Ruby Tuesday Strategic Alternatives Review Process Needs Improvement
By Dr. Hugh Akston :
We have held a significant investment in Ruby Tuesday (the "Company", ticker: [[RT]]) since 2013. Unfortunately, our shareholder experience has likely been identical to virtually every other existing shareholder today. We have openly rooted for the Company during each turnaround attempt, thrown our support behind each new CEO, listened to every quarterly conference call, frequented many locations, and ultimately eyed the value of the company-owned real estate assets as a safety net for shareholders.
We applauded the Company's announcement on March 13, 2017 that it hired UBS to explore strategic alternatives to maximize shareholder value. The stock price responded positively as investors finally saw a light at the end of what has been a long, dark tunnel. That announcement was made over three months ago, and unfortunately nothing has happened since then. Investor sentiment has since soured as this strategic alternatives process starts to resemble nothing more than lip service, rather than an objective review of the Company's situation and an honest discussion of what is best for Ruby Tuesday shareholders.
1. The Board Needs to Extend the Nominating Window Until the Strategic Alternatives Review is Complete
The nominating window for Directors is scheduled to close on July 6, 2017. Given the lack of updates that have been provided to shareholders thus far, we can envision a situation where the nominating window closes without any conclusion to the strategic alternatives review process. We do not think it is fair to ask shareholders to vote on Directors without knowing the outcome of the strategic alternatives review process. This process is perhaps the most important shareholder event in the past decade, and we think it is only fair that shareholders know the outcome of the process before being asked to vote for a Director who will serve for three years.
We request the Company extends the nominating window an additional 30 days to allow the strategic alternative review process to reach its conclusion. We believe this is an extremely reasonable request, and one that is supported by every institutional shareholder with whom we've spoken.
2. The Board Needs to Thoroughly Consider ALL Bids Received
The unfortunate reality is that consumer tastes continue to evolve away from the value proposition and experience that was so successful for Ruby Tuesday in the 1980's and 1990's. We can attest that some locations are wildly popular (and profitable) in their local market; however, some locations are ghost towns. A business model based on a large and dispersed location footprint - and the resulting cost structure needed to maintain it - is no longer a viable proposition for the Company. Every dollar of liquidated real estate proceeds that is redeployed back into the restaurant operating business is destroying value and effectively stealing from shareholders. Spending more money on ineffective TV ads or a redesigned salad bar is not going turn the secular tide of shifting consumer preferences.
The other unfortunate reality is that time is the enemy of Ruby Tuesday shareholders. Shareholder value is being destroyed every day the strategic alternative review process drags out. The Board has a fiduciary responsibility to shareholders and needs to act decisively if and when there is an opportunity to preserve the shareholder value that still remains. It is decidedly too late for the grand turnaround plans (That ship sailed in 2012). At this point, the Board needs to act now to preserve some value for shareholders and avoid being at the helm for a catastrophic wipeout of the equity value.
We believe the Board of Directors (listed below) is comprised of fine people; however, it is hard to argue that their collective actions - and inactions - have served shareholders well. Ruby Tuesday shareholders have fared horribly over the past 10 years.
- Stephen Sadove (term expires in 2017)
- Mark Addicks (term expires in 2017)
- Donald Hess (term expires in 2017)
- F. Lane Cardwell
- Kevin Clayton
- Bernard Lanigan
- Jeffrey O'Neill
- James Hyatt
If the Board receives a viable bid during the strategic alternatives review process and does not accept it, we plan to do everything in our power to hold each individual personally liable to the fullest extent possible.
3. The Real Estate Value is Real, and It Belongs to Shareholders
We have always viewed the company-owned real estate assets as a safety net for shareholders. Unfortunately, the real estate assets have been systematically liquidated in order to subsidize the restaurant operations. This continued activity transfers value from shareholders to lenders, landlords, company insiders, vendors, and employees. Slowly liquidating the remaining real estate assets to fund the restaurant operations will eventually wipe out shareholders.
We have done a great deal of analysis on the Company's real estate assets over the years. The value of the real estate is real, and it belongs to shareholders. Our conversations with industry operators indicate that the replacement cost of the average company-owned location is approximately $2M. We have also analyzed all of the Ruby Tuesday locations that have been listed for sale recently. The average listing price is slightly over $2M per location.
We can debate what haircut to the listing price is appropriate for each location and how much the properties not listed are worth, but in general, the real estate assets are relatively homogenous. Our analysis indicates the real estate assets imply an equity value of $2.50-$3.50 per share for shareholders. If the Board receives a buyout offer in this range, they must vote to accept the offer in order to preserve the remaining shareholder value. The Board needs to remember that they have a fiduciary duty to shareholders. Shareholders have suffered long enough and deserve to keep what remains of the equity value of the Company. If the Board receives a viable bid during the strategic alternatives review process and does not accept it, we plan to do everything in our power to hold each individual personally liable to the fullest extent possible.
4. We are prepared to nominate three Class I Directors for the upcoming election if the nominating window is not extended by 30 days
We are making an extremely reasonable request to extend the nominating window so shareholders can see the conclusion of the strategic alternatives review process. We request the Company extends the nominating window by 30 days and does so by July 3, 2017. If the nominating window is not extended, we will view this poor corporate governance as a blatant disregard for shareholders' interests. We are prepared to nominate three highly-qualified Class I Directors consisting of restaurant operators and a shareholder representative. Given the staggering amount of value destruction that has occurred during the tenure of Mr. Sadove, Mr. Addicks, and Mr. Hess - and their lack of experience in the restaurant industry - we believe our nominees would prevail in a proxy contest . We strongly prefer to avoid a costly and distracting proxy contest, but the Board needs to honestly consider shareholders' interests during the strategic alternatives review process. Extending the nominating window is an easy way to show good faith to shareholders. We look forward to seeing the nominating window extended 30 days by July 3, 2017.
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