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Paul Stahura_Donuts
Paul Stahura

Updated below with Rightside statement.

Donuts, the Bellevue, Wash.-based owner of new domain name extensions, is offering to acquire Kirkland-based Rightside Group’s domain registry for $70 million in cash — going public with its bid this morning in what it describes as an attempt to compel serious consideration of its proposal.

Paul Stahura, co-founder and CEO of Donuts, said that the proposal represents 40 percent of Rightside’s market capitalization, while its domain registry accounts for only 5 percent of its revenue.

Stahura said Donuts has presented the offer to Rightside in the past, but it has not been given serious consideration.

Rightside has both registry and registrar businesses. Its registry owns domain name extensions — also known as top-level domains — such as .band, .dance and .sale. The registrar sells specific domain names to the public. Tim Favia, vice president of corporate development for Donuts, said the registry is like a wholesaler that sells to stores and the registrar is like the retailer that sells to customers.

Privately held and heavily funded Donuts owns close to 200 domain name extensions, including .movie, .LTD, .agency, .email, .school and .group. Stahura said Donuts is publicly releasing this proposal now because he wants to compel Rightside to give it serious consideration.

“We think it will help them come to the table and negotiate with us, that’s why we are going public,” Stahura said.

Rightside CEO Taryn Naidu and other Rightside executives have not yet responded to requests for comment.

Update, 1 p.m.: Rightside issued this statement on the offer.

Rightside Group, Ltd. (Nasdaq:NAME), a leading provider of domain name services that advance the way businesses and consumers define and present themselves online, confirms receipt of an unsolicited, non-binding proposal from Donuts Inc. to acquire Rightside’s entire registry of generic top-level domains and related assets for $70 million in an all-cash deal.

Rightside appreciates Donuts’ interest in these assets and also shares their enthusiasm for the Registry business. The Company’s Board of Directors and management team remain committed to maximizing long-term shareholder value and as such they will evaluate any proposal to determine whether it is in the best interests of the Company and its shareholders.

Stahura originally founded eNom, Rightside’s registrar business, before selling it to Demand Media in 2006. Rightside was spun off from Demand Media as a public company in 2013, and Stahura said he remains a shareholder in Rightside. He said Donuts and Rightside have a strong relationship and shared DNA that can “withstand a few bumps in the road here and there.”

He said Rightside’s registry and registrar arms conflict with each other, not giving shareholders of the public company the best possible value.

Tim Favia_Donuts
Tim Favia

Stahura and Favia said they believe their proposal would be a great deal for Rightside shareholders. Donuts pointed to a letter from Rightside investor J. Carlo Cannell, filed with the U.S. Securities and Exchange Commission in February, to David Panos, chairman of Rightside’s board. In his letter, Cannell said Rightside is focusing too heavily on substandard domain names like .democrat, .dance and .army and ignoring its successful registrar business, eNom.

Cannell recommended unifying all Rightside’s products under the eNom name, cutting staff and adding two new board members or replace existing ones.

“I would prefer to avoid waging an expensive proxy battle to elect my own slate of directors. Such a fight would be costly to both myself and our Company,” Cannell wrote.

Stahura and Favia say they have not spoken with Cannell. “That said, (Cannell) is reflecting views of shareholders; a lot of what he is asking for in his letter is to focus on the core operations of the business.” Favia said.

Stahura today sent a letter to Rightside’s Board of Directors outlining Donuts’ proposal. The full letter is below:

Following due consideration, we have concluded that it is in the best interest of both Donuts Inc. (“Donuts”) and the investors of Rightside Group, Ltd. (“Rightside”) that Donuts should publicly present what we expressed in our May 26, 2016 letter to Rightside’s Board of Directors, detailing our acquisition offer for of Rightside’s entire generic top-level domain (“gTLD”) portfolio and related assets (the “Transaction”). To date, we have spoken to you directly and another member of Rightside’s Board of Directors, but have been repeatedly denied a broader conversation with your Board.

Our proposal represents an undeniably compelling case for all parties involved. For Donuts, Rightside’s collection of gTLDs complements Donuts’ current business and expands the range of domains and related services we can offer, bolstering what is already the greatest range of “not-com” options and economies of scale in the registry market today. For Rightside and its investors, separating Rightside’s registry and registrar businesses would unlock substantial value for both businesses by, among other things, allowing each to focus on their strengths and avoiding channel conflict. We firmly believe that Donuts offers Rightside a differentiated ability to consummate the Registry Transaction in an efficient manner and with an exceptionally high level of certainty.

We note that our all-cash offer of $70 million represents approximately 40% of Rightside’s current market capitalization, though assets meant for acquisition contribute approximately 5% of its revenue. We believe strongly in the value of those assets, which we trust will appreciate substantially as part of Donuts’ consolidated portfolio and business model. But we have an equal amount of conviction that Rightside’s registry portfolio’s full value will go unrealized as long as it remains conjoined to your registrar businesses. Correspondingly, we believe the valuation of Rightside’s registrar businesses are also constrained under your current operating model. A separation of the registry and registrar assets will unlock stockholder value and allow you to focus on your core business, which is generating $200 million in annual sales.

We believe Rightside would do best for its stockholders to acknowledge that our case is sound and work with us to enter into this Transaction. The overwhelming evidence validates the Transaction’s merits; enterprises of your size operating both registry and registrar businesses under “vertically integrated” models have poor track records of performance due to, among other things, inherent and inimical channel conflicts and supplier conflicts. For example, Rightside earns 20% of its registry’s revenue from just one of its registrar’s competitors, GoDaddy Inc., and pays 43% of its registrar’s revenue to just one of its registry’s competitors, VeriSign, Inc. Rightside’s recent performance, and the similar struggles Minds + Machines Group Limited encountered while employing the same basic model, underscore the problems with vertical integration in this space. Rightside and its investors should note the improved financial performance that Minds + Machines has enjoyed following abandonment of that model in favor of operating as a pure-play business.

We remain convinced that this is a deal that represents the best possible outcome for all involved. Unfortunately, the merits of our proposal have not, to date, been appropriately discussed or considered. Donuts is the leader in the new gTLD industry, we fully understand the business we seek to acquire, and we believe we can offer unrivaled certainty and efficiency to consummate the proposed transaction due to, among other things, our geographic proximity and the shared DNA between our two companies. We trust that you will give this proposal the full consideration it deserves and seek the counsel of your investors in doing so. Time remains of the essence. While this $70 million proposal is non-binding, Donuts has the cash available to consummate the Transaction but is considering other strategic objectives in parallel. Therefore, we look forward to discussing this opportunity for mutual benefit with you and your Board within two weeks.

Very truly yours,

Paul Stahura

cc: Donuts Inc. Board of Directors

David Rostov, Donuts Inc. CFO

Alvaro Alvarez, Donuts Inc. SVP, General Counsel and Secretary

Tim Favia, Donuts Inc. VP, Corporate Development

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