RCII - Rent-A-Center

[writser]

Anybody familiar with this company?

 

Earlier this year, an activist with a 20% position (Engaged capital, managed to sell Outerwall in 2016), backed by ISS, won three board seats. The founder and chairman, Mark Speese, was removed from the board (but still is CEO and owns ~2% of s/o). This summer the company turned down multiple takeover bids. A few days ago, on October, 30, the new board decided to "explore strategic and financial alternatives". The previously elected chairman (another long-time board member) resigned from the board because he disagreed with the new strategy. Three days later a new $13 bid appears from a ~6% owner.

 

Activists own ~30% of the stock and now control the board. Alan Mecham also holds a 5% stake. There's a $13 bid on the table and this summer even higher numbers were offered. I'm hardly familiar with this business. It doesn't seem spectacular and the balance sheet is quite leveraged. However, based on what the activists are doing it seems extremely likely to me that this will be sold for ~$12 - $16 somewhere in 2018. You can currently buy for $11.

 

I bought a few shares, am thinking about buying more. If anyone can tell me why that would be a horrible idea then I'd love to hear it.

[valuedontlie]

I had previously owned a call spread on this name around the time the activist(s) first got involved... Have started to take another look...

 

Here is what a sell-side analyst said about the recent offer:

 

Vintage Capital’s offer likely has financing

problems, as well as a clause that is likely a “non-starter” for

RCII.

 

  * Questions how Vintage can finance a deal with already high

    leverage and recent spate of retail bankruptcies

  * Vintage Capital

    provision that RCII not release propriety info to future

    competitors is a “non-starter” as the company has a fiduciary

    duty to disclose such data to potential bidders

[JayGatsby]

I don't know much about them, but was in CONN for a bit and have looked at CONN on and off again since then. Have looked at RCII a few times briefly, but not enough that you should take my opinion as worth anything. CONN had a really good business for a while but then loosened credit, defaults increased, and they never really got their mojo back. It's a sketchy industry in my opinion that's not all that much better than payday lending. They basically sell furniture to people that can't afford furniture and charge them huge financing costs for that service. CONN broke their biz into two segments: retail and lending. The retail business would generate huge margins selling the products. Lending would break even, but that was kind of fine because as long as it broke even the model worked. At one point CONN had a huge amount of these receivables on their books that were all internally financed (no matching liability). Lastly, the market for this sort of stuff has expanded a lot, and either CONN or RCII now have kiosks in Best Buy if I remember right. The industry should be a bit more immune to the internet than other retailers because the whole reason people shop at these stores is because they don't have the cash to spend elsewhere.

 

That may be totally unhelpful, as its been a while since I looked at it and I didn't look at it very deeply. Industry has its fair share of challenges though. Long story short, I'd dig into the fundamentals a bit on this one before trying to arb the sale process.

[writser]

Both: thanks for your replies.

 

With regards to Vintage Capital: yeah, they seem to be a smallish shop, financing could be difficult. I don't know their AUM but in 2014 they owned ~7m shares of AAN (a similar lease-to-own company) worth around $200m and they offered to take private the company in a ~$2.1b deal. Seems like the offer was pulled after AAN made a large acquisition. Their current public holdings aren't that large, hard to infer anything.They already own Buddy's Rents, the third largest lease-to-own franchise in the US (according to themselves, I am not familiar with the company but they seem to have ~300 stores) so a deal seems to make sense at first glance. But agreed, not the safest buyer. However, this summer both HIG capital and Lone Star Funds were also interested in buying the company at a premium according to Reuters - much bigger fish.

 

With regards to the exclusivity agreement: I don't read too much into that. Makes sense from Vintage Capital's perspective but the board has a big incentive to make a good deal (as half the board represents a 20% owner) and I expect them to make a somewhat rational decision: they can gauge interest from other parties and then decide how to handle the Vintage Capital proposal.

 

A tidbit from the latest conference call:

Anthony Chukumba - Loop Capital Markets LLC

 

I just had a question on the CFO search. You're now coming up close to a year without a CFO and no offense Maureen, you're doing a great job, but just I was wondering where you are in that process, and whether some of the sort of disagreements or issues that the board has exceeded that process at all? Thank you.

 

Mark E. Speese - Rent-A-Center, Inc.

 

Well, as I mentioned last time, I just started the search for, I think, everyone knows why it wasn't started initially, in light of everything that's taken place up to that point, and suffice it to say in light of the news that we just announced, don't expect me to be doing much at the moment either. And to your point, Maureen has done a wonderful job and I'm thankful for that, and she continues to do so. So, I got no issue with it, and I probably won't have anything to say on it for anytime soon either.

 

Doesn't really sound like he expects the strategic review ends with a small tender offer and then business as usual.

 

I'm not sure about this one. The Vintage Capital bit doesn't seem super firm, the business looks mediocre and is heavily indebted. On the other hand, if this was WEB buying the next Amazon it wouldn't trade at $10 with a $13 bid on the table. I'm probably keeping this a small position and don't mind trading it opportunistically.

[writser]

https://www.sec.gov/Archives/edgar/data/933036/000093303617000072/0000933036-17-000072-index.htm

 

As stated in the Company’s October 30, 2017 press release, the Board remains committed to exploring a broad range of strategic and financial alternatives and ensuring a fair and impartial process to all parties that have expressed an interest in the Company to date, or that may do so in the future. The Board appreciates Vintage’s interest in the Company and looks forward to additional dialogue. Given the early stage of the strategic review and the level of inbound interest from other parties, we do not believe it is in the best interests of our stockholders to enter into an exclusivity agreement with Vintage at this time.

[writser]

I don't see any news apart from some broker coverage but stock is up ~8% today and ~15% over the past few days. Very volatile. I sold out at ~$12 for a quick profit. That seems like a somewhat fair price with the only concrete buyer being somewhat questionable and making a preliminary offer of $13. Already down to $11 again .. Better to be lucky than good I suppose.

[writser]

I've been flipping some shares around. Bought a somewhat larger position again in todays dip.

[writser]

Up to $12 again on no news / low volume. Sold. This stock is turning me into a day trader.

[writser]

Bought back some shares. Quite some volume today and a decent price swing. I see no news - brokerage report or something?

[johnny]

What's your current theory for where those summer bids went?

[Jurgis]

Bought back some shares. Quite some volume today and a decent price swing. I see no news - brokerage report or something?

 

They appointed some guy as chairman of board:

 

Rent-A-Center Names J.V. Lentell as Board Chairman

BY MT Newswires

— 5:06 PM ET 12/12/2017

 

05:06 PM EST, 12/12/2017 (MT Newswires) -- Rent-A-Center (RCII) said in a regulatory filing late Tuesday that its board of directors appointed J.V. Lentell as chairman.

 

Lentell joined the board in 1995 and was lead director from April 2009 until January 2014.

[writser]

They appointed some guy as chairman of board:

I saw, but I don't read too much into that.

 

What's your current theory for where those summer bids went?

Well, admittedly it's a weak theory but one bid is still on the table and as far as the others are concerned: the company, with the new activist board members, declined an exclusivity agreement with Vintage Capital and is doing a strategic review, probably trying to reach out to potential buyers. Could take a while to reach a conclusion. In the meantime I don't expect the company to churn out press releases. Buyers were interested last summer, doesn't seem crazy to assume they still are. We'll see what happens.

 

Given the prices offered last summer I think $10 is a decent entry point for a small gamble and $12 a decent exit.

[writser]

I sold after todays open. RCII was up significantly the past few days and I didn't exactly think it was good news they are declassifying the board. Sure, from a corporate governance standpoint it is great but I just want the company to strike a deal and if they start to issue press releases that, from June 2019 on, directors will stand for elections annually, then that doesn't exactly suggest to me that the company will be sold in a few weeks.

 

Bought back a tiny position after the stock drifted down 5% intraday but from now on I'll probably be slightly more conservative. Managed to flip my position a few times. Better lucky than smart I guess ..

[Foreign Tuffett]

Stock is down on news that the CEO is resigning effective immediately. Not a shock since he was recently voted off the board and was criticized by the activists who are now in the driver's seat.

 

http://investor.rentacenter.com/phoenix.zhtml?c=90764&p=irol-newsArticle&ID=2324373

[MrB]

I sold after todays open. RCII was up significantly the past few days and I didn't exactly think it was good news they are declassifying the board. Sure, from a corporate governance standpoint it is great but I just want the company to strike a deal and if they start to issue press releases that, from June 2019 on, directors will stand for elections annually, then that doesn't exactly suggest to me that the company will be sold in a few weeks.

 

Bought back a tiny position after the stock drifted down 5% intraday but from now on I'll probably be slightly more conservative. Managed to flip my position a few times. Better lucky than smart I guess ..

 

The board is the obstacle to a deal being struck and the fact this is a staggered board lies at the heart of the problem. Declassifying it is huge, although a bit late, because it is almost certain that Engaged will achieve a majority on the board by June/next AGM anyway. 

[MrB]

Stock is down on news that the CEO is resigning effective immediately. Not a shock since he was recently voted off the board and was criticized by the activists who are now in the driver's seat.

 

http://investor.rentacenter.com/phoenix.zhtml?c=90764&p=irol-newsArticle&ID=2324373

Mark's influence over the board is most likely the single most important reason why Engaged has been unable to affect their proposed organisational/strategic changes, which include the pursuit of a sale. Fadel is Engaged's man and being a previous COO means Engaged's proposals should be implemented effectively and quickly. Whether Engaged's proposed changes will add value is another matter, but Engaged has everything they've been pushing for now. The CEO change is a big deal.

 

If you believe the story then today's price at about 12% more than Engaged's average cost (they started buying in Oct 2016) seems like a good entry point.

[kab60]

Sooo... Apart from buyout speculation (which does seem like the eventual outcome), what do people actually think about the business, the valuation and it's progress during the last year or so? It seems like a lot of the problems were self-inflicted with misaligned incentives and much too high staff turnover. Things that should be fixable.

[MrB]

Sooo... Apart from buyout speculation (which does seem like the eventual outcome), what do people actually think about the business, the valuation and it's progress during the last year or so? It seems like a lot of the problems were self-inflicted with misaligned incentives and much too high staff turnover. Things that should be fixable.

Correct, according to Engaged. This presentation lays it out

http://www.engagedcapital.com/press/RCII-Presentation.pdf

Supplement

http://www.engagedcapital.com/press/Supplemental-Presentation-to-Rent-A-Center-Stockholders.pdf

 

The back and forth between Engaged and RCII as well as between RCII/Engaged and the SEC is worth a read and can be found in the RCII filings.

[writser]

MrB - thanks for your insights.

[Bluffy]

I am still thinking about the impact the new tax bill will have. In this case I am not sure how I could quantify the future impact of the immediate expensing provision has to for example a strategic acquirer.

Am I correct in my assumption that in RCIIs case they don't have immediate GAAP profitability so they cannot reduce their taxes further into negative territory with the immediate expensing of for example their inventory?

Any thoughts are appreciated!

[MrB]

I am still thinking about the impact the new tax bill will have. In this case I am not sure how I could quantify the future impact of the immediate expensing provision has to for example a strategic acquirer.

Am I correct in my assumption that in RCIIs case they don't have immediate GAAP profitability so they cannot reduce their taxes further into negative territory with the immediate expensing of for example their inventory?

Any thoughts are appreciated!

Not an expert, but I don't believe "immediate expensing" can be applied to inventory. http://ww2.cfo.com/tax/2017/12/cfos-expect-new-tax-bill/

 

 

[Bluffy]

I am still thinking about the impact the new tax bill will have. In this case I am not sure how I could quantify the future impact of the immediate expensing provision has to for example a strategic acquirer.

Am I correct in my assumption that in RCIIs case they don't have immediate GAAP profitability so they cannot reduce their taxes further into negative territory with the immediate expensing of for example their inventory?

Any thoughts are appreciated!

Not an expert, but I don't believe "immediate expensing" can be applied to inventory. http://ww2.cfo.com/tax/2017/12/cfos-expect-new-tax-bill/

Thank you for your quick response! I started to dig into RCII's story and found https://seekingalpha.com/news/3319204-new-tax-rule-benefit-aarons-rent-center. Still trying to wrap my head around the tax bill and all its implications.

 

On another note, thank you MrB for all your very well thought out posts and the educational links you provide! Learned a lot already with your help especially by reading your posts in the DVA thread!

[MrB]

I am still thinking about the impact the new tax bill will have. In this case I am not sure how I could quantify the future impact of the immediate expensing provision has to for example a strategic acquirer.

Am I correct in my assumption that in RCIIs case they don't have immediate GAAP profitability so they cannot reduce their taxes further into negative territory with the immediate expensing of for example their inventory?

Any thoughts are appreciated!

Not an expert, but I don't believe "immediate expensing" can be applied to inventory. http://ww2.cfo.com/tax/2017/12/cfos-expect-new-tax-bill/

Thank you for your quick response! I started to dig into RCII's story and found https://seekingalpha.com/news/3319204-new-tax-rule-benefit-aarons-rent-center. Still trying to wrap my head around the tax bill and all its implications.

 

On another note, thank you MrB for all your very well thought out posts and the educational links you provide! Learned a lot already with your help especially by reading your posts in the DVA thread!

Thanks Bluffy. I learn from this board with everyone else as I'm now learning from you that my assumption seems to be incorrect that the rule will not affect inventory. It looks like it will.

[Foreign Tuffett]

Sooo... Apart from buyout speculation (which does seem like the eventual outcome), what do people actually think about the business, the valuation and it's progress during the last year or so? It seems like a lot of the problems were self-inflicted with misaligned incentives and much too high staff turnover. Things that should be fixable.

 

I think the core Rent-A-Center stores generate strong (if fluctuating) free cash flows. These free cash flows have been obscured by wasteful capital allocation. For example the company bought back over $500 million in stock at an average price of $31 per share, and also spent a ton of money on a proprietary point-of-sale ("POS" is definitely the appropriate acronym in this case) system that has been problematic .

 

I thing I worry about is the performance of the company further deteriorating as a result of the revolving door that has apparently been installed in the C-Suite. 

[kab60]

Thanks for the quick and thoughtful responses. It's a pretty proven business model, so it should be fixable, but it's a bit hard to figure out the true economics and how much damage has been done. Still on the sideline even though I think it looks pretty attractive - especially since it should do okay in a recession if there ever is one. Do they need to replace their current POS or has it largely been fixed?