Value Investing

JDP Capital Management’s Full Presentation On ALJ Regional Holdings

JDP Capital Management’s Full Presentation On ALJ Regional Holdings via The Manual Of Ideas

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JDP Capital Management

  • Founded in 2011, seeded by Bay Area family offices
  • 23.4% gross, 17.3% net annualized returns since inception
  • Value strategy focused on companies in transition
  • 2 - 5 year time horizon per idea
  • Highly organized process around idea generation, due diligence and allocation
  • 7 - 10 focused positions
  • Long-biased, No leverage

Last MOI presentation

Wide-Moat Investing Summit, July 1, 2014

JDP Capital Management ALJ Regional Holdings

ALJ Regional Holdings Inc. OTCBB:ALJJ - Company Overview

Summary

Obscure micro-cap that could double from the current $4.59 per share within 3 years (2018)

  • Former tech-bust shell with excessive NOLs converted to permanent capital vehicle by investment banker Jess Ravich in 2006
  • Strategy to absorb NOLs by buying low-capex corporate orphaned divestitures for 4x-5x free cash flow
  • NOLs make existing cash flows and future acquisitions more valuable
  • Completed three acquisitions since 2013, sold steel mill KES in 2012
  • Unique partnership and incentive structure with subsidiary CEOs

Financial Overview

JDP Capital Management ALJ Regional Holdings

Current subsidiaries

JDP Capital Management ALJ Regional Holdings

ALJ Subsidiary overview

Faneuil

  • Acquired in October 2013 for $53 million from McAndrews & Forbes (half cash, half seller-note, 5% ALJJ stock)
  • Call center focused on infrastructure and government services, sticky long-term contracts
  • Verticals include toll booths, utilities, healthcare exchanges, and emergency services
  • At close: $106 million revenue, $14 million EBITDA
  • CEO Anna Van Buren co-invested $1M, earns 10% of EBITDA above $5 million
  • Today: more than doubled contract backlog to $290 million (Q3 ’15), increased EBITDA margins should follow

Carpets N More

  • Acquired in April 2014 for $5.47 million from Levine Leichtman Capital Partners (40% ALJ stock, 37% note, 22% cash)
  • Levine Leichtman Capital paid $46.5 million for the company in 2007*
  • Largest flooring and and cabinets retailer in the Las Vegas area: retail, home builder and commercial end markets
  • Estimated at close: $33 million revenue, $2.6 million EBITDA
  • CEO Steve Chesin contributed 12% equity, stayed on board to restructure
  • Today: revenue up 36% to $45 million, slightly positive cash flow, JDP estimates normalized 10% EBITDA margins in 2016

Phoenix Color

  • Acquired in August 2015 for $90 million from KKR/ Visant (100% debt)
  • Leading manufacturer of book components and commercial color printing
  • High cash flow margins, established niche player in a stagnant industry
  • Stats at close: $88 million revenue, $22.9 million EBITDA
  • CEO Marc Reisch purchased 400,000 ALJ shares and joined the Board
  • Estimated 30%+ annualized cash-on-cash IRR for ALJ

Company history and idea background

Part 1

  • Mid 1990s: Jess Ravich’s Libra Securities raises $17 million in convertible debt for tech startup Network Entertainment
  • 1996: IPO during tech-boom and becomes YouthStream Media Networks (YSTM), Credit Suisse raises $250 million, acquires internet companies
  • 2002: Post dot-com bust sells most assets for $7 million, balance sold in 2004, triggers ~$300 million in net operating losses (NOLs)
  • January 2003: Restructures debt, new board is created including Libra’s Hal Byer, intends to acquire new businesses and harvest NOLs

Part 2

  • September 2003: Ravich leads investor group that includes YSTM (1%), to purchase Kentucky Electric Steel (KES) out of bankruptcy for $2.6 million
  • Ravich buys YSTM convertible note with the intention of converting for control (JDP unsure of purchase date)
  • March 2005: YSTM acquires Kentucky Electric Steel (KES) from Ravich-led investor group for $65 million in a combination of preferred stock and sub debt
  • June 2006: Ravich joins YSTM board, becomes Chairman in August 2006
  • October/November 2006: Changes company name to ALJ Regional Holdings (after Jess’s high school), delists to Pink sheets to save money

Part 3

  • November 2012: Sells KES for $112.5 million, ALJ nets $51 million
  • Simultaneously tenders for 50% of ALJJ outstanding shares to provide liquidity for long-time investors
  • Post-tender ALJ retains $28 million in cash, no operations, and Jess is the largest shareholder, stock starts to trade for a discount to cash
  • October 2013: Acquires Faneuil for $53 million
  • April 2014: Acquires Carpets N More for $5.47 million
  • August 2015: Acquires Phoenix Color for $90 million

ALJJ stock price since Ravich took over on June 26th 2006: $0.16 to $4.59 as of December 31, 2015

JDP Capital Management ALJ Regional Holdings

How JDP got involved

Idea background

  • Introduced to ALJ by fund manager Steven Kiel in mid 2013, passed initially
  • Uniqueness of the Faneuil acquisition in October 2013 led us to reach out to ALJ's CFO Rob Christ with questions, led to a dinner meeting
  • We loved ALJ's vision and asked if there was a way to get involved
  • ALJ was considering a private placement to fund an acquisition, we signed a confidentially agreement and began due diligence immediately
  • Met with Ravich in March 2014, agreed to price of $1.60 per share to help finance Carpets N More, closed in April
  • ALJ remains a core JDP holding

JDP private placement

JDP ownership: April 2014 – December 31, 2015

JDP Capital Management ALJ Regional Holdings

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