Citing poor shareholder returns despite relatively consistent positive sales, activist shareholder Ancora Advisors has offered to buy Nashville-based casual-dining chain operator J. Alexander’s, saying the company would be better off private.
Ancora offered to buy J. Alexander’s at $11.75 per share, which would be $172 million based on the number of company shares outstanding. The per-share price would represent a 24% premium on J. Alexander’s stock dating to Ancora’s initial SEC filing last month.
Ancora has been a large shareholder of the company and currently owns 8.6% of the company’s stock. The investor turned activist in March, which has sent J. Alexander’s shares soaring.
In a letter to the board that served as a blistering critique of the company’s recent moves and stock price performance, Ancora CEO Fred DiSanto said that J. Alexander’s is too small to get enough attention from investors as a public company.
“With a restaurant base of 48 units, [J. Alexander’s] is simply too small to effectively leverage its corporate overhead and public company costs,” DiSanto wrote. He noted the company has “averaged 1.25 new unit openings per year since 2015. We do not believe that this limited pace of growth requires” J. Alexander’s to access public capital to fund expansion.
DiSanto also said that J. Alexander’s should not make acquisitions to get large enough to get the attention it wants. “We are strongly opposed to the company attempting to justify its existence as a public entity through strategic acquisitions,” he wrote. “The company has no currency to do this, and at its current multiple, deals will most certainly be highly dilutive to shareholders.”
Fidelity National Financial took J. Alexander’s private in 2012 but spun the company off three years later under pressure from investors.
J. Alexander’s shareholders defeated a proposal last year to merge the chain with Ninety Nine Restaurants, in part amid concern that the plan would have handed over control back to Fidelity, which owns Ninety Nine.
Since the company returned to the public markets in 2015, J. Alexander’s has had positive same-store sales in 11 of 13 quarters at its flagship J. Alexander’s concept and 12 of 13 quarters at Stoney River. Revenue increased 14% over that time.
But, DiSanto wrote, “total shareholder returns over this period have been terrible.”
He blamed the problem on decisions by the management and board that have been “highly unfriendly to shareholders.”
DiSanto cited the “misguided” Ninety Nine deal, the company’s scale and a consulting agreement with a company called Black Knight Advisory Services, which Fidelity controls. The consulting agreement “created a perception of self-dealing and a board severely lacking independence.”
Black Knight members, DiSanto wrote, included various officers of Fidelity as well as J. Alexander’s departing CEO, Lonnie Stout, who owned an 11.8% interest in the consulting firm.
DiSanto said that Black Knight received more than $7 million from J. Alexander’s over the life of the deal.
“The notion of a fully compensated CEO also participating in a shareholder-funded management consulting agreement seems questionable at best and rife with conflicts of interest,” DiSanto wrote.
DiSanto also wrote that the Ninety Nine Restaurants transaction was “riddled with conflicts of interest.” That included J. Alexander’s board members, who also served on the board at Fidelity Newport Holdings, the Fidelity subsidiary that owned Ninety Nine.
Another J. Alexander’s director, Timothy Janszen, is CEO of Newport Global Advisors, which owns 30% of Ninety Nine Restaurants and would have received $54.3 million in J. Alexander’s stock in the deal.
“This transaction proved without a doubt that management and the board were more interested in self-dealing than looking out for the interests of [J. Alexander’s] public shareholders,” DiSanto wrote.