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A shareholder activist group has penned an open letter to the management of Winn-Dixie Stores asking it to stop investing cash in new stores and remodels so that it can either buy back shares in the company and return cash to investors, or sell the company outright.
George Schultze of Purchase, N.Y.-based Schultze Asset Management sent the letter, dated Nov. 9, 2009, that appears below in its entirety to Winn-Dixie CEO Peter Lynch, along with a corresponding presentation to the chairman of the Jacksonville, Fla.-based grocer’s board of directors:
“Schultze Asset Management, LLC (SAM) serves as investment advisor to various client accounts (including Schultze Master Fund, Ltd., Arrow Distressed Securities Fund, and Schultze Apex Master Fund, Ltd., among others), which together beneficially own approximately 839,478 shares, or 1.5 percent of the common stock of Winn-Dixie Stores, Inc. (WINN, or the company). We seek to encourage management to promptly implement a simple, publicly disclosed strategy to utilize the company’s available excess cash to maximize long-term stockholder value.
“Enclosed you will find our firm’s analysis of the methods we perceive would best maximize long-term stockholder value. We view WINN as an undervalued and underleveraged food and drug retailer. We urge management to close this value gap by implementing a more efficient capital structure as soon as possible. By doing so, the board and management of WINN will send a very clear message to the investing community that they share their shareholders’ valid concerns about the company’s valuation. WINN has significant sources of excess cash available from its balance sheet and through its capacity for a reasonable amount of additional leverage. We estimate this available excess cash to be approximately $590 million and believe it should entirely be used to repurchase WINN stock so the remaining shareholders may benefit from accretion of future earnings per share and cash flow.
“We believe this course of action, repurchasing stock with the company’s available excess cash, is more likely to create shareholder value than management’s current strategy of investing hundreds of millions of dollars on store remodeling. As an example of the lack of success of the current store-remodeling effort, the company has already remodeled 170 stores but WINN’s share price is at nearly the same level as its IPO price in November 2006! Similarly, management stated in its Oct. 27, 2009, quarterly conference call that the company took $3.5 million in impairment charges related to writing down the value of two recently remodeled stores. Clearly, it does not make sense to invest more of our company’s money in remodeling stores, only for such stores to become valuation-impaired right after we make the multimillion-dollar investment.
“Finally, the company’s EBITDA margin (for the last 12 months ended Sept. 30, 2009) of only 2 percent of sales is well below its peer group average of 5.9 percent. This clearly demonstrates that shareholders would be better served if management reduced corporate overhead and other expenses to bring the company’s operating cost structure more in line with that of its peers. This strategic approach of reducing overhead and other corporate expenses, rather than spending shareholder money in remodeling stores that become valuation-impaired right after the investment, is much more likely to yield increased shareholder value for our company.
“We believe that the company could maximize stockholder value by closing the valuation gap and buying back stock based on the following:
“1. We believe WINN’s share value today, assuming a comparable company valuation multiple of 6.18x EBITDA, should be approximately $22 per share.
“2. We believe near-term sources of cash for a stock repurchase program that would help reduce the significant valuation gap between comparable companies and WINN include:
a. $157.6 million of available excess cash on the balance sheet,
b. $3.4 million in expected income tax refunds and
c. $430 million via a new bond offering with conservative credit statistics.
Together, we estimate that total near-term excess cash available for a stock repurchase is approximately $590 million.
“3. We believe, after payment of transaction related costs, the $590 million in cash could repurchase approximately 60 percent to 70 percent of the current float, with full use of the cash raised.
“Upon completion of the share buyback, we believe WINN would trade at a much more appropriate valuation multiple and remaining shareholders would benefit from accretion in both future earnings and cash flow per share. We also believe WINN would trade closer to the comparable company average EBITDA to net enterprise value multiple (i.e., from its current 1.77x to one closer to the comparable company average of over 6.00x). Again, this would represent significant appreciation for remaining shareholders.
“As you can imagine, we are also of the opinion that the board must honor its role as a fiduciary for all shareholders and thereby remain open to selling the entire company if market prices exceed your internal calculations of fair value. As such, in the event management and the board cannot close the obvious valuation disparity between our company and similarly positioned firms by implementing our requested recapitalization and share repurchases, we would then strongly encourage the Board to hire a reputable investment bank to help explore a sale of the entire enterprise at a fair price.
“We look forward to working with you and the Board to formulate a strategy that will enhance shareholder value both in the near term and the long term. Given our frustration at the lack of results management has produced to date, we believe that a meeting with the entire WINN Board would make sense at this point. We kindly ask that you forward a copy of this letter to the company’s board of directors and respond by 5 p.m. EST on Monday, Nov. 25, 2009, to our request for a meeting with the board. A face-to-face meeting would provide the board with a good opportunity to better understand our thoughts on maximizing value for stockholders. We believe that such a dialogue will yield benefits to all stockholders. If we are unable to commence such a dialogue, we may find it necessary to pursue strategies to increase shareholder value directly with our fellow stockholders.
“Please contact me at (914) 701-5260 (x104), or via e-mail at [email protected], regarding the above.
“Very truly yours,