M&A Updates: J. Alexander's Holdings Potential Acquisition

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Includes: JAX, MSGN
by: Special Situation Investor
Summary

J. Alexander's Holdings has extended its strategic review.

New offer might come from the second largest shareholder Ancora.

At the current trading price, MSG Networks tender offer is not attractive enough.

J. Alexander's Holdings (JAX) - M&A

In April, JAX has received a non-binding offer from second largest (8.6%) shareholder Ancora Advisors, together with a bunch of accusations and criticism towards the management. Despite getting support from another activist and 6.6% shareholder, the board has rejected the offer calling it undervaluing. A week later, Ancora has launched a proxy fight pushing shareholders to withhold their votes from reelecting 2 JAX directors in the annual meeting. Both major proxy firms (ISS and Glass Lewis) have recommended to support Ancora's proxy, and in the end, two times more votes were withheld from voting for the directors in the annual meeting. This has shown that shareholders are clearly unhappy with the current situation and some kind of corporate event might be not that far away.

Now, recently (mid-August), the management has announced that they are expanding the strategic review process, which has caused 10% share price increase. Marathon Partners have expressed support for this decision and also raised some concerns with management's competency, no formation of special committee, cessation of quarterly conference calls and separate investor calls, etc. and also noted that they will continue to monitor board's actions closely and might "expand on the concerns in the near future".

JAX is trading at 6x EBITDA vs. 10x peer valuation, and recent Q2 results were not very inspiring (revenue growth slow down, etc.).

So although, the price is trading closely (1%) to Ancora's offer, now that the board has given a signal of interest, a bump or an overbid could be expected. One of JAX peers - Del Frisco's Restaurant Group (NASDAQ:DFRG) - was recently acquired at 10-11x adjusted EBITDA and 1.4x EV/Revenues (vs. 0.65x JAX), so overall, I think this is an interesting situation with considerable potential upside.

MSG Networks (MSGN) - Odd Lot Tender Offer

Current price: $16.4

Tender price: $15-17

Upside: 7% or $109 for odd lots (if priced at the upper limit)

Expiration date: 27th of Sept. 2019

This is a Dutch tender offer with an odd-lot provision. As I did not find any compelling reasons for the upper pricing and the stock already trades in the middle of the range, currently, I am staying out of this. However, I might reconsider if the spread increases.

MSG Networks is buying back $250m of its common shares (23.3-27.2%) for $15-17/share. Shares are currently trading in the middle of the range. 100 or less tendered shares will result in full acceptance without proration.

MSG Networks owns and operates two regional sports and entertainment networks. 90% of its revenues come from distributors that carry their networks and is based on the subscriber amount. Remaining revenue comes from ads. The company is controlled by Dolan family that holds 70% of voting power and this buyback would increase it to almost 80%.

MSGN recently had 6-year lows as a result of '19 annual report, which has shown revenues down 1.8% YoY, operating income down 13% YoY, net income falling 9% YoY, 33% increase in SG&A, and, very importantly, lowest rate of subscriber decline in five years (6.5% YoY). Management owns nearly 5% of the stock and will not participate in the tender.

Major shareholders are:

  • Vanguard - 10% (in Feb '19 decreased from 10.7%). It has acquired half of its stake in Feb. 2013 at the price around $17.
  • Ariel Investments - 11.4% (decreased from 14.7% in Feb). It has bought 5.5% in Feb. 2016 at price around $15.6.
  • ClearBridge Investments - 6.6% (in Feb. '19 decreased from 6.7%). Acquired 5% in Feb. 2014 at around $18.
  • BlackRock - 7.5% (increased from 6.3% in Feb). 6.1% was bought in Jan. 2017 at around $22.
  • FMR LLC - 6.6% (acquired on the 13th of Feb. '19).

Disclosure: I/we 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.