JDP Capital Management’s Full Presentation On ALJ Regional Holdings via The Manual Of Ideas
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
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
Current subsidiaries
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
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
See full slides below.
