The company still maintains a number of restaurant businesses within American Blue Ribbon Holdings (brands include O’Charleys, Ninety Nine and Village Inn) and it had previously announced intentions to spin off that business by the end of this year. Due to ‘market conditions’ though,that is no longer the plan. According to Chairman Bill Foley (all quotes from CapIQ transcripts):
We are currently reevaluating our timing on the planned spinoff of American Blue Ribbon Holdings given market conditions. We’re also considering separates spinoffs of our family and casual restaurant segments. As we move through this process, we will provide updates on our decisions and progress as we are able.
‘Market conditions’ is always tossed out whenever something is delayed, but later comments during the Q&A session make it seem that the decision to delay the spinoff may actually be more of a shift in strategy:
Chas Tyson
Guys, just wanted to get a little bit more color on the ABRH, holding back on that. Is that purely, I guess, market conditions? Or is it — have anything to do with performance and comps? Or I mean, how are you guys thinking about that?
William P. Foley
As we started analyzing the ABRH, we really have 3 distinct businesses. We’ve got the Ninety Nine Northeast restaurant chain, which is Ninety Nine Steakhouses. We have the O’Charley’s business. We have Max and Erma’s, which we’re in the process of disposing of. And we finally have our family business, which is Village Inn, Bakers Square and the pie business. And as we worked through our J. Alexander’s spinoff, we started thinking more about ABRH. And should it really be distributed in the form of one company? Or should it possibly be 3 companies that are more akin to their own characteristics? So family dining has got a set of characteristics, and O’Charley’s is casual, but it’s in sort of the southeast and midwest. And then Ninety Nine is a northeast chain. So we’re really evaluating whether or not we want to do 3 transactions, 1 transaction, 2 transactions. And the other complicating factor is that if we were to do 3 transactions, we need to have 3 years of audited statements for each company. So I think it’s 3 or 2, Brent.
Brent Bannister Bickett
Right.
William P. Foley
Yes, so we need 3 years of audited statements, so we have to go back and kind of reconstruct those audited statements. Because right now, we were audited, but we’re audited on a consolidated basis. So that’s kind of our — the timing is to get these audits done and then to keep on going through this evaluation process, what makes the most sense for our shareholders and what will give them the most value. And we know that when we do spin these companies off and distribute them, they’re going to go through a flat period, just like J. Alexander’s is going through, despite the fact that J. Alexander’s is a high-performing, upscale dining concept with a fine steakhouse concept associated with it being Stoney River. It’s gone through a little bit of a lull because we distributed around $10 or $10.50, and it’s just under $10 as the market stabilizes and people recognize the quality of J. Alexander’s. So those are all things that are in our thought process.
Chas Tyson
Okay. So is it fair to say that it’s kind of more strategic considerations from your end as opposed to anything the market is dictating to you?
William P. Foley
Yes. I’d say it’s strategic, because these will be spinoffs, tax-free spinoffs, to our shareholders. And the more stock we buy back, the more shares each shareholder gets. So we’re continuing to buy stock back.
That was a pretty quick about face on the logic front and it would be interesting to hear more about the thesis and value realization behind pursuing multiple spinoffs. After all, each one will incur transaction costs (ex. getting those audits done vs. the consolidated already ones on file) and each individual business will ultimately have to carry its own individual corporate burden instead of sharing a centralized corporate parent.
Management was also asked about a potential sale and although it is a possibility, given the low basis of their investment, it’s unlikely:
Jason Scott Deleeuw
And for American Blue Ribbon, would it make sense to try to sell the 3 businesses rather than try to spin the businesses, sell them to a strategic or someone like maybe a private equity buyer?
Brent Bannister Bickett
And that’s obviously always a possibility and something that we’d look at. We kind of have a little bit of — I don’t know that you want to call it a high-class problem. But we bought these businesses well, and we’ve done a dividend recap already. So if you look at our tax basis in these businesses, it’s extremely low. So you got to think about, from a value realization perspective to our shareholders is, if I have to take 0.6 of whatever strategic or financial sponsor would buy one of our businesses for versus what it might be worth in the marketplace, I mean, we’re highly confident that we could realize more value by distributing these businesses rather than paying the government 40% of our gain. And so while we’re still clearly open to the idea, and certainly, we’ve had some inquiry with respect to that, we — it’s going to be a high hurdle to have to lose 40% of your gross proceeds to the government.
I guess the buyout premiums are cooling off. Or perhaps management is trying to figure out how stick their consultants into the business and maintain streams of cash flows like they did at J. Alexander’s. Just kidding.
Whatever the reason, the current spinoff plan has been scrapped and it seems that the company has had a change of thinking in its strategy. Ultimately, there will be at least 1 or as many as three different restaurant spinoffs coming from Fidelity at some point in the future. In the meantime, the company is using its large cash position to buy back stock hand over fist. Management claims to be maxxing out its daily transactions due to belief that the stock is trading below BV. While they admit it is possible they could pursue more deals, it seems that their own stock is the most attractive asset on the market to them. While this is just a tracking stock (which admittedly I haven’t looked at in much depth), this is the type of disciplined capital allocation that you like to see – buying assets on the cheap, selling them high and even looking internally when there is a big discount to BV. Quite rare to see.
Disclosure: Author holds no position in any stock mentioned.
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