ALJ Regional Holdings ($ALJJ) — Initiation (1/15/22)

Price: $1.70 Market Cap: $92m Valuation: 3x EBITDA Category: General

$ALJJ 10yr chart

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This was a fairly popular micro-cap stock several years ago that had a meteoric rise from 2012-2016 and then lost steam since then as acquisitions and fundamentals failed to keep pace…

ALJJ has 3 divisions:

  1. Faneuil — call center services; acquired in 2013 for $53m
  2. Phoenix Color — book binding & printing, book covers, packaging and labels, etc.; acquired in 2015 for $88m
  3. Carpets N More — flooring retailer in Las Vegas; acquired in 2014 for $5.25m; sold in Feb 2021

A little history…

Before getting into why it’s an interesting stock to own today, let’s look back at the history of this thing…

ALJJ has been a public company since 2001. Formerly known as failed dotcom business Youthstream Media. Jess Ravich took over as CEO in 2006 (and remains in that position today).

They acquired a bankrupt steel mill in Kentucky, sold it for a handsome profit, repurchased half of shares outstanding for $25m through a tender offer (from 57m outstanding at 9/30/12 to 27m at 9/30/13), then started down the acquisition path of the current mix of businesses we see today…

Balance sheet transformation…

Right at the end of 2021, ALJJ announced they would sell a portion of the Faneuil segment for $140m to publicly traded TTEC Holdings ($TTEC). On top of the $140m they’ll have a shot at another $25m through an earn-out. The deal should close in calendar Q1 2022 (i.e. very soon).

Total debt at 9/30/21 is right at $100m so the cash from this deal could leave ALJJ with net cash of close to $40m depending on transaction costs. NOLs should prevent much taxable impact from the sale…

So we have a stock going from 3-4x leverage the past few years to a net cash position in just a few months… That’s a pretty dramatic balance sheet turnaround!

The key question(s) now become:

  • What do the pro-forma segments look like?
  • What will they do with the cash?

My thesis…

I’ll try to answer the questions above…

Starting with what’s left at ALJJ — they’ll continue to operate Phoenix and “part” of Faneuil.

  • Phoenix — EBITDA has been essentially flat for 6 years at $20m (though this could be viewed as a positive for stability sake). Verso Paper, perhaps a lower quality business than Phoenix, has a net cash balance sheet and trades at 4x EBITDA. It’s likely Phoenix is worth 5-6x. This segment is ideally run purely for cash generation.
  • Phoenix segment

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  • Faneuil — I don’t think we have enough information to properly assess the pieces of Faneuil that will be left behind (utilities, non-health benefit exchange, commercial, and some other stuff). Based on some really old filings (dating back to 2015), the retained businesses are likely going to be 20% or less of segment revenue…
  • Faneuil segments retained

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    9M 2015 sales by Faneuil vertical

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    The revenue performance may have been the attracting factor for TTEC; but this segment seems erratic… especially for a company that was previously carrying plenty of debt…

    Faneuil segment

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  • Corporate — Corporate costs were historically $3-3.5m per year but jumped to $6m in 2021.

It’s possible that the retained portion of Faneuil generates enough EBITDA to offset corporate costs, leaving $20m of EBITDA from Phoenix. At a 5-6x multiple = $100m EV + $40m net cash would equate to $2.60 per share using 54m shares outstanding.

So what will they do with that cash??

History says they’ll look for an acquisition…. There’s little to analyze or debate here other than to acknowledge it’s a likely outcome at some point.

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My hope is they’ll use the cash proceeds to repay all debt, which is quite expensive with $10m+ annual interest costs, but it’s possible they hang onto the $100m existing debt and attempt to use the $140m cash for a new acquisition…

What I don’t like…

There are a few things that rub me the wrong way here…

  • Jess Ravich essentially controls the company with >40% ownership — He owns a $6m convertible note that converts to 11m shares (!!) which seems egregious though the company was in distress when it was issued
    • I’ve included the 11m convertible shares into the diluted share count (54m)
    • As a side note — Jess has issued other notes, preferreds, etc. to the company in the past; including during the successful run with the KY steel mill
  • Business quality seems so-so —
    • It seems unbelievable that ALJJ could fetch a $140m sale price on Faneuil given the erratic earnings (though solid top-line performance)
    • Phoenix has had up-and-down revenue performance and essentially flat EBITDA for 6 years now ($20m)…
    • I would be skeptical of anyone trying to place a big multiple on this stock… Also, they should really avoid high leverage with a mix like this…
  • Finance leases — ALJJ had been spending $3-4m each year on finance leases which act as a stealth version of capex… That’s a lot of money for a company with less than $20m in annual cash flow! This seems to have ended in 2021 where they had zero capital lease purchases.
  • Dilution — The long-run progression of share count is interesting to study… after the mega tender offer that retired ~half of shares post-2012, ALJJ has been quick to issue new shares via acquisitions and dilutive financing. Maybe the worst is in the past since the balance sheet is no longer in distress?
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  • Acquisitions — Has ALJJ learned any lessons from the string of acquisitions dating back to KES?? If you purchased shares in October 2013, after the cash windfall from the steel mill sale and right before the Faneuil acquisition, you’d still have underperformed the S&P 500 despite a great IRR on that deal alone ($140m return on $53m investment over 8yrs).
  • ALJJ vs S&P 500 since October 2013

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Final thoughts…

This is a sub-2% position for me until I know more about 1) what they’ll do with the cash; and 2) what the retained portion of Faneuil looks like. Definitive answers to those questions could make this a lot more interesting.

At today’s price of ~$1.70 / $92m market cap, you’re essentially getting the Phoenix business for less than 3x EBITDA with a net cash balance sheet.

Sure, shares have already rallied some 40% from ~$1.20 to $1.70 since the Faneuil divestiture announcement came out but there’s plenty more to come once the sale closes and the company collects another quarter or 2 of cash generation…