J. Alexander’s Holdings is working to convince skeptical shareholders that its acquisition of Ninety Nine Restaurants is a good deal for the company’s immediate and long-term growth and not a gift to its former owner, Fidelity National Financial.
It’s a complex deal that has received little attention, given the company’s small size and the lack of coverage of J. Alexander’s from analysts. But it would more than double the Nashville-based company’s size and extend its reach into the Northeast, where it currently has no restaurants.
Yet, concerns about the way the deal is structured have drawn the ire of activist shareholders that are opposing the acquisition.
J. Alexander’s announced in August that it would buy Ninety Nine Restaurants from its owner, Fidelity, in exchange for company stock.
The acquisition more than triples the company’s unit count—J. Alexander’s operates 19 J. Alexander’s locations, 12 Redlands Grills and 12 Stoney River steakhouses, while Ninety Nine operates 106 locations, primarily in the Northeast.
From a revenue standpoint, it would more than double the size of J. Alexander’s. The combined chains generated $520 million in revenue in 2016. J. Alexander’s alone generated about $220 million in sales that year.
The company argues that the deal would give it a chain with a smaller average check than its upscale concepts—Ninety Nine has a $15.85 average check. By comparison, J. Alexander’s has a $30.41 average check. J. Alexander’s also says that Ninety Nine is “insulated from certain competitive challenges.”
But shareholders are taking issue with the sale because the stock that J. Alexander’s is paying to get Ninety Nine would give Fidelity more than half of the company’s stock once the deal is complete—meaning Fidelity would own a controlling interest in J. Alexander’s.
Marathon Partners Equity Management, which owns 6.3% of J. Alexander’s stock, says that the deal essentially gives Fidelity, a title insurance company, control of the company without a “premium.”
The stock that J. Alexander’s is paying to Fidelity is valued at $11 per share. Marathon noted in a presentation that the company had been repurchasing shares for $10.47, meaning the company felt it was undervalued at that level. A change-of-control deal, the activist argued, should value the company’s stock at $13 to $15 per share.
And Fidelity is a former owner of J. Alexander’s, having acquired the company in 2012 and spinning it off to shareholders three years later. Fidelity’s chairman is Bill Foley, who was chairman at Carl’s Jr. owner CKE Restaurants when it bought Hardee’s in 1997.
Marathon argues that the J. Alexander’s board was “conflicted” at the time of the announcement: All six members of the board are affiliated in some fashion with Fidelity, mostly as board members at subsidiary Fidelity Newport Holdings. That includes Lonnie Stout, J. Alexander’s CEO.
Marathon complained in a presentation that the J. Alexander’s board agreed to a “no shop” provision for itself, meaning it wouldn’t seek other potential buyers. Such agreements are “extremely unusual,” Marathon said, arguing that the provision kept J. Alexander’s from exploring other shareholder-friendly transactions.
But J. Alexander’s says that the deal would be beneficial to the company and its shareholders. And it says Fidelity would get only one seat on its board, which would go to Foley.
The company argues that it received a “premium valuation,” while getting Ninety Nine Restaurants at a lower valuation.
J. Alexander’s said the acquisition would give it restaurants in New England and New York where it currently doesn’t operate.
The company says its larger size would help it save as much as $2 million in combined costs while increasing the company’s total scale and growth opportunities.
For the deal to be approved, a majority of “disinterested shareholders” have to give their blessing in a vote.
For now, at least, shareholders don’t appear to be giving J. Alexander’s the higher value that Fidelity is supposedly getting for the shares: The stock is trading at below $9.50 per share, which is somewhat lower than the price it was trading back in August when the deal was announced.
The stock is down 29% since peaking at more than $12 a share back in October.