Sees Value of $41 per Share in either Recapitalization or Sale, Over
30% Above Current Price
Sandell Prepared to Nominate Slate of Directors for October 15 Annual
Meeting
Prospective Purchasers of Ethan Allen Shares Encouraged to Pursue
Settlement of Purchases on a “T+1” Basis; Sandell Believes August 17 is
Record Date for Upcoming Annual Meeting
Sandell Asset Management Corp. (“Sandell”), the beneficial owner of
approximately 1.6 million shares, or 5.5%, of Ethan Allen Interiors Inc.
(“Ethan Allen” or the “Company”) (NYSE:ETH), today sent a letter to
Farooq Kathwari, the Chairman and CEO of Ethan Allen.
In the letter, Sandell notes its belief that the Company’s stock is
trading at a significant discount to its intrinsic value, which Sandell
believes is approximately $41 per share, or over 30% above where the
stock is currently trading. Sandell believes that a combination of
sub-optimal fiscal policies and inefficient allocation of shareholder
capital has contributed to the significant discount in the shares, as
Ethan Allen has underperformed its publicly-traded peers by 119% over
the last 10 years. Sandell believes that the Company’s extensive
portfolio of real estate assets may be worth approximately $450 million,
or about $16 per share, and that the Company has the ability to greatly
enhance shareholder value through either a recapitalization and a
monetization of its real estate holdings, or through a sale to a private
equity firm. Sandell believes that either path would result in a value
of at least $41 per share delivered to shareholders.
Ethan Allen on August 12 responded to Sandell’s overtures to the Company
by manipulating the corporate franchise and advancing the date of its
2015 Annual Meeting of Shareholders (the “Annual Meeting”) to October
15, more than one month in advance of the previously expected November
17 date as set forth in the Company’s last proxy statement. This new
advanced date was “publicly announced” by the Company on page 19 of its
recently-filed 10-K. Sandell is prepared to nominate a slate of Director
candidates to stand for election at the Company’s 2015 Annual Meeting,
although it hopes to re-engage with the Company to reach an amicable
resolution and avoid a proxy contest.
Sandell believes that August 17 is the record date for the upcoming
Annual Meeting, and reminds shareholders that any shares held in margin
accounts that may be loaned by a broker will need to be moved into a
cash account in advance of the record date if shareholders want to vote
their shares. Also, any prospective purchasers of Ethan Allen shares
prior to August 17 are encouraged to pursue settlement of purchases on a
“T+1” basis if shareholders want to vote such shares.
The text of the letter is as follows:
August 14, 2015
Mr. Farooq Kathwari
Chairman, CEO and President
Ethan Allen
Interiors Inc.
Ethan Allen Drive
Danbury, CT 06811
Dear Farooq:
As you know, we are significant shareholders of Ethan Allen Interiors
Inc. (“Ethan Allen” or the “Company”) and currently own approximately
1.6 million shares, or 5.5%, of the Company. We appreciate the dialogue
that my colleague Richard Mansouri and I have had with you and the
Company’s CFO Corey Whitely over the last few months. It should be clear
to you that our firm strongly believes in the significant value
associated with the assets that constitute Ethan Allen, not least of
which is the Company’s iconic brand name, which connotes home
furnishings of un-paralleled quality. Unfortunately, what should also be
clear to you is that the Company’s stock price is significantly below
Ethan Allen’s true intrinsic value, which we believe is approximately
$41 per share, or over 30% higher than its current price.
It is also unfortunate that, while you have led Ethan Allen for close to
30 years and have built a unique business of substance, shareholders
have suffered extended and material underperformance due in large part
to what we believe to be the Company’s sub-optimal fiscal policies and
inefficient allocation of shareholder capital over the last several
years. Indeed, Ethan Allen serves as an abject example of the ill
effects that can befall shareholders invested in a company that does not
earn an appropriate return on its capital. The following chart shows in
stark detail the underperformance that shareholders have been subjected
to:
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Ethan Allen Total Shareholder Return (TSR) Compared to:
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1-Year
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3-Year
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5-Year
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10-Year
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Proxy Peers
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-10.6%
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-62.3%
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-125.2%
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-118.6%
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S&P 500
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3.6%
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-21.7%
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-5.2%
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-109.2%
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Russell 2000
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3.6%
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-19.9%
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-6.1%
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-114.8%
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Source: Bloomberg (as of 7/8/15, the day prior to media reports of
private equity interest). Proxy peers include
BSET,HVT,HNI,KNL,LZB,MLHR,PIR,RL,SCS,SCSS,TPX,TIF,WSM.
As you can see, Ethan Allen has underperformed its peers over each
time period, with 10-year underperformance versus its peers a staggering
119%. Moreover, Ethan Allen’s current stock price is actually below
where it was in August of 2005, indicating that shareholders have
witnessed negative absolute price performance over 10 years in addition
to suffering a wide gap in relative performance. Perhaps because of this
staggering underperformance, the Company chose to take what we believe
was the outrageous step of advancing the date of its 2015 Annual
Meeting. Specifically, we find buried in the Company’s recently-filed
10-K that Ethan Allen intends to hold its 2015 Annual Meeting of
Shareholders (the “Annual Meeting”) on October 15, more than one month
in advance of the previously expected November 17 date as set forth in
the Company’s last proxy statement. We have little doubt that the
Company was seeking to catch shareholders unaware, as the nomination
window for submitting shareholder proposals and nominations for
directors is tied to the date of its Annual Meeting.
Clearly, the capital tied up in the Company’s vast portfolio of real
estate assets has been a drag on shareholder returns. You in fact
provide damning commentary when you stated in a press release dated
April 14, 2015: “Since going public, the company has invested in capital
expenditures of $747.9 million including investments in retail and
manufacturing properties and acquisitions.” We note that the market
value of Ethan Allen today is not meaningfully higher than the aggregate
$747.9 million that you have expended over the last 22 years since going
public in 1993. Had the Company earned an appropriate rate of return on
this invested capital over the years, the market value of the Company
would be far greater than what it is today. Sadly, the Company has still
shown no indication that it intends to tap into the exceedingly robust
market for both retail and industrial real estate properties in order to
unlock this capital that has been trapped on its balance sheet.
We believe that Ethan’s Allen’s sizable stable of properties, which
includes: 53 wholly-owned retail design centers; 17 retail design
centers subject to ground leases; its corporate headquarters building
and 18.0 acre campus; its 200 room Hotel and Conference Center; and its
eight wholly-owned manufacturing facilities, as well as various
ancillary properties, is worth approximately $450 million, or about $16
per share, little of which we believe is reflected in Ethan Allen’s
current stock price. To put this in perspective, the value of the
Company’s real estate is over 50% of Ethan Allen’s entire market value.
Furthermore, we believe based upon input from numerous finance and real
estate experts that there are many interested parties and several ways
to help the Company unlock this value, ranging from a series of
sale-leaseback transactions to the creation of a tax-efficient REIT
through an OpCo-PropCo structure.
Along with the trapped capital associated with the Company’s extensive
real estate holdings is the Company’s highly-inefficient balance sheet.
As of June 30, 2015, Ethan Allen actually had negative
net debt. That the Company continues to operate with net leverage below
zero while Ethan Allen’s stock trades at a price below where it was 10
years ago reflects an astonishingly unsophisticated fiscal policy that
we believe is at odds with the fundamental precepts of modern corporate
finance, a policy which is even more troubling when one considers that
prevailing interest rates remain close to historical lows. And while we
have no doubt you will seek to trumpet the Company’s history of
returning capital to shareholders (“Since going public” appears to be
your favored yardstick for measuring Company history, even though that
spans a period of 22 years), recent action by Ethan Allen paints an
entirely different picture. To illustrate, we note that in Fiscal 2012
the Company purchased a mere 79,000 shares, or less than 0.3% of total
shares outstanding, and in Fiscal 2013 and 2014, the Company did not
repurchase any shares at all. Only very, very recently did the Company
step up its repurchase activity (542,000 shares repurchased in 4Q Fiscal
2015) and only after a dramatic fall in stock price following Ethan
Allen’s 3Q Fiscal 2015 earnings disappointment.
We are not suggesting that you alone are responsible for what we believe
to be the Company’s misguided fiscal policies and underperformance; the
entire Board of Directors must shoulder this blame. In this regard, we
note that while you are the longest-standing Director, having been
appointed to the Board 27 years ago, there are three other Directors who
have been on the Board for more than 10 years, namely: Frank Wisner (14
years); Kristin Gamble (23 years) and Clinton Clark (26 years). So many
long-tenured directors can lead to a dangerous level of complacency
which we believe has been manifest at Ethan Allen.
Fortunately, the Company has within its control the ability to take
steps to greatly enhance shareholder value. There are multiple
alternatives available to the Company, though they can be generalized as
two discrete paths that we believe Ethan Allen should consider, namely:
(1) a recapitalization and monetization of its extensive real estate
holdings and (2) a sale to a private equity firm. We believe it is
imperative that the Company announce the retention of an impartial,
nationally-recognized investment banking firm as soon as possible in
order to aid the Company in the exploration of these alternatives.
The first path would contemplate a recapitalization through the
incurrence of a reasonable amount of debt (Net Debt equal to 2.5x
Pro-Forma EBITDA) coupled with the tax-efficient monetization of the
Company’s real estate holdings, possibly by way of an OpCo-PropCo
structure. In such a scenario, Ethan Allen could repurchase a meaningful
number of shares, possibly by way of a Dutch tender, and subsequently
issue by way of a special dividend additional cash and/or shares of a
real estate PropCo. Were the Company to pursue such a tax-efficient
recapitalization, we believe shareholders could receive total
consideration of at least $41 per share. As a show of good faith, we
would be prepared to sign an agreement seeking to maintain our existing
percentage equity ownership (at minimum) pro-forma for the repurchase of
shares in a Dutch tender, as we firmly believe that the pursuit of such
a recapitalization would lead to the creation of significant future
equity value and we would like to maintain a meaningful equity
investment in the Company.
Should Ethan Allen instead seek to pursue a sale to a private equity
firm, we have no doubt that there would be a “line out the door” of
interested parties seeking to acquire the Company. Indeed, we are aware
of multiple private equity professionals who have expressed interest in
pursuing an acquisition of Ethan Allen. The unique characteristics of
the Company, such as Ethan Allen’s exceptional brand name recognition,
its robust free cash flow, its minimal core capital spending
requirements, and its unlevered balance sheet and extensive real estate
holdings make Ethan Allen an ideal, and in fact almost prototypical, LBO
candidate.
What is perhaps most compelling is the fact that you are intimately
familiar with the process of consummating an acquisition of Ethan Allen.
As we have discussed with you on multiple occasions, you were directly
responsible for spearheading the LBO of Ethan Allen in 1989 when a
consortium led by management took the Company private. Today’s
environment is much, much more hospitable to financing acquisitions than
it was in 1989. We note that Ethan Allen had to pay an interest rate of
18.17% before refinancing bonds associated with the Company’s
acquisition in 1989 whereas today we believe a private equity sponsor
could easily procure bank financing at an interest rate in the vicinity
of 4% to 5%. We believe that a purchase of Ethan Allen at $38 per share
should generate an IRR of 20% annually to a private equity sponsor,
which is a remarkably attractive return profile, while a purchase at $41
per share should still generate an IRR greater than 15% annually, a
benchmark threshold for many sponsors.
As a final note, please understand that unlike many chief executives of
publicly-traded companies that we have encountered, we hold you in
higher regard for the meaningful amount of stock that you personally
own. It is our hope that we can engage in immediate dialogue in order to
devise a solution that will result in a dramatic enhancement of
shareholder value. Notwithstanding the Company’s apparent under-handed
attempt to subvert the nomination process by advancing the date of the
2015 Annual Meeting, we are prepared to nominate a slate of Director
candidates to stand for election at the Company’s 2015 Annual Meeting,
though we hope that it will not be necessary to engage in a contentious
proxy battle in order to achieve the goal of enhanced shareholder value
that we could easily accomplish by working together.
Sincerely,
Thomas E. Sandell
Chief Executive Officer
cc: The Board of Directors
About Sandell Asset Management Corp.
Sandell Asset Management Corp. is a leading private, alternative asset
management firm specializing in global corporate event-driven,
multi-strategy investing with a strong focus on equity special
situations and credit opportunities. Sandell Asset Management Corp. was
founded in 1998 by Thomas E. Sandell and has offices in New York and
London, including a global staff of investment professionals, traders
and infrastructure specialists.
SANDELL ASSET MANAGEMENT CORP., CASTLERIGG MASTER INVESTMENTS LTD.,
CASTLERIGG INTERNATIONAL LIMITED, CASTLERIGG INTERNATIONAL HOLDINGS
LIMITED, CASTLERIGG OFFSHORE HOLDINGS, LTD., CASTLERIGG ACTIVE
INVESTMENT FUND, LTD., CASTLERIGG ACTIVE INVESTMENT INTERMEDIATE FUND,
L.P., CASTLERIGG ACTIVE INVESTMENT MASTER FUND, LTD., CASTLERIGG EQUITY
EVENT AND ARBITRAGE FUND, PULTENEY STREET PARTNERS, L.P., THOMAS E.
SANDELL (COLLECTIVELY, THE “PARTICIPANTS”), INTEND TO FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) A DEFINITIVE PROXY
STATEMENT AND ACCOMPANYING FORM OF PROXY CARD TO BE USED IN CONNECTION
WITH THE SOLICITATION OF PROXIES FROM THE STOCKHOLDERS OF ETHAN ALLEN
INTERIORS INC. (THE “COMPANY”) IN CONNECTION WITH THE COMPANY’S 2015
ANNUAL MEETING OF STOCKHOLDERS. ALL STOCKHOLDERS OF THE COMPANY ARE
ADVISED TO READ THE DEFINITIVE PROXY STATEMENT AND OTHER DOCUMENTS
RELATED TO THE SOLICITATION OF PROXIES BY THE PARTICIPANTS WHEN THEY
BECOME AVAILABLE, AS THEY WILL CONTAIN IMPORTANT INFORMATION, INCLUDING
ADDITIONAL INFORMATION RELATED TO THE PARTICIPANTS. WHEN COMPLETED, THE
DEFINITIVE PROXY STATEMENT AND AN ACCOMPANYING PROXY CARD WILL BE
FURNISHED TO SOME OR ALL OF THE COMPANY’S STOCKHOLDERS AND WILL BE,
ALONG WITH OTHER RELEVANT DOCUMENTS, AVAILABLE AT NO CHARGE ON THE SEC’S
WEBSITE AT HTTP://WWW.SEC.GOV/.
INFORMATION ABOUT THE PARTICIPANTS AND A DESCRIPTION OF THEIR DIRECT OR
INDIRECT INTERESTS BY SECURITY HOLDINGS WILL BE CONTAINED IN AN EXHIBIT
TO THE SCHEDULE 14A TO BE FILED BY SANDELL ASSET MANAGEMENT CORP. WITH
THE SEC ON AUGUST 14, 2015. THIS DOCUMENT CAN BE OBTAINED FREE OF CHARGE
FROM THE SOURCES INDICATED ABOVE.
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