J.ALEXANDER’S (JAX) – ACTIVISTS SCREAM BUT SOME THINGS NEVER CHANGE, OR DO THEY?

Download PDF

J.ALEXANDER’S (JAX) – ACTIVISTS SCREAM BUT SOME THINGS NEVER CHANGE, OR DO THEY?

We wrote about J.Alexander’s (JAX) three and a half years ago, with the stock at exactly the current price, and that article is reprinted below. The conflicts of interest were clear, we didn’t think that the public shareholders would get a fair opportunity to share in the company’s fortunes, and they haven’t.

A controversial deal a year ago was rife with conflicts of interest: the proposed acquisition by JAX of Ninety Nine Restaurants, was owned by JAX parent, Fidelity National, and the deal was (appropriately, in our view) voted down. With the stock underperforming the market and peer group by a large margin, Ancora (owner of 9.7%) has made a cash buyout proposal at $11.75 which the Company has turned down. Another large shareholder, Marathon Partners (owner of 6.6%) has called for a full auction process. The Company, has argued that $11.75 is not enough, but they have publicly disclosed no effort, other than continuing emphasis on better operations,  to better that price.

At the moment, in an attempt at better “governance”, Ancora is urging shareholders to vote against re-election of two board members (Timothy Janszen and Ronald Mggard), and Institutional Shareholder Services (ISS) has backed that suggestion. The Company is resisting this change, citing that “Tim is the CEO of our largest shareholder and Ron has been investing in and managing restaurant companies for decades”. (Tim’s private-equity firm is a large shareholder of Ninety Nine Restaurants and Maggard was on a Board at a Fidelity National subsidiary, Newport Global Advisors.)

Bottom Line:

While public shareholders have not benefited, management and affiliates of Fidelity National have profited from the marketability for their shares as they have become vested. At this point, it seems that the clock has run out for management and their obviously sympathetic Board of Directors. Adjustments to “governance” will be have to made if the Company remains publicly held. June 20th is the shareholder meeting so shareholder wishes will be made clear. Since Newport Global Advisors owns only 11.08%, it seems likely that the two directors in question will not be re-elected. Some Companies should not be public, and this is one example. JAX has made no money for public shareholders over the last four years. Perhaps the next four years will be different

Below article is reprinted from November 9, 2015, when JAX closed at $10.47

Opportunity often presents itself when companies are spun out of other diversified holding companies, in this case JAX out of FNFV.  Generally not a lot of shares of the spinoff are distributed relative to the holdings of the previous parent, and there is not a great deal of analyst coverage to the newly public vehicle. While there is an S-1 disclosure document filed with the SEC, very few observers will take the time to analyze the extensive (in this case over 150 pages) document.

JAX has been publicly traded only since 9/15/15 and their well-regarded restaurants, averaging $5.6 million for their J.Alexanders/Redland Grills and $3.4 million for the Stoney River Steakhouses could attract investors. While the Company has said little until their earnings report and conference call just last week, the third quarter earnings did not undermine the numbers presented in their filing documents dealing with the spinoff. Their third quarter report basically followed in line with the numbers in the S-1 prior to the spinoff and the company repeated the guidance issued 9/15 of about $26 million of EBITDA and $0.40 of EPS for the 2015 calendar year. Based on that, at $10 the company has a market value of about $160 million or a little over 6x trailing EBITDA and 25x 2015 earnings. Management gave no further guidance relating to 2016 other than indicating that the growth in units will be about 10% on the base of 41 current units. We don’t know what the earnings power will be but Lonnie Stout (CEO) has been there for many years and presumably the profit margins and EPS will continue the steady progress of the last several years while the Company was privately held. As a vote of confidence, the Company announced their intention to buy back $15 million of stock over the next three years.

Here’s the problem; as disclosed in the presentation on the company website dated 9/15 “Certain officers and directors of FNFV and J.Alexander’s Holdings, Inc. (JAX) …..formed a Management Consulting Company called Black Knight Advisory Services”(BK). There is a tremendous amount of legal jargon surrounding the new relationship between JAX and BK, but it is clear that BK will get 3% of EBITDA, plus reimbursement of out of pocket costs. The rational for this is the “complementary services” that BK will provide, with their experience in mergers, acquisitions, corporate governance, strategic planning, etc.etc. This will go on for at least 7 years. More complex is an arrangement whereby BK will receive what looks like an option on 10% of JAX, which will vest over a period of three years. This was described in the 9/15 presentation, which is posted for investors on JAX’ website. I hope to talk to Lonnie Stout, CEO, later this week, to see if I have misinterpreted the arrangement between BK and JAX in any way.

Of further interest to me, and presumably to investors is the compensation arrangement for management, if employment is terminated with or without a “change of control”, that would pay out a total of about $6.7 million (about $4.5 million to Lonnie Stout, CEO). It seems that this is quite a large amount of money to pay out for a company of this size. Referring back to the “complementary services” that BK will be providing, 3% of $25,000,000 is $750,000 annually for services that could well be purchased more cheaply.

In summary, while FNFV was gracious enough to spin off JAX, thereby creating value for the previous parent’s shareholders, it is not exactly an “unencumbered” interest the new shareholders receive. On the surface, JAX looks inexpensive enough to be interesting. However, the above described self-serving features of this situation do not advance my desire to become a shareholder of this new public company.

Roger Lipton

Download PDF