Liberty Tax is the third largest tax preparer, well behind both H&R Block and Jackson Hewitt, the tax preparer market is a highly fragmented business with a lot of mom and pops. It is the type of franchise business where you effectively own your job and you outsource the marketing and back-office infrastructure to the franchiser. Liberty's business model is mostly targeted at lower income taxpayers who are unlikely to purchase TurboTax or do-it-yourself type software, they want someone else to do it quickly for them and assist in getting their refund as fast as possible, it's a decent business that should be relatively stable. However, in 2018 Liberty Tax's founder and CEO was forced out after a sex scandal was uncovered and his shares where sold to Vintage Capital that July. The company understandably struggled through this upheaval and EBITDA dropped 17% from 2017 levels to $35MM (9/30 fiscal year end). Then in November 2018, TAXA received an acquisition proposal for $13 per share from a private equity buyer that ended up going no where.
Concurrently with all that, Vintage Capital was wrapped up in a bizarre failed merger with Rent-a-Center (RCII) which competes in the same rent-to-own market as Vintage's Buddy's chain with Vintage forgetting to execute a routine extension to the merger agreement that allowed Rent-a-Center to break the deal and force Vintage to pay a substantial break up fee. Presumably Vintage was going to merge Buddy's with Rent-a-Center and continue to pursue a franchise model. With that deal off, Vintage moved to Liberty Tax where they already had a substantial holding and offered to recapitalize the company and give existing shareholders an option to tender their shares at $12, a substantial premium to where the shares had fallen after the $13 buyer had backed away. As part of the transaction, Liberty Tax bought Vintage's Buddy's chain of stores and created "Franchise Group" to pursue a rollup strategy of franchised or "franchisable" businesses.
Since the creation of Franchise Group, Vintage isn't wasting time buying additional struggling businesses, since the merger with Buddy's, they've entered into two transactions but while both Liberty Tax and Buddy's are primarily franchised, the next two fall into the franchisable category. The first announced was with Vitamin Shoppe (VSI), a struggling vitamin and nutrition retailer that is being disrupted by internet shopping. The second transaction announced, which just recently closed, is with Sears Hometown and Outlet for the Sears Outlet business and the 8 Buddy's stores that SHOS operated. My guess is overtime these Sears Outlet stores more or less end up looking like or being re-branded to Buddy's stores as they sell similar household durable type items to the lower income segment.
There's a lot going on here, its a complex situation that I'd guess very few people are looking closely at, volume has been minimal and it just today uplisted back to the NASDAQ under the FRG symbol. I'm sure there are quite a few mistakes with the below, so do your own homework as well, but I tried to come up with a proforma look at what the combined company might look like once the dust settles.
tender offer and the VSI proxy statement. Alongside the closing of the Sears Outlet transaction, they went ahead and franchised 5 stores to "A-Team" for $15MM (they have 120 more stores). The tender offer closed this week with just under 4 million shares participating at $12. Throwing it all together on an admittedly back of the envelope fashion, I come up with the proforma company trading at roughly 5x EBITDA. Franchise businesses trade all over the map, but generally well above 5x -- a rent-to-own comp like RCII for example trades over 7x EBITDA and they are still mostly company operated stores. It's hard to put an exact value on FRG, but I'm guessing there are a lot of value levers to pull here and if it works out (and the economy doesn't rollover) could be a multi-bagger.
Disclosure: I own shares of FRG
What caused the pop, MDC? I saw a group, Cannell Capital, revealed a significant state in FRG on 12/13. Do you know them and was that it? Thanks for all your posts; avid reader.ReplyDelete
No idea why it jumped so much Friday afternoon, given back some of it but certainly not all of it so far this week. I don't know Cannell Capital and don't have a good explanation for the rally other than it was cheap and illiquid. I'm still holding onto to my shares, now a fairly significant position for me, maybe I should lighten up given the move and potential to retrace it all the way back down but I hate taking short term capital gains so late in the year. Sorry for the lack of an explanation but thanks for reading the kind words, if anyone else knows more and is willing to share, I'd love to hear their take on the situation too.Delete
What's your read on the current affairs of FRG, MDC?ReplyDelete
Many have fallen hard but not quite this fast and it's a big holding for you so I assume you're keeping an eye on it. Another's point of view to consider, in case you haven't seen:
The author seems way too bullish to me, didn't really address the debt. If they can survive and we get back to work, the rent-to-own business should do fairly well. I'm holding for now, but it could be an ugly situation, doing a series of debt funded deals right before the bottom falls out, poor timing.Delete
MDC- What is your current stance on FRG? They seem to have a bright future from where I'm standing. Curious to know your thoughts since a lot has happened since this was written.ReplyDelete
It's turned into my largest holding, I've just held it. It is now sort of morphed into a compounder type bet on Brian Kahn. If I hit a slow patch in finding new ideas I might write it up again, but I still like it and continue to hold.Delete
Is FRG really serious about buying Kohl's? Wouldn't be too risky?ReplyDelete
Apparently they are very serious, KSS is a really cheap stock, if you believe the activist presentation, the real estate basically covers the market cap today. Brian Kahn probably sees it similar, based on what they just did with Babcock, I would imagine he'd pull out most of the cost basis by selling the real estate. But it is certainly thesis creep, I don't see how KSS is a "franchiseable" business, so now FRG truly does become a public PE fund if they make this deal.Delete