Holder of 17% of At Home’s Common Stock
Rejects Hellman & Friedman’s Revised Offer of $37 Per
Share
Believes At Home’s Sale Process is Tainted
by Apparent Conflicts Involving Chairman and CEO Lee Bird, Who Has
Been Engaging With Hellman & Friedman Since 2017 and is
Set to Retain Meaningful Upside
Highlights Latest Hellman & Friedman
Offer Continues to Dramatically Undervalue At Home’s Clear
Momentum, Considerable Growth Runway and Significant Margin
Expansion Opportunities
Underscores That a Reasonable Take-Out Price
for At Home is $70 Per Share or More
Urges Fellow
Stockholders to Reject the Insufficient and Grossly Undervalued
Tender Offer
CAS Investment Partners, LLC (together with its affiliates,
“CAS” or “we”), which beneficially owns approximately 17% of the
outstanding common stock of At Home Group Inc. (NYSE: HOME) (“At
Home” or the “Company”), today sent the below letter to the
Company’s stockholders. The letter can also be downloaded at
www.ProtectAtHome.com.
***
Dear Fellow Stockholder,
CAS Investment Partners, LLC (together with its affiliates,
“CAS” or “we”) holds approximately 17% of the outstanding common
stock of At Home Group Inc. (“At Home” or the “Company”), making us
the Company’s largest stockholder. We focus on conducting
fundamental research and making value-oriented investments. We have
a successful history of investing in consumer and retail entities
that include Carvana Co. (NYSE: CVNA), B&M European Value
Retail S.A. (LSE: BME), Herbalife Nutrition Ltd. (NYSE: HLF) and
Party City Holdco Inc. (NYSE: PRTY).
We are writing to you today regarding the proposed sale of At
Home to funds advised by Hellman & Friedman LLC (collectively,
“H&F”). Based on our thorough analysis of At Home’s business
and the transaction terms, we have concluded that H&F’s
original offer of $36 per share and its recently revised offer of
$37 per share grossly undervalue the Company and deprive
stockholders of meaningful value. We urge
you to reject H&F’s insufficient tender offer.
Although we expect At Home’s Board of Directors (the “Board”)
and H&F to dispute our analysis and tout the purported
comprehensiveness of their transaction process, we urge you to see
through this smokescreen. We believe you should instead focus on
one question when considering whether or not to participate in the
tender: Is $37 per share fair
consideration for a business with clear momentum, a considerable
growth runway and significant margin expansion
opportunities?
We devote the rest of this letter to explaining why the answer
to this question is clearly “no.” We lay out three of our primary
conclusions:
- At Home’s sales process has been flawed from the start and
tainted by its Chairman and Chief Executive Officer’s apparent
incentives to reach a deal with H&F;
- The Board’s Special Committee seemingly wrote off the Company’s
past several quarters of tangible business improvements and
material progress, and;
- The Board’s Special Committee discounted the Company’s
significant future revenue and earnings potential, resulting in an
overly-pessimistic valuation.
If H&F wants to acquire At Home, we believe it should pay a
reasonable premium that appropriately reflects the Company’s path
to enhanced value and the present consumer environment. It is
disturbing that the Board’s Special Committee is trying to usher
through a fire sale just as At Home is gaining considerable
momentum and the pandemic’s economic overhang is subsiding. At
Home, which can become the next great American retailer, has the
ability to grow rapidly and produce tremendous value for
stockholders in the public market.
STOCKHOLDERS SHOULD
CLOSELY SCRUTINIZE THE BOARD’S SALE PROCESS AND MR. BIRD’S APPARENT
CONFLICTS OF INTEREST.
At Home’s Board formed its Special Committee in December 2020,
when the COVID-19 pandemic was continuing to wreak havoc over the
U.S. economy and retailers still faced material uncertainty. A
simple review of At Home’s financial results and stock price
volatility over the course of 2020 underscores just how much the
pandemic impacted the Company’s business and valuation last year.
This is why we continue to seriously question whether late 2020 was
even an appropriate time to explore a sale to a financial sponsor
known to pursue low-multiple transactions.
As At Home’s business has recovered and begun to achieve
momentum during the first half of 2021, it appears the Special
Committee and its advisors failed to sufficiently account for the
Company’s sustained progress when negotiating with H&F. In
March 2021, At Home reported fourth quarter sales that included a
41% net sales increase and a 30.8% comparable store sales
increase.1 The Company also reported record-setting fourth quarter
net income of $72.7 million.2 This momentum has continued into
fiscal year 2022 with the Company reporting first quarter sales of
$537 million, the second highest quarterly sales in the Company’s
history and up 75.4% compared to the first quarter of fiscal year
2020. [Third party credit card data indicates the Company’s strong
sales trends are continuing into the second quarter.]
While the Special Committee secured several price bumps (albeit
insufficient) to increase H&F’s bid, we feel there is nothing
for stockholders to celebrate. We question how the Special
Committee and its advisors could even consider a “best and final”
$37 per share bid to be sufficient when At Home’s shares were
already trading around $30 per share before reporting excellent
earnings in March. Moreover, long-term stockholders can no doubt
recall that the Company’s stock price was trading above $37 per
share at this time three years ago – well in advance of material
and permanent improvements achieved in the intervening period.
It seems clear to us that At Home’s leadership is all too eager
to enter into a transaction with H&F. This is especially
concerning when taking into account that the Board did not announce
and carry out a comprehensive review of strategic alternatives
prior to falling into H&F’s arms this spring or otherwise
attempt to reach out and seek the support of key stockholders,
including CAS. Instead, it formed the Special Committee last year
to take over discussions that had been occurring between H&F
and the Company’s Chairman and Chief Executive Officer, Lee Bird,
since 2017.
We feel At Home’s proxy materials paint a very troubling picture
of Mr. Bird’s frequent conversations with H&F over the years.
It is not surprising to us that At Home was not receiving interest
from other sponsors and strategic buyers when Mr. Bird was
consistently engaging with H&F. Our experience suggests that
this type of interaction between a corporate executive and
potential acquirer can have a chilling effect on other parties’
interest in a potential transaction.
Unlike stockholders, who would likely leave a lot of value on
the table under the current deal, it is important to understand
that Mr. Bird stands to be handsomely rewarded if At Home is sold
to H&F:3
- Mr. Bird will receive over $100 million of estimated
consideration in connection with the merger;
- Approximately $72 million on account of common equity holdings
and vested stock options;
- Approximately $15 million from the accelerated vesting of
certain stock options and PSUs, and;
- The conversion of approximately $14 million of long-vesting
equity awards to RCAs, which eliminates any performance-based
vesting conditions;
- Mr. Bird will continue to serve as Chairman and Chief Executive
Officer;
- Mr. Bird will receive a new employment agreement with very
favorable equity vesting and payment terms;
- Mr. Bird will receive stock options representing approximately
4% of the fully diluted shares through the 10% option pool;
and
- Mr. Bird will roll over $10 million of equity and may have
other favorable optionality on converting securities granted to
him.
Given the substantial compensation and benefits Mr. Bird is set
to receive under the proposed sale and his continuous dealings with
H&F, we believe the sales process was flawed and riddled with
conflict. We anticipate that At Home will try to deflect attention
away from our concerns by highlighting its 40-day “go-shop”
process, but the reality is that these processes have become an
increasingly ineffective check on a bad deal. A 2020 analysis in
the Harvard Law Review notes that “go-shops, in general, are no longer an effective tool
for post-signing price discovery.”4 The authors of the
analysis “document several reasons for this change: the
proliferation of first-bidder match rights, the shortening of
go-shop windows, CEO conflicts of interest, investment banker
effects, and collateral terms that have the effect of tightening
the go-shop window.”5 An after the fact “go shop” does not change
the fact that this transaction was not the result of a full and
fair sale process to maximize value for all At Home
stockholders.
STOCKHOLDERS SHOULD
CHALLENGE THE SPECIAL COMMITTEE’S OVERLY-PESSIMISTIC VALUATION OF
AT HOME.
Based on our most conservative analysis of the proposed sale,
H&F’s implied purchase price is only 12.9x the underlying
earnings power of the current and immediately planned store base
for fiscal year 2023.6 This valuation
seems to assume something that is quite implausible: (i) the store
base only grows to 250 (the average planned for fiscal year 2023)
without any subsequent growth and (ii) all gains across At Home’s
operations and competitive position between fiscal year 2019 and Q1
fiscal year 2022 reverse by fiscal year 2023. Under this
extraordinarily pessimistic scenario, At Home’s revenue per store
will have regressed to its prior trendline of $7.5 million per
store (vs. $9.4 million per store during the LTM period) and the
Company’s adjusted EBIT margins – excluding store opening expenses
– will have dipped back to fiscal year 2019 levels of approximately
13.1%.7 It is utterly confounding that fiduciaries with an
obligation to maximize value for At Home stockholders would accept
this type of valuation.
In our view, a far more realistic valuation could be determined
by assuming At Home can return to approximately 20% store growth in
fiscal year 2023. As a result of keeping some of the gains from
fiscal year 2021 and building upon those in the subsequent years,
we now believe the Company can achieve $8.5 million in sales per
store and 14% EBIT margins – net of pre-opening expenses – by
fiscal year 2027. Under this scenario and operating without
financial leverage, we estimate the Company’s earnings can grow to
approximately $6.748 per share by fiscal year 2027.
We contend that by fiscal year 2026, the market could value At
Home at 20x forward profits or even more given the following
tailwinds:
- The Company’s unlevered balance sheet;
- The further remaining opportunity to continue expanding to 600+
stores;
- The potential to expand revenue per store to $10 million plus,
and;
- The potential to further expand margins going forward.
In light of this, we estimate that At Home’s stock would be
worth more than $135 per share by the end of fiscal 2026, which is
less than five years from now. Discounting this $135 back five
years at the conservative rate of 13% yields a fair take-out value
of $70 per share or more today.
With all this context in mind, we feel stockholders could do
even better than this scenario and receive a substantial
distribution immediately if the Company were to leverage its
balance sheet in the manner H&F plans to do. This is why we do
not intend to tender our stock and will continue to vehemently
oppose this grossly undervalued transaction.
STOCKHOLDERS SHOULD
QUESTION THE SPECIAL COMMITTEE’S DECISION TO WRITE-OFF THE
COMPANY’S RECENT IMPROVEMENTS.
In addition to apparently discounting At Home’s most recent
quarterly earnings progress, it seems the Special Committee also
wrote off numerous business improvements when negotiating with
H&F. Stockholders should recall that the Company’s own
presentations and filings have laid out the following developments
in recent years:
- Millions of consumers have discovered At Home based on unaided
brand awareness increasing from 15% to 19% over the course of
fiscal year 2021.
- The Company’s Insider Perks loyalty program, which had zero
members in August 2017, grew by approximately 2.6 million to
approximately 9.1 million members over the course of fiscal year
2021.
- The Company has gone from a non-existent e-commerce presence in
fiscal year 2019 to a robust one that now enables customers to
execute online purchases and arrange for in-store pick-up or direct
delivery.
- The Company substantially improved the merchandizing of its
unique offering with the introduction of EDLP+.
- The Company has expanded its direct sourcing from practically
nothing in fiscal 2018 to 15% at the end of fiscal 2020 to nearly
20% at the end of fiscal 2021, thereby driving hundreds of basis
points of margin improvement on each item sourced directly while
enhancing product quality.
- The Company’s growing store footprint and larger customer base
has increased its purchasing scale and corporate leverage.
- Many of the company’s competitors have reduced their store
footprints or permanently shuttered, including Bed Bath &
Beyond (NASDAQ: BBBY), Pier 1 Imports, Inc. and Penney OpCo LLC’s
JC Penney.
We find it extremely curious that At Home promoted many of these
developments in recent years, only to then apparently discount them
when reaching a deal.
THE CHOICE SHOULD BE
CLEAR: REJECT THE H&F TENDER.
We know we are not alone in opposing this insufficient,
conflict-ridden deal. It has been encouraging to receive
unsolicited feedback from many other stockholders who share our
view about At Home’s long-term prospects. As noted, we truly
believe the Company can become the next great American retailer as
the pandemic fades and the housing economy thrives.
In the coming days and weeks, CAS will continue to share our
analysis and views regarding this flawed sale. We are committed to
continuing to demonstrate that it is in stockholders’ best interest
to reject the H&F tender. At Home’s decision to pivot to a
tender offer seems like recognition that the deal would have likely
been voted down. We believe this only further proves how imperative
it is that stockholders do not tender into this grossly undervalued
price. We will not sit by as At Home gets taken private on terms
that would benefit H&F and the Company’s insiders far more than
stockholders.
Sincerely,
Clifford A. Sosin Founder and Portfolio Manager CAS Investment
Partners, LLC
***
About CAS Investment Partners,
LLC
CAS Investment Partners, LLC is a value-focused investment
management firm with offices in New York City and Connecticut. The
firm was founded in 2012 by Clifford A. Sosin.
1 Press release entitled “At Home Group Inc. Announces Fourth
Quarter Fiscal 2021 Financial Results” issued on March 23, 2021. 2
Press release entitled “At Home Group Inc. Announces Fourth Quarter
Fiscal 2021 Financial Results” issued on March 23, 2021. 3 Company
filings (bullets pertaining to Mr. Bird’s compensation reflect a
$36 per share sale price). 4 Harvard Law Review, "Go-Shops
Revisited," February 10, 2020. 5 Harvard Law Review, "Go-Shops
Revisited," February 10, 2020. 6 CAS analysis excludes pre-opening
store expenses. 7 CAS FY 2019 adjusted EBIT excluding store opening
expenses as follows: Adjusted EBITDA of $191,245 plus costs
associated with new store openings of $18,656, minus stock based
compensation expense of $5,530 minus depreciation and amortization
$56,529 equals Adj EBIT ex preopening expense of $153,003, which
divided by $1,165,899 of sales yields a 13.1% margin. 8 Based on
67,293,430 fully diluted shares of Common Stock outstanding as of
January 30, 2021.
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version on businesswire.com: https://www.businesswire.com/news/home/20210618005314/en/
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