Breakingviews: Box KKR deal kills two birds with three stones

Cloud-services company Box has found an over-complicated way to buy some time. Activist investor Starboard Value was pressuring the $4 billion group to consider a sale and revamp its board. Now Box has announced a $500 million investment led by private equity firm KKR that will enable it to buy back shares. Board changes may have more lasting impact, but it still looks like killing two birds with three stones.

Starboard took a stake in Box in 2019. With no sign of a sale, Reuters reported earlier this year that Jeff Smith’s fund might challenge three directors, including Aaron Levie – the founder, chief executive and chairman – at the company’s upcoming annual meeting.

Wednesday’s news means any immediate sale is off the table, helping send Box’s shares down 8% in morning trade. A $500 million stock repurchase would be equivalent to well over 10% of Box’s current market capitalization. Starboard owns almost an 8% stake, according to Refinitiv data, meaning there could be room for the fund to exit if it wishes.

Box’s other threat was Starboard’s push for boardroom changes. Box needed three responses: cash, a buyback promise, and governance changes on its own terms. As regards the latter, KKR is putting a representative on the board and Bethany Mayer, currently an independent director, is being named chair, removing one of Levie’s roles.

The financial elements, though, look overwrought. The company is issuing convertible preferred stock to KKR. That can be a useful way to raise funds cheaply, and the attached 3% dividend isn’t onerous. But it’s easier to justify using these financial tools for investment than to fund a buyback. While there’s some protection against future dilution, it’s a lot of effort for short-term relief.

The board changes may have a more lasting impact. Box has struggled to take advantage of trends rivals have hopped on, like home working. Box’s stock is slightly below where it ended its first day of trading in 2015. Perhaps more independent and less patient oversight might help Levie put Box’s business into higher gear.

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