Activist Investors Eye Big Lots Value Opportunity

Macellum Advisors and Ancora Advisors, activist investors who are sponsoring a slate of nominees for the Big Lots board of directors, has issued an open letter for fellow shareholders describing what they see as means to increase the value of the company.

Together, they own 4.3 million Big Lots common shares constituting about 11% of its outstanding stock, Macellum Advisors and Ancora Advisors stated. In part, the investors wrote in the letter:

“The investor group believes that substantial value can be created by pursuing a sale leaseback transaction for the company’s sizable real estate assets. The investor group also believes that it is critical this transaction be accompanied with meaningful change to the company’s board of directors so that a refreshed board, with new and more relevant skill sets, can work to address the company’s deteriorating operating results, put the business back on a pathway to growth and allocate capital more efficiently.”

As they detailed the purpose of their Big Lots initiative, Macellum and Ancora concluded:

“We are deeply troubled that the board does not appear to have given an SLB transaction much consideration. We approached Big Lots with a framework for an SLB as well as a debt transaction roughly three weeks ago and have not heard back from the company since. We also know that over a year ago, the board rejected a credible offer from a nationally recognized private equity firm to enter into an SLB transaction for certain of the company’s real estate valued at over $1 billion. Given the apparent lack of movement by the company to pursue this compelling opportunity, we are concerned that the board is not functioning effectively and not prioritizing or fully exploring the creation of shareholder value, especially in light of the recent collapse in the company’s share price following the company’s Q4 2019 earnings miss.

We believe the company’s recent S&P debt rating downgrade to junk status is yet another example of how this board has failed its shareholders. Just three years ago, the company had a fortress balance sheet. Since then, the board has little to show for the material investment cycle it decided to undertake beginning in 2016. Despite investing $263 million in capital expenditures above depreciation and amortization over the past three years (or $640 million in total capital expenditures), there have been no disclosed improvements in earnings, operating performance, or return on invested capital to date. Instead, the company’s debt burden is now at $279 million and the company has experienced a 40% drop in earnings based on 2020 guidance.

While the company may argue that an SLB transaction could cause more downward pressure on the company’s debt rating, which was expressed by S&P, we flatly disagree. We believe an SLB transaction would result in the repayment of $200 million of the company’s outstanding debt. We note further that our analysis is limited to just four of the company’s DCs and the company has additional owned stores that can be monetized to further reduce its debt.

In our view, the board has demonstrated poor judgment in evaluating capital allocation plans and should not be entrusted to evaluate future asset dispositions or determine the best use of proceeds therefrom. We caution the board against choosing what we view as a far inferior means of monetizing the company’s real estate assets using debt as a financing source and demand that no material decisions be made by this board until after the board is reconstituted.”