ALJJ - ALJ Regional Holdings, Inc.

[orion]

Had this company on my watchlist but didn´t invest. Yesterday, puzzled by the sudden jump in share price, I found out that they have sold their operating business and that they want to buy back 50% of the outstanding shares - after the sale is completed - at a price between $0.84 and $0.86 per share. 

 

Alpha Vulture and Whopper Investments both made a good write-up:

http://www.whopperinvestments.com/aljj-tender-arbitrage-opportunity

http://alphavulture.com/2012/11/20/alj-regional-holdings-mergertender-offer-arbitrage/

 

Any opinions?

[Palantir]

Disappointing.....I was thinking about opening a position in a year or so after they had paid down some more debt....but my analysis was focused on debt levels going down which leads to increasing book value and then multiple expansion....which was wrong I guess.

[matts]

I got into this today as a special situation play. The cash box that is left after the tender will also have a ton of tax loss carry forwards that I hope offsets any discount to book (basically just cash) the company will trade at.

 

[orion]

Stock is down 16% today. Seems the buyer has problems with the financing.

 

ALJ Regional Holdings, Inc. (Pink Sheets: ALJJ) ("ALJ") and Optima Specialty Steel, Inc. ("Optima") today announced that while Optima has not completed its proposed debt acquisition financing at this time, it continues to pursue various potential financing options that would enable it to complete the transaction on or before the "Outside Date" under the Merger Agreement (defined below), which is February 28, 2013. ALJ will proceed with its special meeting of stockholders (the "Special Meeting"), scheduled for 8:00 am (Pacific Time) on December 21, 2012, for consideration of the sale of KES Acquisition Company, its majority-owned subsidiary ("KES"), to Optima pursuant to a merger (the "Merger") as contemplated by the definitive merger agreement dated November 18, 2012 (the "Merger Agreement"). The Merger remains conditioned on Optima's obtaining sufficient financing to consummate the transaction. ALJ and KES have determined not to exercise their right to terminate the Merger Agreement at this time due to the fact that Optima has not secured financing at this time.

 

"We are disappointed that our financing efforts have not succeeded as quickly as we had all hoped, but we continue to pursue various potential financing options that would enable us to complete this transaction, which we believe is a great fit for both companies," said Kevin Stevick, Optima's CEO.

[orion]

Finally some good news.

 

ASHLAND, Ky., Jan 18, 2013 (BUSINESS WIRE) -- ALJ Regional Holdings, Inc. (Pink Sheets: ALJJ) ("ALJ") today announced that based on conversations with Optima Specialty Steel, Inc. ("Optima") regarding its efforts to secure sufficient financing to complete the acquisition (the "Merger") of ALJ's majority-owned subsidiary, KES Acquisition Company ("KES"), ALJ believes that the closing of the Merger is likely to occur on Monday, January 28, 2013.

[Olmsted]

I had a bid in last Friday and this whole week that never got filled.  Oh well...

[Hielko]

I do have a position, and this is good news obv. Bit of a bad beat: tried to buy some additional shares when the problem with the financing was announced. My order was literally $0.001 below the lowest trade price that day...

[orion]

Happy ending :)

 

ASHLAND, Ky., Feb 05, 2013 (BUSINESS WIRE) -- ALJ Regional Holdings, Inc. (Pink Sheets: ALJJ) ("ALJ") today announced that it has completed the sale (the "Merger") of its majority-owned subsidiary, KES Acquisition Company ("KES"), to Optima Specialty Steel, Inc. ("Optima"). Optima paid $112.5 million in cash for KES.

 

http://www.otcmarkets.com/stock/ALJJ/news

[orion]

ALJ has been informed by the depositary for the tender offer that the final proration factor for the tender offer is approximately 90.8 percent.

 

http://www.otcmarkets.com/stock/ALJJ/news

[writser]

looks cheap again

[Hielko]

looks cheap again

Wouldn't surprise me if it will get even cheaper. 33M shares were tendered while 30M shares were accepted in the offer. Think there are a now a bunch of people that have a tiny position remaining and who want to sell.

[ragnarisapirate]

A cash box, NOLS, and a manager who can make a debt laden mini-mill in an impoverished region make money...

 

I have to say, there is a price where this thing gets really interesting really fast.

[matts]

Does anyone have a good handle on the amount of NOLs left at ALJJ? I have not been able to piece together how much, if any, would have been used up on the KES sale. Would appreciate any guidance.

[Hielko]

Does anyone have a good handle on the amount of NOLs left at ALJJ? I have not been able to piece together how much, if any, would have been used up on the KES sale. Would appreciate any guidance.

I think the company needs to recognize a gain on the KES sale. Book value was negative $13 million at the latest annual report, and guess it was positive +$51 million after the merger but before the tender offer. So guess that was 64 million of taxable income. The company had $258 million in NOL carryforwards so that would leave them with $194 million in NOL's, but there are some restrictions on 36$ million of this amount, so probably better to assume they have now ~$158 million effective in NOL carryforwards. Could be used to shield the company from $55 million in income taxes assuming 35% tax rate.

 

They also have a significant accumulated deficit ($300 million pre sale). I would guess that has some value as well since I would think this would allow the company to pay dividends tax free in the future as a return of capital as long as this remains negative.

[matts]

Exactly what I was looking for, a very logical estimate. Thanks Hielko!

[Chris DeMuth Jr]

This was an attractive opportunity earlier this year (http://seekingalpha.com/article/1098481-turn-steel-into-gold-with-alj-regional-holdings).  Worth taking another look?  Management was competent and shareholder-oriented.  It would be interesting to see if they could pull off another success. 

[slkiel]

An update on ALJJ:

 

On Oct. 18 they announced the acquisition of Faneuil, a call center sub of Harland Clarke (which is a sub of Perelman's M&F). Press release is here: http://www.otcmarkets.com/otciq/ajax/showNewsReleaseDocumentById.pdf?id=1788101770

 

ALJJ paid $25m in cash, Harland Clark offered $25m in seller financing (rate unknown), and ALJJ gave Harland Clark 3m ALJJ shares. Total purchase price was $53m. Faneuil's CEO, Anna Van Buren, also bought about $2m worth of Faneuil (not sure why she bought Faneuil directly and not ALJJ shares).

 

It appears they got a deal. The first six months of 2013 showed Faneuil with $6.9m in operating income on $80m in revenue. This is a nice increase over full year 2012's numbers: $8.8m in operating income on $155m in revenue. This is all of the granularity I could find in the filings. References are here:

 

2012 10K: http://www.sec.gov/Archives/edgar/data/1354752/000135475213000005/hchc201210k.htm#s30B24F3A88268FC5364BD6662C6224F6

 

First six months 2013 10Q: http://www.sec.gov/Archives/edgar/data/1354752/000135475213000039/hchc-10q2013630.htm

 

Remember, ALJJ has $176m in NOLs at the end of Q2 2013. At the end of June, they also had $1.04 in net cash and short term investments. They typically make their quarterly announcements 45 days after the end of the quarter, so we should know on Nov. 15 if that number increased.

 

The question is how to value this with the limited information currently available. These may not be the best, but it is currently trading at the following:

 

2012 operating income: 3x

2013 operating income (full year run rate): 2x

2013 revenue: 0.18x

 

What multiple should it trade at? I don't know, and would like to hear the opinion of those on the board. I don't know that I've found enough information to figure out EBITDA or free cash flow. Maybe others have found better info.

 

One other point. Clearly we would want to know why someone like Perelman would sell? It looks like Faneuil just doesn't fit into the rest of Harland Clarke's business. There were also some comments floating around about Harland Clarke wanting to focus their operations. Here, incentives are still aligned as they get to participate in the upside in the stock with the 3m shares, and will collect a healthy interest rate from the seller financing. There is a figure that Harland Clarke acquired Faneuil for $70m in early 2012, but that was simply moving it from M&F to Harland Clarke. Apparently M&F acquired it in Dec. 2011, but I don't know the price. I'm not worried about that $70m figure. It seems to be more for accounting than an indication of the value at the time.

 

The business is a call center with some government contracts (SunPass in FL, etc.), utilities, health care. There may be some more potential in the health care space. Their website with more info is here: http://www.faneuil.com

 

Even after the 30% run over the last few days, this still looks like a double at a minimum from here, and possibly much more. Love to hear your thoughts.

 

 

[slkiel]

Good article today from Whopper: http://seekingalpha.com/article/1757152-alj-regional-holdings-new-acquisition-unlocks-value. If you look at the links in it to the slides for 2012 and 1H 2013 you'll find the EBITDA numbers I was looking for. Looks like EBITDA is $25m run rate for 2013 and $29m for full year 2012.

 

Current EV/EBITDA multiple is 2x if we use the 2013 run rate.

 

I'm not sure what EV/EBITDA multiple to use, but a 5 multiple, which would seem to be very cheap, would give equity of $3.33/share. Shares are currently at $1.22, Plus, for good measure, no tax for a long time with the $170m in NOLs. If you looked at it from a free cash flow perspective, you may get $15m-$20m/yr after the sale to ALJJ and interest on the seller note. FCF yield of 28% minimum.

 

[Hielko]

Don't forget that those segment EBITDA numbers don't include corporate overhead, ALJ doesn't own 100% of the business and it's unlikely that a sophisticated seller is going to sell a division for 53 million if it's worth a lot more. They might have gotten a good deal, but it's imo very optimistic to think the business (excl. the value of the NOLs) is worth a multiple of that number today. Also note that the EBITDA numbers are adjusted EBITDA numbers, so it's excluding some negative events that may or may not be one-time events.

[writser]

Agreed, the Whopper article seems a bit optimistic (don't forget that he is paid if he writes an 'alpha-rich' article). The 29 mio EBITDA the article is talking about is adjusted (GAAP EBITDA is 19 mio for 2012 and even that is excluding corporate overhead). We only have limited knowledge about the transaction so far and limited information about the history of Faneuil. A sophisticated seller is willing to sell the division for ~50 mio, looks like a bit of a stretch to me to assume that based on 10 powerpoint slides we can deduce that Faneuil suddenly is worth twice as much or more.

 

It looks like a great transaction but I'd rather be a bit more conservative beforehand.

[slkiel]

Good point re: the overhead and adjusted number. That would definitely ding it. Looks like we may have to be patient to get some concrete info. I have a call into Rob Christ at ALJJ to see how much of the Harland Clarke numbers we may be able to rely upon. and am hoping to hear back (though I may be too optimistic). I also had an entertaining conversation with someone at Faneuil, but wasn't able to gather any more info.

[Saidal]

Steven,

 

I'd love to hear how your call goes. I'm pretty sure Harland must of shopped the deal, hence a CIM should be out there, along with  a quality of earnings report. Even if you ding the biz for overhead and certain adjustments, a purchase at 4x-5x is ultra attractive given the NOLs.

 

I've spent a limited amount of time on the acquisition, however my diligence items so far include:

 

(1) Covenants, terms and pricing of the seller note.

(2) CapEx and OCF conversion (EBITDA - Capex/EBITDA). I've seen similar competitors in the space mint EBITDA, but the majority goes towards CapEx every year.

(3) Given the "cheap" price, customer concentration and contracts/renewals could be a major concern. Hopefully the Management team could provide some color.

(4) Reasoning why Perelman, a smart investor would sell the biz, then have it churn hands a couple more times. However at $70MM, this could of been a drop in the bucket for Perelman

 

 

 

 

[Packer16]

In looking at the website it looks like they are doing some Obamacare work.  I wonder if this is a large portion of their revenue orif this may go away at some point. 

 

Packer

[slkiel]

(4) Reasoning why Perelman, a smart investor would sell the biz, then have it churn hands a couple more times. However at $70MM, this could of been a drop in the bucket for Perelman

 

I originally thought that M&F acquired it in 2011, but I later found something saying they acquired it in 2006. It looks like it was just moved around a few times under the M&F umbrella. I tend to think Faneuil is just small potatoes to Perelman. M&F gets this revenue stream from the seller note and some upside from the ALJJ shares. M&F/Harland gets a revenue stream while focusing their operations. Plus, who knows, maybe Van Buren (Faneuil CEO) was pushing them somehow.

 

There may be a concern about the customer concentration. The customers they reference on their website seem like they would be pretty sticky, though. For example, it would probably be a bit tough for SunPass to switch, and you wouldn't think the Washington health care exchange would be quick to switch call centers. The CEO was a lobbyist, which is probably where a lot of these contracts came from. A lot of these government contractors just kind of continue to exist. The contractors may not offer the best service, but the government often lacks motivation to switch. They may not get great margins, but the government won't price them to bankruptcy either (unless it's Medicare doing the pricing).

 

Another element to consider is that the CEO (Van Buren) is now fully responsible for Faneuil and may be able to have the freedom to be more entrepreneurial. At Harland Clarke and M&F, it looks like there may have been some bureaucracy. It might have some spin-off quality characteristics in that regard. She is certainly incentivized with her $2m purchase, though it seems odd she bought Faneuil and not ALJJ shares. I don't know how it would work, but wouldn't she be missing out on the value of the NOLs for her share of the company?

[morningstar]

I have been following this company for a couple years (as part of Harland Clarke) and I would point out two things...

 

(1) In 2012, Harland reorganized its reporting segments to include some call center operations from its other business units under the "Faneiul" segment, so I don't know if what is being sold to ALJJ includes everything they were reporting as part of that segment. ALJJ might not be getting the full $29-30m in annual segment EBITDA. However, I think additional corporate overhead would be pretty low as the corporate segment at HC is basically just the office of the CEO.

 

(2) I wouldn't use the $70m price for the MFW-HC transfer as meaning much of anything. It is most likely inflated. The transaction allowed Perelman to remove cash from HC (a levered entity, whose refinancing hopes looked grim at the time with bonds trading at 20%+ yields). Certainly the perception of HC investors at the time was that MFW was stuffing a bad asset into HC. The fact that it's being sold 20 months later at about a $20m loss pretty much confirms that view. I suspect there is actually less to Faneiul than meets the eye.