Situation - Shareholder Activism - Short term trade
- Regis Corporation (RGS) - Currently trades at $ 16.27
- Market Capitalization: $ 900M
- Share Float: Approximately 58M
- Dates to watch out for: 27-October- 2011
- Sector: Service ; Industry: Personal Service
- Main Catalyst: Proxy fight on 27-Oct-2011, Potential $200M - $250M of buybacks or special dividend, Potential breakup of the company
- Trading timeline: 6 Months
What does Regis do?
Regis Corporation is engaged in owning, operating and franchising hair and retail product salons. In addition to the primary hair and retail product salons, the Company owns Hair Club for Men and Women, a provider of hair restoration services. As of June 30, 2010, the Company owned, franchised or held ownership interests in over 12,700 worldwide locations. The Company's locations consisted of 9,929 Company-owned and franchise salons, 95 hair restoration centers, and 2,704 locations, in which the Company maintains an ownership interest of less than 100%. The Company's hair restoration centers offer three hair restoration solutions: hair systems, hair transplants and hair therapy. The Company is organized in two lines of business: salons and hair restoration centers. (Source: Google Finance)
Background of the Situation
In a press release RGS stated that the Board of Directors has concluded its review of strategic alternatives announced on Aug-2010. After a thorough and robust process, the Board determined that the best option to maximizing shareholder value was for RGS to continue to execute upon its existing business plan. However, in the most recent publication, Barron’s pointed out that RGS stock has declined 19%, 55%, 60% over the past one, three and five years versus gains of 21%, 29% and 33% for its peer group. Furthermore, RGS reported a 70% increase in company's operating expenses since 2004, despite only a 20% increase in revenue. RGS shares have fallen approximately 23% to date.
Starboard Value and Opportunity Master Fund filed a13D on 15-Sep-2011, declaring an approx. 5.2% stake in RGS. The fund, among other things, spoke about nominating three directors to the RGS board which currently consists of 7 directors elected annually. In a letter filed in the same filing, the fund stated that RGS trades at a steep discount to sum of its parts and only trades at 4.6x 2012 EBITDA, far below its peers that trade at 7.3x. One of the areas highlighted is cost reductions in unallocated corporate overhead. The fund believes that RGS should only keep its North American Salon business and divest non-core assets. Non-core assets include Hair Club and 400 International salons, as well as two minority owned assets, Provalliance and Empire Education Group. In a DEFC14A filed with the SEC on 03-Oct-2011, the fund outlined its concerns as following:
- We are concerned with the Company’s historically weak stock price performance and low valuation
- We believe the Board and management have failed to adequately address the Company’s bloated operating expenses
- We believe the Board and management have failed to fully explore alternatives for non-core assets
- We believe the Board has failed to address corporate governance issues including excessive executive compensation, related party transactions, and lack of stock ownership by the Board
Another contention the fund has is that apparently no director of RGS has any major shareholdings in the company. Fund three nominees are, James Fogarty (Former CEO of Charming Shoppes); Jeff Smith (CEO & CIO of Starboard fund) and David Williams (CFO & Exe. VP of Chemed Company).
As a follow on to Starboard’s demands, the firm stated that some cost cuts and a strategic review has been undertaken. Among the actions is that announcement by RGS that it has hired BofA Merrill to sell its hard club business. Some industry reports suggest that the business might be valued by some in the range of $ 200M. If successful, RGS plans to return it back to shareholders via share buybacks of special dividends. With a market cap at $900M, that might be material. However, in its most recent 13D/A Starboard Fund suggests that these actions have been cosmetic and just present an “Illusion of change”. The final showdown on 27-October-2011 will determine what direction the company will take. The fund has been involved in other activist situations, including Wausau Paper.
RGS is already up by more than 15% in the past month trading at $16 a share. The firm traded at a 52 week high of $22. Lots of industry reports suggest the firm’s valuation to be $20.
If the fund succeeds in getting nomination shareholders, it will assure shareholders that they will not only benefit from the potential special dividends or share buybacks, but also a potential upside in the shares as a complete review of the business is undertaken and is restructured.