
opportunity to register their views on the performance of all
directors annually.
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We also believe Coinstar's compensation practices should more
closely align management's interests with the stockholders'
interests, by directly linking pay to performance. In addition,
Coinstar's public disclosures should be more transparent in
explaining how, why and when compensation is fixed, measured and
paid. Over the last several years, we have shared with both the
management and the Board our thoughts of how to make structural
improvements that we believe would improve the important and complex
area of executive compensation. We believe the Board has chosen to
ignore best practices of significantly linking pay to performance
and continue to have a suboptimal compensation structure.
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Priority: Rebuild Trust and
Confidence with Stockholders Through Better Communications with
Coinstar Stockholders
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We believe it is about time that Coinstar restores the investor
confidence and trust that we believe has been lost through a lack of
transparency and clarity in Coinstar's communications to its
stockholders. Our nominees are committed to transparent
communication to allow Coinstar's owners to more fully understand
the direction and plans of its fiduciaries.
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Consider the following examples:
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-- Stockholders' role as detectives: In Coinstar's
third quarter and fourth quarter 2006 investor conference calls,
Mr. Cole unequivocally stated that Coinstar had no plans or
intentions to make any significant acquisitions. However, just a
few months later, Coinstar announced its acquisition of Groupex
Financial Corp. - the second largest cash acquisition in
Coinstar's history. When Brian Turner, Coinstar's CFO, was asked
about the inconsistency between Mr. Cole's public comments and
Coinstar's actions, Mr. Turner stated that if we had closely
compared the transcript of the Coinstar first quarter 2007
conference call with the two prior calls we would have noticed
that Coinstar did not reiterate its "no acquisition commitment" in
the latter call.
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Coinstar's stockholders deserve better communication from its
management, and we reject the notion that stockholders should have
to glean Coinstar's business strategy by drawing inferences from the
absence of statements in Coinstar's public communications.
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-- Paying management for achievements below publicly announced
guidance: While the Company's publicly announced guidance for
2007 EBITDA was $114 million to $124 million, incentive
compensation targets for executives were based on achieving EBITDA
levels of only $106 million to $118 million.
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-- Recent Company proxy solicitation statements:
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1. Coinstar's Board claims credit for recent gains in revenue and
EBITDA growth; yet it fails to disclose that the Company invested
more than $550 million over the last 5 years to achieve those gains,
and that net income growth during the same period has been anemic at
best.
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2. Coinstar's Board claims credit for improved share price
performance since July 14, 2003; yet it measures performance by
selecting a beginning date which is the third trading day after
the Company disclosed it had just lost an important and
significant contract with supermarket giant, Safeway.
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3. Coinstar's Board has chosen to launch personal attacks against
our nominees and questioned our motives. Yet, the incumbent Board
has done so without ever interviewing our nominees. In addition, the
incumbent Board fails to acknowledge the successful 30 year track
record of Shamrock Holdings, Inc., the sponsor and investment
manager for the Shamrock Activist Value Fund.
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4. Mr. Cole asks that you take it on faith that the Company's future
is bright, yet, over the past year, senior management (including Mr.
Cole) and members of the incumbent Board have purchased a total of
only 1,000 shares of Coinstar stock in the open market at a value of
approximately $25,500. In fact, Mr. Cole has recently disclosed that
on May 2 and May 5, 2008, he has sold an aggregate of 24,054 shares
of Coinstar stock. SAVF has invested more than $99 million in
Coinstar's shares since October 3, 2005 and more than $43 million in
the last twelve months.
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These are just a few examples of what we believe are less than
complete and forthright communications from Coinstar. Our trust and
confidence in the Board and senior management has been damaged and
we believe Coinstar stockholders deserve better.
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An Insular Board
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We believe that the current Coinstar Board is insular. With the
exception of one member, composition of the Board has remained
unchanged for over 5 years. In addition, the majority of the
incumbent non management Board members maintain their principal
business activities in Seattle, WA, and two incumbent Coinstar
directors, Ms. Bevier and Mr. Grinstein, have simultaneously
served on the boards of directors at both F5 Networks and Ackerley
Group. The incumbent non management Board members collectively
own only 0.12% (1.3% including options) of the Coinstar shares.
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Instead of even seeking to interview any of our three proposed Board
candidates, the Coinstar Board would like you to believe they are
open to new ideas and are acting responsibly by planning to spend
$3.4 million to $6.4 million of the Company's capital -
significantly more than Coinstar's first quarter net income and over
ten times our planned expenditure - to preserve three seats on the
Coinstar Board for its own hand-picked Board candidates.
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If you believe that IT'S ABOUT
TIME for:
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