Finally, we have elected to postpone the spinout of ABRH as we continued to monitor brand performance and evaluate alternative monetization strategies..
The spinoff was brought up a number of times during the conference call and naturally, market conditions were brought up again:
As we look at the marketplace and, clearly, in the fourth quarter and then more recently, rolling into here, the equity markets have been clearly displaced. I mean, we could be patient. We’re relatively unlevered. I just — I think we’re under 1x net levered right now. We have multiple brands. They’re held in LLCs. We have the ultimate flexibility in how we pursue monetization strategies. At one point, there was a thought when — to have a multi-brand strategy, but we’re coming to the belief that maybe more focused family dining and casual dining in their own segments might be a better way. But the good news is we’re not under any pressure. We’re — we have good — we have modest leverage on the business. We’re still making investments in terms of image enhancements of the restaurants. We’re going to spend 2016 focused very directly on brand performance and making sure we’re running the business as efficiently as we can. And so that’s going to be the focus of us as owners of the business, to get these things running even better than they are now. And we’ll see what happens with the equity markets. But the good news, we’re not under any time pressure. The business are in solid financial footing. But I think we could do some — make some investments and do even better in terms of our margins.
Basically, they feel they can improve the businesses (hopefully leading to a better valuation/rating) and there is no rush, especially during a lousy market. Seems plausible, but of course, the story took another turn during a later line of questioning:
We saw the performance of the J. Alexander’s stock. And J. Alexander’s is a fine restaurant chain, well-run, great EBITDA growth, opening a modest number of restaurants per year, all of them are performing well. But by doing the spinoff, it’s become a little bit of an orphan. And so when we saw the way J. Alexander’s performed in the market, which was a little different than the Remy performance, we just decided not to do an IPO or not to do a spinoff of this restaurant, these individual restaurant chains but to look for other alternatives and in the meantime, see if we can’t carve some expenses out in terms of some corporate overhead. So that’s kind of the story on the restaurants. They’re all great chains that have improved a lot. Ninety Nine, in particular, is showing same-store sales growth of 4% to 7%. So they’re doing fine. It’s just the market is not quite right.
So in addition to market choppiness, it also sounds like J. Alexander’s stock performance also played a role in postponing the restaurant group spinoff. JAX is basically flat since the spin, but it has only been independent for about 5 months. That feels like way too short of a timeframe to really draw any meaningful conclusions.
Perhaps the company is considering other monetization options? After all, the company did sell one of its restaurant brands, Max & Erma’s, for a small amount of cash during the past quarter. Management once again mostly threw cold water on that route for tax reasons:
We have a situation of having a very low tax basis in these 3 restaurant chains, but that doesn’t mean that we can’t create a situation that we merge with another entity, a public entity or a private entity And so all things are on the table with these 3 restaurant chains…
Perhaps our old friend the Reverse Morris Trust to the rescue?
Interestingly, the company has been rapidly building up a stake in Del Frisco’s Restaurant Group (DFRG) and is now its largest shareholder with ~12.4% of the shares outstanding. When asked, here was their investment rationale:
We like the brands. We — they have 3 really good brands. We’re — the stock has been really hammered over the last 6 or 8 months. They haven’t quite met some of their expectations, and relative to revenue growth and the Del Frisco’s Grille concept, has not met expectations in certain locations. So I guess what I would say is we view it as a very attractive investment. We feel like we’re not novices in the restaurant business and that we have the ability to help restaurant companies improve their performance, although we have not yet contacted management or — nor have we talked to the company in any fashion. But we do like the investments and we feel like the concepts are good solid concepts.
Very interesting that they jumped right into a new big position in another restaurant group. Later on they talk about eventually having talks with management so it seems like the Del Frisco’s investment could be just a small piece of a larger plan for the restaurant space. Perhaps the JAX spinoff experience led them to believe in having more of a platform restaurant business as opposed to offering the market specialized choice? Wouldn’t that be ironic?
Disclosure: Author holds no position in any stock mentioned.
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