Tuesday, May 31, 2011

Thoughts On Syms' Exploration Of Strategic Alternatives

Recently, it became official that the board of Syms is considering a possible sale of the company. Soon after, it came out that they had enlisted the help of Rothschild to explore strategic alternatives, but that when it came to a sale of the company, they would only take bids for the whole of the company pie.

As previously has been the case, they guys at Esopus Creek Advisors pointed out that such a decision is fool hardy, and should be reconsidered. For the good of shareholders and the financial stability of whatever form the company eventually takes, they are absolutely right. As I pointed out in a previous post, I am happy to be invested along side them, as they have the track record of being a good gatekeeper that keeps management from doing anything too off the wall (like de-listing the stock). I think that there is a good chance they will make headway in this matter, as the facts are so overwhelmingly slanted in their favor.

One of the reasons that only considering a sale of the whole company is a blunder, comes from the letter of Capstone which was published on Ragnar Is A Pirate last week. In it, Joshua Zamir points out that there are no board members with significant real estate experience... As the bulk of any investment thesis in this company more or less revolves around the real estate assets, I can't imagine that the board could make a strongly informed decision in regard to the sale of the company, or even the parts of it, without having someone in the know representing shareholders in the matter. This is something that needs to be addressed ASAP, so that the board can act in a judicious and fiduciary manner.

Let it be known that only considering the sale of the whole company to a single buyer is no doubt a value destroying blunder that would likely strongly benefit the buyer over shareholders... In this particular case, it is likely to be management. At a minimum, the Trinity store should never again be part of the Syms puzzle. As a retail store, it will constanly be underutilized by both society and whoever owns it... It needs to be sold off to a shrewd developer, demolished, and replaced with nice residential apartment units. At best, the company should likely selectively sell off a good bit of it's real estate, and then sell the leased and remaining owned locations to other off price retailers.

While there has been contentious debate in the blogosphere and various message boards in regard to the future of the retail operations, I believe that the bulk of the stores that are leased (mainly due to the acquisition of Filene's Basement) still have significant economic worth. At present, there is no doubt that operations are certainly not where they need to be; in different hands, they could do quite well. There could be huge potential synergies in advertising, name recognition, distribution, SG&A and many other items that would make the locations quite profitable in the right hands. It is important to remember that TJX trades at over 6x book value- Gordman's trades at well over 7x book. Syms on the other hand, was recently trading at 1/2 of an absurdly understated book value! There is a lot of room for operational improvement that others can, and are more than able to do, especially with locations that seem to be (at a minimum) not terribly placed in their respective markets... Many, are in superb locations! As a side note, companies like TJX are sitting on the cash to buy out Syms' assets, additionally, I wouldn't be surprised if bankers would not bat an eye for shelling out the cash to finance a project. Previously, in middle of one of the worst economies ever, Men's Wearhouse bid for the Filene's assets, so, it is no stretch of the imagination that they may again be interested in the assets of the entity. Other discount retailers will likely have an interest in the locations as well, since it wouldn't take much money to bring them under the umbrella of the Burlington Coat Factory, Gordmon's, or even the TJ Maxx brand names.

So, what happens if the company still manages to be taken out by management or nothing happens? I don't see this happening at anything close to book value, mainly because as I have already pointed out, the book value of the company is so freakishly understated on the books that there is no way that any body with anything resembling a brain could render a fairness opinion for that (and I have seen some crazy fairness opinions). Additionally, I would imagine that there would be a large amount of shareholders signing on to a lawsuit against the directors of the company if the price is to low.

So, in order to make things fly, management would have to pony up a fair amount of cash to take out the stock that they don't control. How could they do this? I see a bunch of options, a few of which, I will list below, with some thoughts:

1) Capstone helps them lever up the company in exchange for equity and some other perks... An option that I kind of like, since it is pretty quick. Again, this is a great option, provided that it doesn't screw the minority shareholders out of what is obviously a group of valuable assets.

2) Management uses debt, then starts shuttering stores like crazy (there are numerous leases getting ready to expire) and sells off real estate to cover the debt, making a killing in the process...

3) They spin off the real estate assets and continue to operate the stores... The only downfall here, is that the retail operations would have to turn around even more than they need to now. After all, unless they start making money, how can they make rent payments on the ~20 properties that they own, and were paying virtually nothing on before?

4) The company stays public. Operations may or may not improve, but, we still sit on a mound of real estate to protect investment. Recent results have shown that something has to be done to save the ship.

Most of these, or many other potential options seem to lead us back to the beginning of the post, which is that the company needs to be split up, in some way, shape, or form, at some point in the not so distant future... Honestly, I don't see that management has much of a choice but to do so, given the losses. Furthermore, since it is a company that bears a family name, the family should have a strong desire to see what they have worked so hard for not be destroyed AND get a nice pay day in the process.

For all of these reasons, I believe that there is much more upside to the price of Syms stock, despite complaints of the retail sector being in a secular decline. Any concerns that I have, or could have with the company and/or industry have likely been more than priced into the stock (even at $9 bucks a share). On this note, since I have repeatedly been asked what I think this thing is worth, I will give the following answer:

I almost never tell anybody so much as even a range of what I think anything is worth. Simply put, there are way to many variables to assume to come up with a range, let alone an exact amount. If I would ever need to break out a DCF calculator then it is probably too close to the line for me to get to excited about! Without over complicating things (and, likely, under complicating them): as a mental exercise, let's say that the real estate of the company is worth $200 million as that is the low end that the guys at Capstone suggest (then, we value those ops at nothing), then, lets say that their leased locations are worth ~$1.5 million bucks a piece- a value of which happens after taking out debt, allowing for inventories, and allowing a nice bit for the upside that a really good operator could juice out of them (keep in mind that number is a lot less than Syms paid for the Filene's stores almost 2 years ago when things were a lot more scary)... With those assumptions, the stock is worth ~$250 million, or put another way, there is another ~80% upside from the date of this publication.

To show why someone might want to acuire the ops of the company, if the stock trades at the premium to book value that TJX or GMAN does, then, we are looking at the stock being at well over $60 bucks a share... Which is actually part of why I think that it is such an attractive candidate for another discount retailer to buy. If the acquire buys it with stock for $35/share, and get operations to what is an industry standard in a few years, then shareholders of Syms, those of the acquirer win and the executives that orchestrated the deal. Big time. Maybe the insiders at Syms would also get to keep their jobs working at another firm? Which, in a tightly knit company is often a concern. Certainly, I am not saying that is what the stock is going to trade at, as TJX and the like are a lot more capital lite operationally than Syms, but, it is a way of starting the process to think about what could potentially happen. Use your own assumptions and models.

In closing, I again will say that I still plan on being at the annual meeting. I encourage all shareholders to attend. It is important to meet with the people running and overseeing the company that you are a minority owner of and to let your opinion be known. It actually does make a difference (remember the reversal of the decision to do the last reverse stock split at Biglari Holdings? Or the modification of Biglari's pay package due to shareholder uproar?). For those of you who don't think it is justified to show up based on a small ownership of stock, consider this:

Even if you own just $5K in stock, and you spend a whopping 10% of that to go to the meeting, you may be part of something that could generate even greater returns... plus, you would get to take a few days off work, know your company a lot better, and likely write a good bit of the expense off of your cost basis for the stock (talk to your tax guy before hand), and chill in NYC for a few days!

Disclosure: I am long SYMS. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, write, do, or so much as even think about.

No comments: