Market Musings - June 6, 2018

We continue our blog series: Market Musings, Volume 2, Edition 17, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present "Value in Supervalu? Blackwells' SVU Activist Campaign".

A new activist has emerged on the scene: Blackwells Capital. Blackwells is run by Jason Aintabi, whose bio can be found here. On March 22, 2018, Blackwells announced that they are running a proxy contest to place six of their nominee directors on the BoD at Supervalu (SVU) - SEC filings here:

Blackwells' 5% stake is currently worth about $37MM. SVU has been an unmitigated disaster for shareholders over the past 10 years, dropping over 90% during that timeframe:

Enough is enough, say the activists; to spread their message they have created their own Save Supervalue website. Basically, Blackwells is urging the company to focus its energy on the company's valuable wholesale business (with the view of eventually selling it to the highest bidder) and ending the distractions involved in running the smaller (negative EBIT) retail operation (by separating it from the remainder of the company). Thus, Blackwells is advocating for the following actions at SVU:

Multiple strategic initiatives to drive growth and margins, and reduce Supervalu’s significant valuation discount;
A sale-leaseback of Supervalu’s wholesale distribution center real estate to reduce net leverage and significantly boost share price;
A sale or spin-off of the retail segment, transforming Supervalu into a pure-play wholesale business, which would be accretive to EPS and improve valuation multiples; and
A sale or merger of Supervalu’s strategically attractive wholesale business to or with one of multiple potential competitors.

The bios of Blackwells' six director nominees are as follows:

In addition, we have excerpted below a few of the more interesting slides from Blackwells main Powerpoint presentation regarding SVU, which indicates that there may be 110% to 125% upside in the stock from the current $20 level:

Blackwells' arguments appear quite persuasive (in our humble opinion). Unfortunately, instead of doing the logical thing (for shareholders) and engaging with Blackwells to try to get out of the massive hole SVU has fallen into, SVU's BoD and management have predictably responded to the activists with the following "circle-the-wagons"/ "we've got this, thanks anyway guys" kiss off (in other words, the usual empty C-suite PR spin):

"The Board and management team already have SUPERVALU’s transformation strategy well underway, and do not believe the changes to the Board proposed by Blackwells are necessary to ensure the continued execution of the Company’s initiatives to create stockholder value. As previously disclosed, members of our Board and management team have had several discussions and meetings with representatives of Blackwells over the last several months to discuss overlapping objectives and attempt to reach a constructive path forward. Nonetheless, Blackwells has chosen to respond with a public campaign and an attempt to take effective control of the Company. However, and as previously announced, we are committed to Board refreshment and will consider Blackwells’ candidates as we would any other potential directors to assess their ability to add value to the Board and the Company for the benefit of all stockholders."

(Note that SVU conveniently omits to mention the fact that the current BoD already has "effective control" of the company and never paid shareholders a dime for this.) With SVU's stock price down 27% over the past year, it seems as if Blackwells may have a decent chance in this proxy contest. Although SVU's directors last year received only de minimis number of "No" votes at the annual meeting, close to 17% of the shares were not even voted (see full meeting voting results here). Thus, shareholder apathy with the current board seems high, indicating the time may be ripe for an activist campaign.

Finally, there is encouraging precedent for a "separate the retail and wholesale segments / monetize the real estate assets" activist campaign in the food space. Bob Evans Farms (BOBE) - SEC filings here - came under scrutiny from activist Sandell Asset Management in early 2014. A copy of Sandell's initial presentation on BOBE can be found here. Similar to Blackwells' message to SVU, Sandell encouraged BOBE to split their retail restaurant operations (Bob Evans Restaurants) from their packaged food wholesale business with grocers (BEF Foods) (although in this case, the initial emphasis of the activist was on maximizing value on the retail side and divesting the wholesale operations); in addition, Sandell urged BOBE to monetize their real estate:

At the time Sandell initiated its proxy fight, BOBE stock was trading around $44/share, while Sandell estimated shares could potentially be worth between $76 and $91, or approximately double their then current value:

So how did things work out for BOBE shareholders in the end? Sandell won four BoD seats at the 2014 annual meeting (see here), the imperial CEO was forced to give up his Board Chairmanship (see here) and eventually forced out as chief executive (see here), the company moved to monetize several hundred million dollars in corporate real estate assets to free up funds to repurchase shares (see here), as well as entered into sale-leaseback transactions regarding its restaurants, freeing up hundreds of millions more in capital to return to sharheolders (see here), the company announced the sale of its retail restaurant business to Golden Gate Capital for net proceeds of approximately $480MM and consequently declared a $7.50/share special dividend (see here), and finally the remaining public company (i.e., the wholesale business) was sold to Post Holdings for $77/share (see here).

Thus, without even counting regular dividends, BOBE shareholders realized an aggregate return between April 2014 (when Sandell announced their activist campaign) and January 2018 (when the sale of BOBE to POST was completed) of $40.50/share (i.e., $33 in capital gains plus the $7.50 special dividend) on a $44/share cost basis, representing a CAGR of 19% for that holding period. Including regular BOBE dividends, the CAGR was nearly 21%. Not too shabby...

Readers should also note that somewhat similar activist campaigns involving Starboard Value commenced in February 2014 against Darden Restaurants (DRI) (for which see here), as well as Biglari Holdings in September 2011 against Cracker Barrel (CBRL) (for which see here), both of which resulted in huge gains for shareholders--food for thought: