OTCPK:BOBS: Conference Call Does Not Provide the Answers We Seek
First, I want to ask an open-ended question… if the external factors such as exchange rates, inflation, and increasing competition are so bad to the point where management actually hires and pays third-parties to recommend you sell them your shares, then why do they want them so badly in the first place? Why did management host a video conference today to pitch the deal to investors after previously having zero exposure to the investment community via conference calls? Why are the shares worth $15.50 to us, but more to them? It is because management knows the shares are worth over $30. I performed a much more succinct valuation analysis in my original write-up on the company, which can be seen here. I contend that my analysis is much more accurate than the one provided by BFFC's third-party advisor, which can be expected as BOBS is unknown and delisted and hence, the advisor does not feel they are putting their reputation on the line by failing to protect shareholder interests.
Today, Brazil Fast Food Corp. (OTC: OTCPK:BOBS) hosted an "investor conference call" to discuss the go-private transaction. The call, to be frank, was a complete joke: management cherry-picked questions from investors and chose only the most cookie-cutter questions to answer. The tougher questions I asked were sliced and diced into simplified versions of what was meant to be asked, and at some points, it appeared management was "answering" fabricated questions straight from a script it had previously prepared. For the tougher questions it hose to answer, management appeared to be reading directly from the proxy statement (specifically its third-party advisor's shoddy valuation analysis). Management took several 5 minute breaks to "gather questions from the queue", more likely to have their helpers look at the questions and prepare scripted answers (other people were seen walking in back and forth behind the table management was seated at during the call).
Here are some of the things management said on the call:
"We are sure that they [board members] are really independent members of the committee."
"The special committee carried out a rigorous sale process."
"They insisted on important provisions in the transaction."
"Being private allows speedy decision making and what is right for us medium and long-term, and not necessarily what is right every quarter."
"Being private brings significant tax efficiencies… BFFC is a U.S. based company but all operations are conducted in Brazil. Since Brazil and US don't have tax exemption agreement, when Brazilian subsidiary remits dividends to US they may be taxed in the US creating double taxation and an additional financial burden to shareholders."
I would offer a few responses to these statements, for the rest of the minority shareholders to note:
- The board, management team, and investor group have known each other for many years and are buddies. They are looking out for their own skin, not yours
- The special committee did NOT carry out a rigorous sale process, as the company was not properly shopped. During the call, management noted that the Investor Group would not accept a higher offer from an outside investor group and thus, did not shop the company. This confirms that the Investor Group knows that BOBS is worth much more than $15.50 per share, as they are not willing to accept a higher immediate offer price from an outside investor which would separate them from all of BOBS business risk (this is the EXACT same rationale they are forcing down minority investors' throats). If an immediate cash payment provides "immediate value for shareholders", then why would management not accept a $20 or $25 bid from an outside party?
- On the call, management was asked "why aren't you assuming the macro environment will improve at some point?" They responded that they looked at the beginning of the year's macro conditions to capture the valuation. Later in the call, management noted "being private allows speedy decision making and what is right for us medium and long-term." If that is the case, why did they not consider a healthier macroeconomic outlook in their valuation? Why did Duff & Phelps not do the same? Very shoddy work and poor explanations, business as usual for BOBS' management despite their excellent operational performance in recent years.
I was able to ask why $15.50 is a fair price if the stock is currently quoted at $15.60. Management responded that "things are rapidly changing." The only things that are rapidly changing include BOBS' revenue and EBITDA growth. Currency fluctuations and civil unrest have had virtually no effect on the company's performance, and thus, these explanations should be discounted heavily. BOBS shares are worth north of $30 on current fundamentals alone, and potentially over $75 by the time the Olympics get here. Management tried explaining that the Olympics hurts their business evidenced by poor London Olympics retail numbers, even though increasing investor awareness and scrutiny as the Olympics approach would surely put the spotlight on BOBS. Management also noted that the company has liquidity issues and is an "orphan" stock, and hence cannot raise capital on attractive financing terms and must opt to utilize bank financing. There is an easy solution to this problem: uplist to a major exchange and split the stock. This improves liquidity and increases analyst attention and coverage.
My friend had a chance to ask how much the Yum! Brands portfolio is worth, and management's answer was something along the lines of "very little", despite the fact that BFFC's Pizza Hut portfolio generates over $14m in operating income annually and accounts for a substantial percentage of BFFC's operating profits. Management appears to be attempting to deceive investors, as they are obviously aware of the strong operational and brand value attributable to the BOBS' Yum! Brands portfolio. Management claims to only own 1 property with the rest being leased, and were extremely unclear in their answer to how much the total brand value of the company is worth. It is clear that BOBS brand value among its various portfolios is likely worth tens of millions of dollars, considering the size and scale of the BOBS store network and an attractive, well-positioned lease portfolio.
Minority shareholders, do NOT vote with management on this deal. You are being asked to give something up for much less than its true value, and management knows it. This is why the Investor Group will not accept a higher offer than $15.50 share price they have offered to us, as they know BOBS shares are worth far more than that. They have affirmed to us over and over again that if an outside investor came in and offered a higher price, that the insiders would not take it even though it offers them "immediate value" by their own logic and reasoning.
Additionally, note that BOBS released an opinion from ISS Shareholder Services in direct contradiction with my original article shortly after my original article was published. They have been extremely sloppy and disorganized with respect to this entire process, as the company did not even publish instructions for the conference call until after 9 PM Wednesday night (the night before the conference call). Management is expecting the minority owners to roll over and is trying to instill fear by spending the company (and shareholders') money on fancy opinions from ISS and Duff & Phelps. I would note that the ISS opinion represents a major conflict of interest: ISS improves its revenues and fee income by siding with those who pay them, and has no incentive to advise against the transaction as it would likely harm future business prospects.
In summary, I want to ask shareholders why owning BOBS is worth it to management, but not to us (the minority shareholders)? Vote no to the deal, as there are sunny skies ahead for this company due to its massive scale, strong operational performance evidenced by abnormally high margins and growth rates, and an extremely valuable portfolio of brands likely worth tens of millions of dollars.