ALJ Regional Holdings ($ALJJ) — Merger Proxy Notes (3/20/22)

Reviewing the merger proxy for the sale of Phoenix Color. Here are a collection of notes and comments…

Sale Price…

Sale price is $134.775m which is ~6.4x EBITDA — likely a good outcome for this business based on management projections

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How will they use the cash…

This seems to be the ultimate post-close question with ALJJ. Here’s what the proxy had to say:

Anticipated use of Proceeds from the Phoenix Color Sale (see page 66)

We estimate the Company will receive total gross proceeds of approximately $134,775,000 upon consummation of the Transaction (see “Proposal 1: The Phoenix Color Sale Proposal—The Stock Purchase Agreement—Purchase Price” beginning on page 48 of this proxy statement).

The Company expects that it may use these proceeds to pay transaction expenses, to pay down any remaining debt of the Company, to purchase additional assets or businesses, to buy back the Company’s stock and/or for any other purpose that our Board of Directors deems appropriate.

Once we have the appropriate level of certainty with respect to the amount and timing of sources and uses of cash from our strategic actions, we may take the action to commence returns of capital to stockholders. We estimate that up to $110,000,000 of excess cash could be available for return to our stockholders

At a recent $2.65 share price and 55m shares outstanding = $145m market cap. A $110m capital return would net shareholders 75% of the current share price!

Pro-forma balance sheet…

Incorporating both the Faneuil sale and Phoenix sale — all debts will be repaid and the remaining net cash balance looks like $138m ($2.54 per share). There’s another ~$27m in working capital (A/R less A/P).

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Pro-forma income statement…

There’s a 3-month and full-year P&L to look at. As a quick recap — the RemainCo will consist of various pieces of the Faneuil business. Run-rate sales from the latest quarter look like $130m annually and FY21 RemainCo sales were $173m (i.e. the latest quarter saw a decent revenue decline, which we already knew from the latest 10-Q).

4Q21 pro forma P&L

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FY21 pro forma P&L

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Both the full-year and quarterly picture indicate that RemainCo is running an operating loss (though we don’t know depreciation or capex).

Other notes…

  • Faneuil CEO Anna Van Buren is out following the transaction closing (p. 34). Makes you wonder how the management of the still quite large Faneuil business will be handled… On top of that, purchaser TTEC has a call option to acquire the remaining Faneuil verticals over the next few years!
  • Ms. Van Buren’s employment with the Company and its subsidiaries will terminate as of the closing of the Faneuil Transaction.
  • Included in the Faneuil sale was a $15m escrow balance that should eventually come back to ALJJ, it’s unclear whether this is incorporated into the pro-forma balance sheet?
  • CEO Jess Ravich holds a $6m convertible note (hence the 55m share count instead of the reported 42m)… In the latest 10-Q this rolled up into the term loan balance. The pro forma numbers highlight this as a use of cash but Ravich would almost certainly convert at the $0.56/share price instead of taking the loan repayment. This could be some extra cash not included in the projection above.
  • Maybe it’s a cop-out valuation but pro-forma book value is close to $180m (includes $11m intangibles) and that’s $3.25 per share. This seems like a good price target until we get a clearer picture.
  • Shareholders are very likely to get some combination of buyback, large tender offer, or special dividend perhaps within the next few months.