FrontFour Capital, which owns around 3.4% of ClubCorp’s outstanding shares, criticized the company’s stock performance, which is down nearly 36% over the past 12 months, and urged the company to sell a select number of non-core, lower-returning clubs to help pay down debt. ClubCorp said it appreciated the shareholder feedback, but is confident in its business strategy.
ClubCorp stock was trading up nearly 7% as of 2 p.m. on September 15, after one of its largest shareholders issued a letter encouraging the company to consider selling itself, the Dallas Business Journal reported.
In a letter sent to ClubCorp CEO Eric Affeldt and the company’s board of directors, Greenwich, Conn., investment advisory firm FrontFour Capital, which owns around 3.4% of ClubCorp’s outstanding shares, criticized ClubCorp’s stock performance, which is down nearly 36% over the past 12 months, closing September 14 at $14.43. FrontFour’s valuation of the stock projects $27 per share, the firm said in its letter, the Business Journal reported.
FrontFour compared ClubCorp’s stock performance to other leisure companies, saying the company trades at three times less than the broader industry. And the firm claimed ClubCorp’s “bolt-on acquisition strategy” of acquiring smaller clubs is no longer accretive to the company, the Business Journal reported.
“Accordingly, ClubCorp’s ability to execute on the stated strategy, the accretive roll-up of the country club industry, has been significantly impaired,” the letter reads.
The Connecticut firm did praise ClubCorp for a delivering strong operational performance and earnings before interest, taxes, depreciation and amortization in the past year. But it added that the company has failed to provide returns for existing revitalization products, not executed on a $50 million stock buyback program announced in February and issuing $350 million of 8.25 percent senior unsecured notes in December, the Business Journal reported.
It also criticized ClubCorp for casting itself in a bad light by saying it would be comfortable with a 5-times debt to EBITDA ratio to fund acquisitions. FrontFour said ClubCorp has characterized itself as an over-levered operating company instead of a “high-recurring membership revenue model with a strong real estate value underpinning.”
“We believe that management’s current public messaging…has significantly penalized the performance of the stock as investors are pricing in a ‘levering event,’” the letter states. “ Additionally, over the past year, the equity markets’ comfort level with increased leverage levels has changed significantly. Whereas the market once embraced ‘levered roll-up stories,’ it is now largely skeptical of them.”
In its letter, FrontFour urged ClubCorp to target a 3 to 3.5 multiple and sell a select number of non-core lower-returning clubs to help pay down debt and increase the company’s valuation. It also urged the company to break out performance at its Texas-based clubs, which FrontFour said are being impacted by dips in the state’s oil and gas industry, the Business Journal reported.
To fully realize ClubCorp’s value, FrontFour concluded its letter by urging the company’s board to “retain an investment bank to pursue any and all strategic alternatives, including an outright sale of the company.”
“We believe that ClubCorp’s portfolio of assets, which includes 30,000 acres of fee simple acreage, would garner significant strategic and financial interest from a variety of parties,” FrontFour wrote. “Given ClubCorp’s currently depressed valuation, projected decline in capital expenditures and the potential near term exhaustion of tax mitigation strategies, the strategic alternatives process should consider whether the right time is approaching for a conversion to a (real estate investment trust) in order to unlock significant value.”
In response, ClubCorp said it appreciated the shareholder feedback, but is confident in its business strategy. “Our board and management continuously seek to provide long-term shareholder value and appreciate feedback from our investors,” Affeldt said in an emailed statement to the Dallas Business Journal. “We continue to believe in the merits of our business model and strategies and value the opinions of our shareholders.”
This is not the first time ClubCorp has been criticized by its shareholders. In its letter, FrontFour stated it had “spoken to other shareholders who share similar frustrations with ClubCorp’s current valuation,” the Business Journal reported.