ALJ Regional Holdings (OTCPK:ALJJ) recently purchased Faneuil, which allows the company to begin to benefit from its sizeable net operating losses (NOLs). ALJ Regional Holdings acquired this subsidiary at a very good price and will benefit from Faneuil's immense potential for growth in the information technology niche. Under chairman Jess Ravich, ALJJ should remain a good choice for aggressive investors. Faneuil appears to be well-run, with strong leadership, and a focus on innovation and cost-cutting.
In November 2012, ALJ sold steel subsidiary Kentucky Electric Steel (KES) to Optima Specialty Steel for $112.5 million in cash. (The holding company bought the steel mill in the mid-2000s, borrowed against it, and acquired a large number of net operating losses (NOLs)). After ALJ paid off the debt, they began a tender offer for nearly 50 percent of outstanding shares. In February 2013, the transaction closed-and tender shortly afterward. Through the tender, the holding company bought 30 million shares for a total of $25.2 million.
By the end of the quarter (March 31st of last year), the holding company was in the following position:
• It had about $30 million in cash.
• It had some short term investments.
• It had a total of only $2 million in liabilities.
• It had about 27.5 million shares outstanding.
• It had 176 million in NOLs, which would expire between 2020-2027.
• Shares were trading around 82 cents a share.
At that point, it also lacked operations and had few expenses. All things considered, it was in a very good position to buy another company-putting its NOLs to good use.
The Faneuil transaction came along October 18th, 2013 (reflected in chart below). Harland Clarke, a subsidiary of M&F Holdings, sold 96.43% of Faneuil for $53 million dollars. The deal was brokered with: $25 million in cash, a $500,000 cash contribution for working capital, 3 million shares worth $25 million of ALJ stock, and a seller note for $25 million.
Faneuil: An Almost-Perfect Acquisition
There are a number of reasons why ALJ made the right move by waiting for Faneuil:
• Faneuil is a high-tech company that uses advanced applications.
• The workforce consists of about 3,000 IT and service professionals.
• It delivers outsourcing support on a broad scale. (Think of Convergys.)
• It has multiple customer care centers.
• It has multiple fulfillment operations.
• It provides a wide range of IT services.
• It provides electronic toll collection, as well as processes toll violations.
• It gives health insurance enrollment assistance.
• It offers tracking for form processing.
• It offers tracking for medical devices.
• The various centers for customer care hire from 50 to 500 staff members, and these centers are spread across numerous states.
What's more, the company has an incredible client base, including:
• Several toll authorities.
• A health benefit exchange.
• A multi-state utility.
• Several municipalities.
• An agency operating two major airports in Washington, D.C.
• Several government agencies.
• Several commercial entities.
ALJ has made a great transition and is now part of an exciting industry. Moreover, it is undervalued with significant growth prospects. Currently, it trades considerably cheaper than competitors in the call center niche like Sykes Enterprises, Teletech, and Convergys.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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