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J. Alexander's-Ninety Nine merger dealt a big blow

A pair of advisory firms are recommending that shareholders vote against the deal.

A pair of proxy advisory firms are recommending that shareholders vote against a proposed merger between J. Alexander’s and Ninety Nine Restaurants, saying that executives didn’t do enough to analyze strategic alternatives before recommending the deal.

The recommendations, from Institutional Shareholder Services and Glass Lewis, are a big blow to J. Alexander’s executives that are pushing for the merger.

That’s because shareholders pay close attention to the firms’ recommendations when voting on critical issues.

At issue is a proposal to merge the publicly traded J. Alexander’s with Ninety Nine. The Nashville-based J. Alexander’s, which operates a trio of upscale casual concepts, would buy Ninety Nine in an all-stock deal valued at $199 million. Ninety Nine operates 106 casual-dining locations, mostly in the Northeast.

But Ninety Nine is owned by the title insurance company Fidelity National Financial, which would gain a controlling interest in J. Alexander’s if the deal gets the go-ahead.

An activist shareholder, Marathon Partners Equity Management, has come out against the merger, arguing that it gives up control of the company to Fidelity without a “premium.”

ISS, the largest and most well-known of the proxy firms, says that J. Alexander’s board “does not appear to have thoroughly explored other alternatives.”

“Voting to oppose the merger is shareholders’ last chance to avoid becoming minority shareholders of a controlled, small cap company,” ISS said.

Marathon believes that such a role would hurt the company’s valuation and would give those investors reduced input in decisions.

The firm said that J. Alexander’s could have looked at other alternatives, such as accelerating unit growth, selling the company or changing its capital structure. ISS is also worried that six of the board’s directors had conflicts as board members of a Fidelity subsidiary when it began exploring the deal with Ninety Nine.

ISS also said that there doesn’t appear to be a strategic fit between the two companies. The two companies do not have overlapping markets—J. Alexander’s being primarily in the Midwest and the South, while Ninety Nine is in the Northeast. And their target audiences are different, with J. Alexander’s average check at least $30.41.

Ninety Nine, meanwhile, has an average check of $15.85.

On Monday, J. Alexander’s said it “strongly” disagrees with the recommendations.

“The J. Alexander’s board and management team have worked diligently to identify and execute opportunities to drive growth and value for our shareholders, and we are confident that the proposed transaction with Ninety Nine Restaurants represents a significant opportunity to do so,” the company said in a statement.

The company argues that the combination “would create a larger and more diversified restaurant holding company.”

J. Alexander’s stock has risen 9% since Friday, when word of the proxy firms’ recommendations were released.

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