Sunday, October 24, 2010

The ITEX Proxy Contest Heats Up.

ITEX just issued their proxy statement.

I must say, this takes on a different tone than the last time that something with the company went down.

ITEX put forth a timeline about the events that preceded this contest.

Here are some highlights:

On October 4, 2008, Mr. Polonitza phoned Steven White and stated he had an interest in participating in an ITEX “going private” transaction. He informed Mr. White that he had a “couple hundred grand” and would like to receive 8-10% preferred stock plus warrant coverage. Mr. White communicated that going private was not part of the Board’s current strategic plan.

On December 12, 2008, Mr. Polonitza attended the ITEX stockholder meeting. Alnesh Mohan and Sanjeev Parsad of Vancouver, B.C. were also in attendance. Mr. Polonitza joined Mr. White and Mr. Zimmelman for dinner after the stockholder meeting, and the three had general discussions about the Company. Mr. Polonitza voiced his feelings that Mr. White was operating the Company efficiently and was complimentary about the performance during the past year. Mr. Polonitza strongly advised Mr. White and Mr. Zimmelman not to trust Alnesh Mohan and Sanjeev Parsad.

On January 22, 2009, Rahul Pagidipati sent an unsolicited email to the Board of Directors of ITEX to see if they would be interested in exploring a PIPE investment or other type of recapitalization from the Pagidipati family. Mr. Pagidipati referenced the tender offer from Sardar Biglari of Western Sizzlin Corporation, and stated “but I think we make a much better partner.” The email stated “We could invest between $1M+ as a PIPE or we are also interested in a buyout of the firm based on the terms/valuation. For example if the existing management team is interested in doing an LBO, we could help with the financing and get involved as a partner.” The Board did not respond to Rahul Pagidipati.

On December 11, 2009, Alnesh Mohan and Sanjeev Parsad attended the ITEX shareholder meeting. Mr. Parsad asked whether the Board had considered a capital allocation strategy utilizing a holding company. He recommended a holding company structure which would allow surplus cash generated by ITEX to be channeled to the parent for reallocation and deployment in pursuit of attaining a higher return on investment. Mr. White responded that removing cash to a holding company was not part of the Board’s strategic plan.

On March 23, 2010, a letter was sent by the group to the Board of Directors of ITEX applauding management for adopting some of its initiatives and seeking additional changes. Issues raised by the group included increasing franchise locations and improving franchise profitability, improving corporate governance, providing additional services to members, managing the SuperMedia relationship, managing cash flow differently, separating the CEO and CFO positions, and improving member retention rates.

On April 1, 2010, Mr. White sent a letter to the group to correct the record and respond to several inaccurate statements. Mr. White reminded the group that ITEX had adopted its corporate initiatives as a result of the Board’s strategic plan and not in response to their group suggestions. Mr. White noted that the suggestions of the group did not offer any clear execution plan.

Then there was this, which, BY FAR, was my favorite:

As noted above under “Background of the Solicitation,” we fundamentally disagree with the capital allocation strategy advocated by certain members of the Pagidipati Group of utilizing a holding company structure to allow cash generated by ITEX to be channeled to a parent for reallocation and deployment in pursuit of attaining a higher return on investment. This was the same strategy previously advocated by Western Sizzlin and Sadar Biglari when an exchange offer for all outstanding shares of ITEX was commenced in December 2007 an offer that was rejected by over 95% of ITEX stockholders. It was Mr. Biglari’s intention to use his own holding company to operate ITEX as one of several subsidiaries engaged in a number of diverse business activities. Mr. Parsad, a member of the Pagidipati Group, was a stockholder in three of Biglari’s companies, Western Sizzlin, Steak'n Shake and Biglari Holdings, and operates an investment community board whose members study and advocate this investment philosophy. (Bold and Italics mine.)

I understand where ITEX management is coming from in regards to the relationship of the CEO to the franchisees, I also understand that he has a great amount of experience in the barter industry. However, it does seem that the dissident shareholders have made a good case, and, frankly, could replace management with no problem... The statement though, just seems absurd.

Normally, I would question the investment acumen of a management team that truly doesn't understand why you would want to earn high returns on invested capital; I am gonna give Steve White the benefit of the doubt on this one... I don't think that he is stupid, and, I am guessing by what seem to be obvious and huge fallacies in his stated logic, probably hopes that shareholders are. It seems as if he is trying to get a lot of the return on their investment in the company in the form of a salary and share price appreciation, rather than only on the later. Even if he gets canned after the contest, I won't feel too bad for him, as, he has a nice departure package lined up.

Certainly, I would imagine that the dissenters would be happy with dividend payments and share repurchases in lieu of a holding company. I find it unfortunate that, when rejecting the idea of a holding company, ITEX mentions that it is the same philosophy espoused by Sardar Biglari... as if the whole concept if evil, simply because they feel that a value investor low balled them for the company. After all, that is kind of the idea behind value investing.

Furthermore, on a personal note, I don't know why anybody would want to take such a great franchise model, which is pretty low risk, and then try to make it capital intensive, as has been the case with ITEX... Not all businesses are meant to become empires. Presently, ITEX seems to be dragging shareholders along for a historically capital destroying journey to build a revenue generating empire, while giving no real evidence that they can raise earnings in step.

Disclosure: I am long Biglari Holdings. This is not advice. Always do your own research in when thinking about doing anything that I talk, think or write about.

1 comment:

Robert Pio Molloy said...
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