NEW YORK, Sept. 26, 2017 /PRNewswire/ -- Marathon
Partners Equity Management, LLC, together with its affiliates
("Marathon Partners"), one of the largest shareholders of J.
Alexander's Holdings, Inc. (NYSE: JAX) ("J. Alexander's" or the
"Company"), with an ownership position of approximately 6.3%
of the outstanding shares, announced today that it has delivered a
letter to the Board of Directors of J. Alexander's expressing
serious concerns regarding the proposed transaction between J.
Alexander's and 99 Restaurants, LLC ("99 Restaurants"), a
majority-owned enterprise of Fidelity National Financial, Inc
("FNF"). On August 4, 2017, J.
Alexander's and FNF announced a definitive agreement under which J.
Alexander's will acquire 99 Restaurants in an all-stock transaction
valued at approximately $199 million, including the assumption
of $20 million in net debt, and following which FNF will own
approximately 52.5% of the outstanding shares of capital stock of
J. Alexander's.
The full text of the letter follows:
September 26, 2017
Board of Directors, c/o Corporate Secretary
J. Alexander's Holdings, Inc.
3401 West End Avenue, Suite 260
P.O. Box 24300
Nashville, Tennessee 37202
Dear Board Members:
Our firm, Marathon Partners Equity Management, LLC ("Marathon
Partners"), is a long-term oriented investment firm that seeks to
deploy capital in undervalued securities. We have been shareholders
of J. Alexander's Holdings, Inc. ("J. Alexander's" or the
"Company") since the spin-off from Fidelity National Financial
Inc.'s tracking shares ("FNF") approximately two years ago. We have
increased our ownership over time and currently control in excess
of 900,000 shares of J. Alexander's, making us one of the Company's
five largest shareholders.
Our investment in J. Alexander's was predicated on a number of
factors, including the critical belief that it would be run by the
board of directors (the "Board") as an independent company and free
to pursue the best interests of its shareholders. After reviewing
the proposed merger between J. Alexander's and 99 Restaurants, LLC
("99 Restaurants"), we now question that initial assumption. We
believe the proposed transaction is overly accommodating to the
interests of FNF and other affiliated entities and clearly not in
the best interests of J. Alexander's shareholders. Further, we are
highly concerned the Board's deep and active ties to FNF are
hindering the pursuit of alternative options that could potentially
result in better outcomes for shareholders. Therefore, we are
strongly opposed to the proposed transaction.
We have several concerns regarding the proposed transaction and
note numerous deficiencies that we believe contributed to this
ill-advised and poorly-timed decision:
- J. Alexander's lacks independent directors in respect to the
proposed transaction. All Board members are affiliated with FNF –
the majority owner of 99 Restaurants – or one of its
subsidiaries.
- No special committee was formed to evaluate the proposed
transaction or to consider other value-enhancing alternatives that
might prove superior for shareholders.
- The Board supports a transaction that relinquishes control of
the Company but delivers no premium to shareholders.
- The Board agreed to a no-shop provision on itself, despite
being the buyer. This highly unorthodox decision was potentially
very costly to shareholders and particularly troubling given the
Board's close ties to FNF.
- We estimate J. Alexander's intrinsic value ranges from
$13 to $15 per share, significantly
higher than the $11 used by the Board
to underpin the proposed transaction.
- There is little strategic rationale for combining 99
Restaurants with J. Alexander's given the nature of the two
distinctly contrasting dining concepts.
- The 2016 combined operations earnings accretion analysis
presented by management in support of the transaction is overly
generous in its assumptions. A more balanced and realistic analysis
produces significantly less earnings accretion than management has
estimated, and other factors also pose risks to any earnings
accretion envisioned from the proposed transaction.
Given the Board members' willingness to allow for a change of
control at J. Alexander's, we believe the Board should delve deeper
into the evaluation of strategic alternatives, including a
potential sale of the Company. We believe such an outcome would
likely generate a much higher risk-adjusted return versus the
proposed transaction with FNF-controlled 99 Restaurants.
Poor Corporate Governance Led to a Severely Flawed
Process
The J. Alexander's Board, in its entirety, serves in various
roles at FNF and related entities that own 99 Restaurants. It is
highly disconcerting the Company does not have a single, truly
independent or disinterested director to review this unusual
transaction advanced by FNF.
J. Alexander's
Board of Directors – Related Party Conflicts
|
J. Alexander's
Holdings
(NYSE:
JAX)
|
Fidelity National
Financial (NYSE: FNF)
Fidelity National
Financial Ventures
Group (NYSE: FNFV)
|
Fidelity
Newport
Holdings
("FNH")
|
Newport Global
Advisors
|
Black Knight
Advisory Services
|
Board of
Directors
|
Director/Executive
|
Director
|
CEO
|
Member
|
Lonnie Stout,
CEO
|
|
x
|
|
x
|
Timothy
Janszen
|
|
x
|
x
|
|
Ronald
Maggard
|
|
x
|
|
|
Frank Martire,
Chairman
|
|
x
|
|
|
Raymond
Quirk
|
x
|
|
|
|
Douglas
Ammerman
|
x
|
|
|
|
Notes:
|
|
-
|
Fidelity National
Financial Ventures Group (FNFV), a tracking stock of Fidelity
National Financial, Inc. (FNF), owns a 55% interest in Fidelity
Newport Holdings, LLC (FNH).
|
-
|
FNH is the owner and
operator of 99 Restaurants and other restaurant
concepts.
|
-
|
Newport Global
Advisors owns a minority interest in both FNH and J.
Alexander's.
|
-
|
Mr. Stout owns an
11.76% interest in Black Knight Advisory Services which provides
consulting services to J. Alexander's.
|
Source: J.
Alexander's Holdings, Inc. Proxy Statement, 2017.
|
We understand a special committee was not formed to evaluate the
transaction or to consider other alternatives to the proposal
presented to J. Alexander's. Given the obvious conflicts of
interest, substantial ownership dilution, and change of control
present in this transaction, the formation of a special committee
to evaluate all alternatives would seem perfunctory.
We are perplexed as to why the Board would agree to a no-shop
provision despite J. Alexander's role as the buyer in this
transaction. It would be extremely difficult for a seller (99
Restaurants & FNF in this case) to extract a no-shop provision
from a buyer in an arm's length transaction, and so, it appears to
be a favor given to FNF and other related entities at the expense
of J. Alexander's shareholders. Further, the timing of the no-shop
provision could not have been worse, as J. Alexander's was close to
exiting its two-year restrictive period which would enable it to
freely pursue a change of control transaction. These rights were
therefore very valuable, particularly at this moment in time.
This transaction is amongst the most one-sided, conflicted deals
we have seen in twenty-five years of investing. Essentially, the
Board is recommending shareholders sell control of J. Alexander's
to another entity its Board has deep ties to, for no premium, while
simultaneously restricting other options available to enhance
shareholder value. The Board's recommendation for this transaction
makes it appear as if FNF still maintains control over J.
Alexander's despite FNF's divestiture of the business two years
ago. We are hard-pressed to understand how the Company's directors
supported such a transaction.
J. Alexander's Intrinsic Value
We are disappointed that J. Alexander's used $11 per share as "fair value" for the
transaction. We believe fair value lies significantly higher and
that the Board's actions over time support this assertion.
Since the spin-off, J. Alexander's has repurchased over 300,000
shares at an average price of $10.47.
We logically assume the Board believes this was an attractive use
of capital and that the buybacks were executed at a significant
discount to J. Alexander's intrinsic value. For example, if the
Board believed the shares were repurchased at a 20% to 30% discount
to intrinsic value, this would imply a fair value range from
$13 to $15 per share as opposed to
the "fair value" of $11 being used as
the cornerstone of this transaction. We believe intrinsic value has
only improved since the share repurchases, as recent operating
results have exceeded expectations and management raised 2017
guidance earlier this year.
Unlike many operators, J. Alexander's owns the land under
approximately 40% of its restaurants. Considering the last
re-valuation of its real estate holdings occurred five years ago, a
fair value well above its $20 million
carrying value may be warranted. This asset represents a meaningful
percentage of the current market capitalization, further
highlighting the inadequacy of using $11 as fair value in the proposed
transaction.
We are certain that the Board will secure a fairness opinion
stating that fair value lies in proximity to where it seeks to
justify this transaction. Despite that, we believe the range of
$13 to $15 is a reasonable
approximation of J. Alexander's intrinsic value per share that is
supported by a variety of valuation methodologies.
Limited Strategic Fit to 99 Restaurants
We believe J. Alexander's and the privately held Hillstone
Restaurant Group are among the best national operators of upscale
restaurant chains. The restaurant industry is extremely
competitive, and brands have great difficulty remaining relevant
amidst changing consumer preferences over time; however, J.
Alexander's is a quasi-institution in many of its markets and has
built tremendous goodwill amongst its customers. It has steadfastly
maintained a high level of service and food quality over time – in
excess of twenty years in some markets – and has earned permission
from its consumers to raise prices in order to offset cost
increases. Recently, J. Alexander's embarked on a growth phase
again, and given the Company's track record and strength of
operations, we believe the business is a unique and valuable asset,
especially to the right party who would understand and appreciate
its business model.
99 Restaurants operates in a very different area of casual
dining than J. Alexander's. Its units are located in the very
competitive Northeast corridor of the country. The average ticket
for 99 Restaurants was $15.82 in
2016, significantly less than J. Alexander's average tickets of
$30.41 and $44.13 for its two main concepts. Its customers
are much more price sensitive and value-focused than J.
Alexander's. Given J. Alexander's much higher food quality, coupled
with the fact that there is no geographic overlap with 99
Restaurants, we question the value of combining these two very
different concepts. J. Alexander's management team has also stated
that 99 Restaurants will continue to operate out of its existing
headquarters in Massachusetts
which will limit expense reduction opportunities.
FNF's initial decision to separate J. Alexander's from 99
Restaurants and other casual dining concepts just two years ago
supports the notion that there is little strategic rationale for
combining these two very different businesses. In documents filed
with the Securities and Exchange Commission at that time, FNF
shared its reasoning for spinning-off J. Alexander's. Excerpts from
this section are as follows:
- Holders of FNFV common stock will benefit from portfolio
clarity as separating our upscale dining concepts business from
FNF's other business will allow each management team greater
flexibility to pursue growth strategies and allocate capital
appropriately within their respective market opportunities;
- Upscale dining is a large and fast growing market with
different valuation methodologies, capital requirements and
marketing efforts, and we are well-positioned to capitalize on
this opportunity;
- The upscale dining industry has rebounded substantially since
2009, and FNF concluded that we are uniquely positioned to
execute against opportunities throughout the United States.
Source: J. Alexander's
Holdings, Inc., Form 10-12B/A, September 9,
2015, p. 67.
Questionable Timing
Since 2015, FNF has explored strategic alternatives for its
Restaurant Group which has significantly underperformed according
to its conference calls. FNF has also expressed its desire to
entirely exit the restaurant space, which makes us question why
they did not sell 99 Restaurants to a non-affiliated party that is
geographically or strategically aligned with the value side of
casual dining. It is also no secret that the casual
dining space has faced an extremely difficult environment marked by
rising costs, flat-to-declining comparable sales, and shifts in
dining habits over the past few years. Mr. Stout expressed
his view of the casual dining space on J. Alexander's Q2 2017
conference call, describing it as "a segment of the industry that's
in serious trouble." We concur, and while Mr. Stout considers
99 Restaurants an "exception to a lot of this" presumably due to
their strong same-store sales in 2015 and 2016, FNF has now
approached J. Alexander's to acquire 99 Restaurants at a time when
guest traffic and same-store sales have deteriorated and turned
negative for the first half of 2017.
We are concerned that 99 Restaurants may have reached an
inflection point where its ability to pass on rising costs to
customers is diminished. This is particularly worrisome given 99
Restaurants low average ticket size and concentration in the
Northeast where rising labor costs may begin to increasingly
challenge local operators. For a mature casual dining
restaurant chain that caters to price conscious diners, this trend
is troubling.
Deceptive Earnings Accretion Analysis
Management expects tremendous earnings accretion from the
proposed transaction. The following was shared in the merger
Q&A document:
"Had the transaction
occurred at the beginning of fiscal 2016, and using a set of
assumptions detailed in Exhibit 1 attached, we estimate that
diluted earnings per share would have been $0.70 on a combined basis, or a 49% improvement
over the $0.47 reported for the
Company for 2016."
Source: J. Alexander's
Holdings, Inc., 99 Restaurants Merger – Q&A, August 10, 2017, p. 2.
We believe management's assumptions are overly generous and
overstate the level of accretion. When a more realistic set of
assumptions are made, it appears to us that this transaction is
significantly less accretive to 2016 earnings than management has
presented, as it:
- Adds back costs associated with the profits interest plan that
are fully contingent on J. Alexander's share price;
- Does not reflect any costs related to a new equity incentive
plan for executives;
- Fails to show the real costs of eliminating the items that are
being added back;
- Ignores the fact that faster growing J. Alexander's is more
heavily burdened by pre-opening costs of new restaurants versus 99
Restaurants; and
- Does not contemplate the market may value the combined
operations differently when 99 Restaurants, a slower growing casual
restaurant concept, is added to J. Alexander's upscale
portfolio.
A large portion of the accretion from management's analysis is
coming from the elimination of costs associated with the profits
interest plan in the management consulting agreement with Black
Knight Advisory Services, LLC ("Black Knight"), an entity
controlled by William Foley,
Lonnie Stout, and other
FNF-affiliated individuals. It strikes us as disingenuous to add
back this expense and credit the transaction for the resulting
accretion considering this expense is contingent upon the Company's
share price. At the current price of approximately $10 per share, Black Knight is not entitled to
receive any shares of J. Alexander's as compensation, and as a
result, this expense is greatly diminished with or without the
transaction at this time.
The proposed transaction will accelerate the vesting of existing
options used to incentivize the management team. In its analysis,
management adds back the expenses associated with the options for
the executive team without contemplating a replacement plan. It
seems unlikely that J. Alexander's will be able to retain
high-quality executives at historical rates without replacing the
incentive instruments that will be eliminated in this transaction.
On that basis, simply adding back this expense and counting it as
earnings accretion in the transaction seems unrealistic.
In its exhibit, management failed to show the upfront costs and
charges that would be associated with eliminating Black Knight's
consulting fee (3% of adjusted EBITDA paid in cash annually) and
other accelerated items. This is a favorable assumption that
ignores the one-time charges that would occur in the initial
period.
Separately, management has stated that the transaction will be
"significantly accretive" to 2018's earnings. Management's
estimates for 2018 accretion are highly sensitive to same-store
sales assumptions, a metric that has trended down and turned
negative for 99 Restaurants in the first half of 2017. For
illustrative purposes, we estimate that a 1% to 1.5% decline in
sales for 99 Restaurants from 2016's results would lower earnings
per share results by $0.05 to
$0.11 or approximately 7% to 16% from
management's 2016 combined operations analysis.
Earnings accretion alone is not the sole determining factor of
whether or not a transaction is worth pursuing. Business quality,
growth prospects, and broader industry dynamics all play a material
role in how investors value any potential earnings accretion. On
this basis, we believe it is obvious that 99 Restaurants is a
significantly less attractive property than J. Alexander's. Any
subsequent compression of valuation of the combined company would
serve to lower the benefit of any potential earnings accretion from
the deal. Given J. Alexander's more favorable growth prospects and
singular focus on the more attractive upscale dining segment, we
believe adding 99 Restaurants to the portfolio will lead to a lower
valuation of the combined operations versus what would otherwise
prevail if J. Alexander's remained as a stand-alone concern.
Summary
At the time of J. Alexander's spin-off, FNF had broad discretion
to form the new company in any fashion it saw fit. FNF made a
conscious decision to structure J. Alexander's as a completely
separate entity and to include only its upscale dining concepts.
The decision to spin-off J. Alexander's in this manner created a
clear obligation for the Board to act independently and in the best
interests of its own shareholders.
The proposed transaction seeks to re-establish FNF's control of
J. Alexander's in a manner that is inconsistent with good corporate
governance and substantially unfair to the shareholders. The
liquidity needs of FNF and its affiliated entities, if any, have
absolutely no place in the J. Alexander's boardroom. We support J.
Alexander's decision to pursue a change in control transaction but
believe the Company's shareholders would have been much better
served by expanding the process to potential buyers beyond FNF. We
strongly suggest the Board take any necessary actions within the
parameters of the current ill-fated transaction to rectify this
untenable situation so that it may be free to pursue the interest
of other potential suitors.
In our view, engaging and properly incentivizing an investment
banker with no ties to FNF to conduct a formal auction process of
J. Alexander's would produce a materially better result than that
which you as directors and fiduciaries have negotiated on behalf of
shareholders. We suggest that the Board move forward quickly and
decisively so that it may reverse the damage and wasted time that
has resulted from the proposed transaction.
Please let us know if we can be of any help in this process.
Sincerely,
Mario D. Cibelli
Managing Member
About Marathon Partners:
Marathon Partners Equity
Management, LLC is an equity investment firm that deploys capital
with a long-term investment horizon.
Investor contact:
Mario
Cibelli, (212) 490-0399
http://www.marathonpartners.com
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