Every time I think I have a handle on what Fidelity National Financial Inc. is up to, it manages to surprise me.
Jacksonville-based Fidelity last week announced a $72 million agreement to buy J. Alexander’s Corp. That shouldn’t be a surprise to anyone because, while Fidelity is mainly a title insurance company, it also has been using excess cash to invest in other businesses and has built up a sizable restaurant subsidiary.
Along with other investors, Fidelity formed a restaurant company called American Blue Ribbon Holdings Inc. that now owns the Bakers Square, Max & Erma’s, Village Inn, Stoney River Legendary Steaks, O’Charley’s and Ninety Nine chains.
Fidelity owns 55 percent of that company which operates, through the six chains, 674 restaurants in 43 states and has annual revenue of about $1.3 billion.
J. Alexander’s adds 33 more restaurants in 13 states and will increase American Blue Ribbon’s annual revenue to about $1.5 billion.
Here’s the twist to this deal: American Blue Ribbon will be issuing a combination of cash and stock to J. Alexander’s shareholders and the new stock will be publicly traded.
So American Blue Ribbon becomes a public company itself after the buyout, with Fidelity still controlling a majority interest.
Fidelity said it will retain a special class of American Blue Ribbon stock that will give it at least 50.1 percent of the voting power as long as it maintains a 40 percent economic interest in the restaurant operations.
Current J. Alexander’s stockholders will end up with a 6 percent economic interest in American Blue Ribbon, and those are the shares which will be publicly traded.
You got all that?
Fidelity Chairman Bill Foley did tell analysts in April that the long-term plan for the restaurant business was to build it up and possibly take it public a couple of years down the road. However, Fidelity never sits still for very long, so maybe it shouldn’t be so surprising that it sped up the timetable.
Fidelity hopes to complete this deal in the fourth quarter.
One major J. Alexander’s shareholder opposes the buyout
There is one other issue to be addressed in Fidelity’s deal. The buyout will require approval from J. Alexander’s stockholders and one large shareholder has already come out against it.
Nashville-based J. Alexander’s is publicly traded, under the interesting ticker symbol “JAX.” Under the agreement, J. Alexander’s shareholders can elect to receive $12 in cash or $3 in cash plus one share of American Blue Ribbon.
“We believe this transaction will provide significant benefits for our shareholders,” J. Alexander’s Chairman and CEO Lonnie Stout said in a news release.
“It not only rewards them with a cash premium for their existing shares, it offers them participation in the future business prospects of a much larger entity,” he said. J. Alexander’s stock was priced at $9.90 before the deal was announced last Monday.
Atlanta-based Privet Fund LP, which controls about 10 percent of J. Alexander’s stock, doesn’t agree with Stout. It sent a letter to the company’s independent directors “to inform you of our dissatisfaction” with the deal.
“We have seen no evidence that a widespread and thorough process was conducted by the company or its investment bankers. This was not the market-clearing price as determined by a robust auction with competitive bidding,” Privet’s letter said.
“We are mystified as to how this contemplated structure can possibly be of greater benefit than an all-cash bid. No shareholder of J. Alexander’s wants a nominal, secondary class interest in an accumulation of businesses that have minimal overlap with the company’s growing market niche and superior brand reputation,” it said.
This is not the first time Privet has publicly criticized J. Alexander’s management. The firm filed a proxy statement seeking to elect two of its own representatives to J. Alexander’s board of directors at the company’s upcoming annual meeting.
It will be interesting to see if Privet receives the support of other shareholders to oppose the Fidelity deal.
Other Fidelity also announces deal
While Fidelity National Financial was announcing its complex deal last week, the other Jacksonville-based Fidelity announced a significant deal of its own that is more straightforward.
Fidelity National Information Services Inc., which calls itself FIS, announced it will sell its health care benefits solutions business to New York-based private equity firm Lightyear Capital LLC for $335 million in cash.
FIS provides technology services mainly for financial institutions and it said the sale of the health care benefits business is consistent with its focus on the financial industry.
The health care benefits business generated revenue of $120 million and contributed about 5 cents per share to FIS’ earnings last year. FIS had total revenue of $5.7 billion and adjusted earnings of $2.27 a share in 2011.
FIS expects to receive after-tax proceeds of about $220 million from the sale but will incur a loss of $55 million, or 19 cents a share, in the third quarter from the deal. It also said the sale will reduce this year’s earnings from continuing operations by 7 cents a share.
“While mildly dilutive (and a little surprising to us), the divestiture does potentially simplify the company’s end markets and offers an opportunity to reduce FIS’ debt levels,” Robert W. Baird analyst David Koning said in a research note.
S&P upgrades outlook for LPS
Let’s not forget the other Jacksonville-based company that was spun off from Fidelity National Financial, Lender Processing Services Inc. While the two Fidelity companies were making deals, Standard & Poor’s upgraded its ratings outlook on LPS from “negative” to “stable.”
“The outlook revision reflects our expectation for stabilizing revenue and earnings, continued analytics services revenue growth, and, beginning in 2013, increases to foreclosure processing activity,” said S&P credit analyst John Moore in a news release.
LPS provides technology services to mortgage lenders through all phases of the loan process, from origination to possible foreclosure.
Interline lands no other offers
Interline Brands Inc. announced Friday that its “go-shop” period expired without any competing offers to buy the company.
That means Interline is moving forward with its proposed buyout by P2 Capital Partners LLC and an affiliate of Goldman Sachs.
The two firms agreed May 29 to buy Jacksonville-based Interline for $25.50 per share, but the agreement allowed Interline to solicit competing offers for 30 days.
Interline expects the buyout to be completed by the end of the third quarter.
CSX facing class-action suit over fuel charges
Analysts have been closely watching CSX Corp. and other major railroad stocks after a federal judge in Washington, D.C., ruled June 21 that a lawsuit over fuel surcharges can go forward as a class action.
According to Bloomberg News, more than two dozen companies have filed suits that have been consolidated into one. The lawsuits allege that four major railroads colluded on imposing surcharges beginning in 2003.
CSX and the other three railroads have denied the allegations. But analysts see the case as a drag on the companies’ stocks because the case is a long way from being over.
“We don’t expect a final ruling or settlement for at least a year and likely longer. The rails don’t believe they have done anything wrong, so we wouldn’t expect them to quickly settle without a fight, although we suspect they could ultimately settle to help protect their antitrust immunity,” Wolfe Trahan analyst Ed Wolfe said in a research note.
Despite concerns that a settlement or ruling could be costly for the railroads, Wolfe said “we suspect a worst case scenario settlement or ruling (likely not for a couple of years) would have little impact on the rails’ balance sheets or pricing power.”
Shoe Carnival pays cash dividend
For the first time since Wayne Weaver took the company public, Shoe Carnival Inc. is paying a cash dividend.
The Evansville, Ind.-based footwear chain announced last month that its board of directors approved a quarterly dividend of 5 cents per share.
“The payment of a quarterly dividend reflects our financial strength and commitment to increasing shareholder value and total shareholder return,” Shoe Carnival CEO Mark Lemond said in a news release.
“Our history of generating consistent cash flow enables us to be in a position to continue to strategically grow our retail store base and return excess capital to our shareholders.”
Weaver took Shoe Carnival public in March 1993, about the same time he became the lead partner in the group that was trying to bring an NFL franchise to Jacksonville. Of course, he was awarded the Jaguars franchise later that year.
Weaver remains chairman and is the largest shareholder of Shoe Carnival. He and his wife, Delores, control 24.5 percent of the stock, with about 3.3 million shares.
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