01 Mar Activist fight over Specialty Fashion looms as test for board and investor
Source: The Australian Financial Review.
It might seem incongruous that anyone could get too exercised about the fate of perennially struggling fashion group Specialty Fashion.
In a sector full of companies clinging to life, Specialty has at times looked like a candidate for the scrap heap; its directors said the business was a going concern in the December accounts, but with debts of $20.5 million bank funding that will soon be cut from $40 million to just $22 million, it looked a close-run thing.
But activist investor Sandon Capital, led by Gabriel Radzyminski, has a much more optimistic view of the business. He doesn’t believe the business is dire straits at all – while it’s not all rosy, the free cashflow of the business is reasonable is a sign of its potential. Indeed, if a turnaround can be achieved, that would deliver as much as a five-fold return.
But the source of Radzyminski’s consternation is a chain called City Chic, perhaps the most fashion-conscious chain in Speciality, which also owns the Rivers, Katies, Autograph, Millers and Crossroads chains.
Speciality, which has investment bank Luminis Partners in its corner, has been fielding offers for parts of its business – it’s understood the City Chic has attracted the most interest, with talk of a price tag of $100 million.
Others examining the business include Noni B, which is backed by investment firm Alceon Group, and has just pulled off the sort of turnaround that gives Speciality investors hope.
But the prospect of a deal has prompted Radzyminski to make public a letter to Specialty chairman Anne McDonald in which he argues that a capital raising would be much preferable to an asset sale – especially if that asset is City Chic.
There’s a long history of letters to the chairman in activist investing circles, particularly in the United States, where such letters have become an art form.
What’s interesting about Radzyminski’s letter is not that it contains theatrics or pointed barbs, but rather that it sets out a very specific plan for rescuing Speciality.
Radzyminski says he has approached stockbroker Taylor Collison with the express purpose of raising $19.2 million via a rights issue priced at 20¢.
While Radzyminski concedes the pressure will be on the board to “take the money and run” by doing a deal, he arguestheir board should instead steady the ship and remove any questions of stress with a rights issue and then “maximise the value opportunity we believe it has within its grasp”.
Speciality shares are currently trading at 23¢ a share, down from around 60¢ at the start of 2017.
But Sandon argues the business if worth 47¢ a share now, based on a earnings before interest, tax, depreciation and a amortisation of $18 million in 2017-18 (the low point in the cycle in the eyes of Radzyminski) and a multiple of five times.
But if Speciality is “successful with its store optimisation and transformation program” the business could be worth between 65¢ and 78¢ a share. Throw in Speciality’s deep pool of franking credits and its value could be as high as $1.04 a share – or almost five times the current value.
“If our analysis is reflective of where the status quo value of the company lies, a rights issue of the type we are proposing should be well received by most shareholders, especially if it removes any pressure that exists to sell assets in the short term.”
There are, of course, some assumptions in the Sandon theory – not least of which is Speciality’s new chief executive, former Myer executive Daniel Bracken, pulling off the turnaround in an extremely challenging environment.
But in talking to other Speciality shareholders who share Sandon’s concerns about asset sales, it’s clear that any turnaround would be very difficult if City Chic was sold and Speciality’s other bands were left behind. These shareholders are supportive of a capital raising if that is what’s needed.
So what they are worried about is fatigue. Will the board, wearied by a very tough few years, be tempted to take an attractive deal that Luminis can put together?
Radzyminski has asked Specialty “that no sale, particularly of the City Chic business, be undertaken without seeking shareholder approval”. That view would appear to have support among other shareholders, who are prepared to get involved and help the company if necessary.
The view from inside the Speciality camp is that much has changed in the last two months – a new CEO, plenty of offers for assets and now an activist publicly stating the case for a turnaround.
While a divestment remains an option, the board and management’s focus is on closing the valuation gap between the current market capitalisation and the proposals that have flooded in.
At The Australian Financial Review Business Summit next week I will be hosting a panel on the rising of shareholder activism and Speciality is an interesting case study.
The discussions Sandon has had with Speciality would be similar to talks that take place between investors and chairman all the time. But Sandon’s decision to publish its letter and put pressure on the board and management makes this one to watch.
Who said $44 million companies can’t be fascinating too?
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