Current price: $10.7
Acquisition Offer: $11.75
Expiration Date: TBD
This idea was published by Rangeley Capital. I find it intriguing and would recommend reading their full post. Below I am sharing the core thesis with some additional thoughts.
On the 8th of April restaurant chain JAX received unsolicited and non-binding offer from Ancora Advisors (8.6% shareholder) at $11.75/share in cash. Their letter reads more as a proxy fight statement with a number of accusations of management’s missteps and conflicts of interest rather than an acquisition proposal. This was most likely intentional as it is not clear whether Ancora really wants to acquire JAX or whether this is just a way to put the company in play. Ancora’s proposal quickly received support from another activist Marathon Partner’s (6.6% shareholder) only to be outright rejected by the board arguing that the offer undervalues the company – although just a year ago the same board agreed to a merger with 99 Restaurants at $11/share valuation in all stock deal (voted down by shareholders).
A week later Ancora issued another letter refuting company’s claims and then couple days ago launched a symbolic proxy fight encouraging shareholders to withhold their votes from reelecting 2 of the directors in the upcoming annual meeting (these directors will still be elected anyway as there are no other nominees, also one of them is the largest 11.3% shareholder in the company).
So that is the brief timeline leading to today. Shares currently trade at pre-announcement levels, albeit in the meantime somewhat negative / neutral quarterly results were released. The spread likely exists as Ancora’s words/actions do not indicate it has strong intentions to proceed with its own bid.
But the story is still very fresh and the play here is based on the following assumptions:
No. 1) JAX sale (solicited or unsolicited) is likely to attract a number of interested parties. This assumptions is backed by historical interest in the company. In 2012 when JAX was taken private by Fidelity National Financial (FNF) the sale process received multiple bids and FNF was forced to raise its offer couple of times (later in 2015 FNF spun-off JAX back to public markets). J. Alexander’s small size, stable financials, real estate ownership and low financial leverage coupled with unscaled and mismanaged operations are likely to be attractive for both private equity and larger restaurant operators.
No.2) JAX shareholders will either force management to sell the company or shareholders will force management change. Company’s execs are clearly entrenched, have conflicting interests and are enriching themselves at the expenses of shareholders. 3 out of 4 top execs named in the 2012 annual report are still running the company today, they survived through FNF buyout as well as subsequent spin-off. So forcing their hand might prove difficult especially keeping in mind that one of the directors is the largest shareholder (11.2% ownership). However, when a year ago board recommended value destructive merger with 99 Restaurants, JAX independent shareholders rejected it, albeit only by a narrow margin. Also back in 2012 company’s sale process coincided with the proxy fight by activist Privet, which potentially caused management to finalize the sale process faster facing the risk that Privet will force board change. With 15% of shareholders already vocally pushing for the sale and accusing management of value destruction, gathering the required majority does not seem like a stretch.
No.3) And the last and probably the most important assumption is that JAX is undervalued, which gives the upside to current prices as well as confidence in holding the stock until the situation gets resolved one way or another. In the initial letter Ancora outlines undervaluation relative to peers – JAX trades at 6.1x 2018 EV/EBITDA vs 10x for the peer group median despite comparable margins and lack of leverage (see table below). On top of that company owns 37 out of their 46 restaurants, which based on Rangeley’s estimates is another $50m in value (but margins would somewhat deteriorate if properties are sold and leased-back).
Probably the main reason for undervaluation relative to peers is that JAX spends most/all of the generated EBITDA on capex (growth and maintenance) and these incremental investments failed to generate any additional returns to shareholders despite steady growth in revenues and same store sales. This problem is partially due to lack scale and partially due to mismanagement, both of which would be addressed by selling the company.
All in all, given large valuation discount relative to peers, stable financial performance as well as incremental value of the real estate I feel comfortable holding JAX stock while waiting to see how assumptions No.1 and No.2 play out. As for timeline, the nearest event will be shareholder meeting on the 20th of June where shareholders will signal their trust with the board. I do not expect too much from this, but if high percentage of votes are withheld indicating support for the activists, then Ancora might push for the full board overhaul. Any other bids are unlikely to surface till the meeting or before board begins dialogue with Ancora.