Mill Road calls for the sale of Big Lots. Here’s what we could learn from the company’s past deals

A customer walks out of a Big Lots store in Clifton, New Jersey.

Emile Wamsteker | Bloomberg | Getty Images

Company: Big Lots (BIG)

Business: Big Lots operates as a retailer in the United States. The company offers products in various merchandising categories, such as furniture, seasonal products, hospitality products, consumables and food. As of March 15, 2021, it operated 1,410 stores in 47 states and an e-commerce platform.

Market value: $977.3 million ($34.22 per share)

Activist: Mill Road Capital

Percentage of ownership: 5.14%

Average cost: $20.10

Activist Comment: Mill Road Capital is an investment firm focused on investing in and partnering with publicly traded micro-cap companies in the United States and Canada. The company was founded in 2004 by Thomas E. Lynch, who began his investment career at Blackstone. In their last 13F filing, Mill Road said they manage $300.74 million across 27 different positions. Mill Road has made 30 previous 13D filings and taken Section 4 action in 14 of those situations.

What is happening?

On March 15, Mill Road sent a letter to company shareholders announcing that it was asking the company to pursue a sale, which it said could happen for $55 to $70 per share (a premium of 72% 119% from the closing price on March 14). Mill Road also congratulated the company’s management team and their successful implementation of a strategic plan.

In the wings:

Mill Road is not an activist investor, and that is a far cry from shareholder activism. Mill Road has sent a letter to the company saying it believes its management team has done a great job over the past few years and has improved the company’s long-term prospects. They specifically cited that: (i) the Broyhill ($700 million in sales) and Real Living ($600 million in sales) brands could each reach over $1 billion in sales, (ii) retail penetration electronics can range from 5% to 15%. % over time, and (iii) long-term growth and margin prospects imply a 150% to 320% increase in annual operating income. Yet despite this positive operational success and outlook, Mill Road is urging the board to proceed with a sale-leaseback and “fully utilize the company’s existing credit facility” to generate low-cost funding that can be used to finance a business acquisition. .

It is not Mill Road that defends the best long-term interests of shareholders, but urges the board to pursue a short-term agenda to rapidly increase share prices. This is not a letter on behalf of long-term shareholders, but a love letter to potential leveraged buyout acquirers to increase Mill Road’s return on this investment at the expense of potential long-term shareholders. term upon leaving the company.

Mill Road has owned 4.95% of the company since the fourth quarter of 2020. They have an average price of $20.10 per share and have been deliberately silent during their holding period, ensuring they remain below the threshold of 5% 13D. When shares outstanding fell due to share buybacks, in the second quarter of 2021, Mill Road sold its position to stay below 5% and avoid having to file a 13D. Now he’s increasing his beneficial ownership by 29,393 shares on his 1.4 million share position just to top 5% so he can file a public 13D to get a stock price boost and/or attract private interests.

Perhaps Mill Road would even participate in an acquisition to snatch some future value from shareholders. They are used to offering to acquire their portfolio companies, and they have been successful at (i) Rubio’s Restaurants, Inc (acquired 2010), (ii) PRT Growing Services, Ltd (acquired 2012), ( iii) RG Barry Corp (acquired in 2014), (iv) Skullcandy (acquired in 2016) and (v) Mother’s Market & Kitchen (acquired in 2016). It’s not shareholder activism, but it’s what gives shareholder activism a bad name.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.

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