GREENWICH, Conn., Sept. 15, 2016 /PRNewswire/ -- FrontFour Capital
Group LLC, a significant and long-term shareholder of ClubCorp
Holdings, Inc. (NYSE: MYCC) (the "Company"), announced today that
it has delivered a letter to the Company's CEO and Board of
Directors (the "Board") in which it explained its belief that the
Company's depressed valuation is largely self-inflicted and that
the Board should pursue strategic alternatives, including a
potential sale of the Company, in order to unlock shareholder
value.
The full text of the letter follows.
Mr. Eric L. Affeldt
Chief Executive Officer
ClubCorp Holdings, Inc.
3030 LBJ Freeway, Suite 600
Dallas, TX 75234
cc: Board of Directors, ClubCorp Holdings, Inc.
Dear Eric,
FrontFour Capital Group LLC ("FrontFour" or "we") has been a
long-term and significant shareholder of ClubCorp Holdings, Inc.
("ClubCorp" or the "Company") since shortly after the Company's
September 2013 IPO.
Presently, our holdings represent approximately 3.4% of the
Company's outstanding shares, making us one of ClubCorp's largest
shareholders. As we have discussed with you in the past, we
were attracted to ClubCorp for the following reasons:
(i) Highly predictable revenue and recurring cash
flow streams supported by 185,000 memberships and over 430,000
individual members;
(ii) Low annual capital intensity of 3–5% resulting in
robust free-cash flow generation and an attractive dividend
yield;
(iii) The opportunity to drive incremental margins and
reduce churn via the continued increased penetration of ClubCorp's
Optimal Network Experience (O.N.E.) program;
(iv) Improved member engagement through the transformation
of traditional golf clubs into fuller-scope family and
lifestyle-oriented leisure country clubs;
(v) ClubCorp's opportunity to consolidate the fragmented
private country club industry and deliver an improved member
experience;
(vi) The opportunity to deploy reinvention capital at
attractive cash returns of 17% or greater; and
(vii) ClubCorp's irreplaceable portfolio of geographically
diverse real estate holdings, which includes approximately 30,000
acres of land, underpinning a low cost of debt capital and the
potential for a REIT conversion or other real estate monetization
strategies.
Over the past year, ClubCorp has delivered strong operational
performance through operating margin expansion and EBITDA growth
while management has provided a robust financial outlook.
Despite these positives, the EV/EBITDA multiple at which ClubCorp
trades has compressed significantly from 10.0x forward EV/EBITDA
shortly after the IPO to approximately 7.5x today, as illustrated
by the chart below.
Unsurprisingly, the compression in ClubCorp's multiple has
resulted in the stock declining by approximately 40% over the last
year. As a result, ClubCorp now trades at a
significant discount to comparable publicly traded leisure
companies (see Peer Valuation chart below), as well as to our view
of current value at ~$27 per share,
which represents 10.0x our 2017 estimated EBITDA of $268 million. In addition, we
believe the stock is potentially worth even more in a strategic
sale, REIT conversion or real estate monetization
scenario. Simply put, the Company's shares are trading at
the lowest sustained valuation multiple since the September 2013 IPO and marginally above the
Company's $14 per share IPO price,
even in light of all of the positives accomplished to date.
This valuation discount has created a dynamic where ClubCorp's
bolt-on acquisition strategy of creating average pro forma club
purchase multiples of ~6x following 3 years of investment and
stabilization is no longer accretive. Accordingly,
ClubCorp's ability to execute on the stated strategy, the accretive
roll-up of the country club industry, has been significantly
impaired.
We have spoken to other shareholders who share similar
frustrations with ClubCorp's current valuation. We believe
the status quo is untenable and we fear that without more
aggressive action from the Board of Directors (the "Board") to
unlock shareholder value, the current discount to intrinsic value
will persist indefinitely.
Leisure Peer
Valuation Metrics at 9/13/16 ($ in millions)
|
|
|
|
|
Company
Name
|
Market
Cap
|
EV
|
2017E
EBITDA
|
2017E
FCF
|
EV/2017E
EBITDA
|
2017E FCF
Yield
|
Net
Leverage
|
|
|
|
|
|
|
|
|
US Theme
Parks/Resorts
|
|
|
|
|
|
|
|
Cedar
Fair
|
$3,291
|
$4,813
|
$496
|
$212
|
9.7x
|
6.4%
|
3.4x
|
Six Flags
Entertainment
|
4,780
|
6,723
|
569
|
348
|
11.8x
|
7.3%
|
2.9x
|
Vail
Resorts
|
5,756
|
6,331
|
513
|
305
|
12.3x
|
5.3%
|
1.2x
|
SeaWorld
Entertainment
|
1,103
|
2,698
|
347
|
117
|
7.8x
|
10.6%
|
5.2x
|
Merlin
Entertainment
|
6,287
|
7,707
|
678
|
139
|
11.4x
|
2.2%
|
2.4x
|
Ryman
Hospitality Properties
|
2,552
|
3,995
|
360
|
216
|
11.1x
|
8.4%
|
5.9x
|
Average
|
$3,961
|
$5,378
|
$494
|
$223
|
10.7x
|
6.7%
|
3.5x
|
|
|
|
|
|
|
|
|
Golf
Operators
|
|
|
|
|
|
|
|
Accordia
Golf
|
$885
|
$1,456
|
$110
|
$40
|
13.2x
|
4.6%
|
5.9x
|
|
|
|
|
|
|
|
|
Regional Gaming
Companies
|
|
|
|
|
|
|
|
Isle of Capri
Casinos
|
$690
|
$1,527
|
$205
|
$84
|
7.5x
|
12.2%
|
4.1x
|
Boyd
Gaming
|
2,082
|
5,111
|
609
|
253
|
8.4x
|
12.2%
|
5.4x
|
Eldorado
Resorts
|
657
|
1,414
|
187
|
85
|
7.6x
|
13.0%
|
5.0x
|
Red Rock
Resorts
|
2,410
|
4,852
|
553
|
124
|
8.8x
|
5.2%
|
4.7x
|
Average
|
$1,460
|
$3,226
|
$388
|
$137
|
8.0x
|
10.6%
|
4.8x
|
|
|
|
|
|
|
|
|
ClubCorp
|
$946
|
$1,954
|
$266
|
$91
|
7.4x
|
9.6%
|
4.2x
|
|
|
|
|
|
|
|
|
Source:
Bloomberg, FrontFour estimates
|
|
|
|
|
|
|
As evidenced by the comparison table above, ClubCorp trades at a
significant discount of nearly 3x to the broader leisure space,
which encompasses peers including theme park operators, a large ski
resort operator and a Japanese golf club operator. These
comparable companies have similar seasonality, capital intensity
and free cash flow characteristics when compared to ClubCorp.
The average 2017 EV/EBITDA multiple of the U.S. Theme
Parks/Resort comparable companies is 10.7x, even when including the
depressed multiple of SeaWorld Entertainment, which still trades
richer than ClubCorp despite the significant operational, political
and structural challenges, as well as brand impairment
issues. ClubCorp also trades at a significant discount to
Accordia Golf, a Japanese owner/manager of both golf course and
driving ranges despite the fact that Accordia's business model is
significantly more exposed to the number of public rounds of golf
played in contrast to ClubCorp. ClubCorp even trades at a
discount to the regional gaming universe despite their higher
leverage, no dividend payment policy and the economic, competitive
and regulatory risks associated therewith.
ClubCorp's Botched Investor Messaging
We believe that ClubCorp's multiple compression has been largely
self-inflicted and stems partially from poor communication with
investors. Again, we want to reiterate that most, if not all,
of these points have been echoed by numerous shareholders over the
past several years. Below we provide the following investor
concerns and our corresponding views:
(i) Management's public messaging that
it is comfortable taking leverage back up to 5.0x Debt/EBITDA to
fund acquisitions
FrontFour:
We believe that management's current public messaging that it is
comfortable with leverage up to 5.0x debt/EBITDA has significantly
penalized the performance of the stock as investors are pricing in
a "levering event". 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. ClubCorp management has allowed the "story" to be
cast as that of an over-levered operating company, as opposed to a
high recurring membership revenue model with a strong real
estate value underpinning. As a result, we believe that it
would be most beneficial for ClubCorp to toggle from the position
of providing a "leverage cap" of 5.0x to an actual reduced leverage
target of 3.0 – 3.5x in conjunction with a plan/bridge to achieve
this target. A leverage target of 3.0 – 3.5x is more
in-line with other leisure comparable companies and would be well
received by investors. We believe that given the Company's
strong free cash flow generation, when coupled with projected
EBITDA growth, would enable the Company to reach the mid-point of
that target range at the end of fiscal year 2017.
Furthermore, we are highly confident that selling a select number
of non-core, lower returning club assets would be accretive to the
Company's valuation, improve ClubCorp's margin profile and would
also provide capital for accelerated debt pay down, which would
have the potential to drive the valuation multiple even higher.
(ii) The concern that low oil prices
would have a significant impact on ClubCorp's operations given the
Company's exposure to the Texas
market
FrontFour:
We believe that ClubCorp's operational performance within its
Texas markets demonstrates that
not only are its operations stable, but that it can continue to
grow its Texas operations despite
low oil prices. However, we do not agree with
management's recent decision to cease breaking out the performance
of its Texas operations given the
second quarter's weather-induced weakness experienced in the
Houston market. In doing so,
ClubCorp is providing fodder to skeptics who take a cynical view
that management now wants to hide its Texas results from investors. We think
that it would be most beneficial if the Company were to continue to
break out the Texas operations for
the balance of fiscal year 2016.
(iii) Management's reluctance to
provide realized returns associated with existing reinvention
projects
FrontFour:
ClubCorp's reinvention program aimed at both acquired and legacy
clubs is a central tenet to the investment thesis. However,
while ClubCorp targets a minimum return threshold of 17% on
reinvention capital, it has never provided investors with a
scorecard of realized reinvention returns to date on legacy
clubs. While we understand management's sensitivity to
provide individual club level returns, we believe that there a
number of ways to provide investors with the transparency that they
need and are entitled in order to properly evaluate ClubCorp's
reinvention program, while protecting the integrity of any
"proprietary data". Furthermore, we find management's
reluctance to disclose returns on reinventions a bit puzzling,
especially since it has provided this return information for
acquired clubs. Management's effective "trust us" stance is
unacceptable and needs to be rectified so shareholders have greater
transparency into all reinvention project returns, whether legacy
or acquired.
(iv) Investor concern as to the ongoing
capital intensity of the business driven by confusion between
maintenance versus reinvention capital expenditures and by
extension the "true free cash flow power" of the
Company
FrontFour:
We believe that a point of contention of the ClubCorp investment
thesis is the confusion between maintenance versus reinvention
capital expenditures. There are many cynics who believe that
the Company is masking maintenance capital as reinvention capital
and therefore downplaying the true "maintenance capital intensity
of the business". Furthermore, with the significant amount
of reinvention capital that will have been deployed within the
acquired Sequoia Golf portfolio and with the moderation in
information technology spending, we believe that many investors are
looking for capital expenditures to significantly drop off post
2017, therefore creating a free cash flow inflection
point. Given the extensive due diligence that we have
conducted while visiting dozens of ClubCorp's facilities, it is
obvious to us that ClubCorp's reinvention capital expenditures are
transformative in nature and are in no shape or form
"maintenance". However, as counter-intuitive as it would seem
to forgo reinvention projects with 17%+ returns, public equity
holders would welcome a moderation in reinvention capital that
would further increase free cash flow. Please refer to
the Projected Financial Performance chart on page 6 for a detailed
free cash flow bridge.
(v) Management's lack of execution on
the $50 million stock buyback program
announced in February
2016
FrontFour:
Given the fact that the stock has traded off approximately 40%
from levels one year ago against the backdrop of strong operational
performance and now trades at a significant discount to intrinsic
value, we believe that the Company should be much more aggressive
in buying back stock than the $1.2
million that has been executed to date. With the
Company continuing to reiterate its 2018 aspirational EBITDA target
of $300 million, we believe now is an
opportune time to effectuate the stock buyback program.
Assuming a 10.0x multiple on ClubCorp's 2018 EBITDA target of
$300 million would result in a target
price of ~$31 per share, excluding
cash generated through this period. Based on the recent
closing price of $14.43, this would
equate to an annualized ROI of over 40%. When comparing this
return to the Company's internal ROI target of 17% by the third
year, it becomes fairly obvious that buying back stock at current
levels is by far the highest return on capital the Company can earn
for its shareholders. Furthermore, repurchasing stock would
provide a much needed and important show of confidence by
management in the Company's future prospects and long-term
guidance.
(vi) Management's decision to issue
$350 million of 8.25% Senior
Unsecured Notes in December 2015 and
its failure to highlight and leverage the Company's irreplaceable
real estate to achieve low-cost debt financing
FrontFour:
In December 2015, we believe that
ClubCorp's management and Board made a significant mistake in
repaying part of the Company's existing Term Loan B which had been
priced at an all-in interest rate of 4.25% (L + 325, with a 100bps
Libor floor) with $350 million of
8.25% Senior Unsecured Notes to create further flexibility to fund
a potential acquisition that did not come to fruition. In
doing so, the Company has locked itself into approximately
$14 million in annual incremental
interest expense. We find it interesting that in its investor
presentation materials, ClubCorp does not highlight that it owns
the underlying land at 126 out of 160 golf and country clubs, which
represents approximately 30,000 acres of real estate. As
management has stated, this real estate was previously appraised at
a value of ~$1.5 billion in early
2016 by an independent real estate valuation firm. We believe
that had management better utilized the real estate value, cheaper
financing offering significant financial flexibility would have
been available either in the form of a mortgage or second-lien
note.
Valuation
PROJECTED
FINANCIAL PERFORMANCE ($ IN MILLIONS)
|
|
|
|
|
|
|
|
FY
2016E
|
FY
2017E
|
FY
2018E
|
|
|
|
|
Revenues
|
$1,087.1
|
$1,141.9
|
$1,195.3
|
YoY
growth %
|
2.6%
|
5.0%
|
4.7%
|
|
|
|
|
Adjusted
EBITDA
|
250.1
|
267.9
|
285.6
|
YoY
growth %
|
7.0%
|
7.1%
|
6.6%
|
margin %
|
23.0%
|
23.5%
|
23.9%
|
|
|
|
|
Less: Cash
Interest(1)
|
70.3
|
59.9
|
59.9
|
Less: Cash
Taxes(2)
|
15.0
|
15.0
|
37.2
|
Less:
Maintenance Capex
|
59.5
|
45.7
|
47.8
|
Less:
Reinvention Capex
|
43.1
|
40.0
|
22.4
|
Less: Working
Capital Use / (Gain)
|
19.5
|
(0.5)
|
4.4
|
Run-Rate Free Cash
Flow (FCF)
|
42.6
|
107.8
|
114.0
|
FCF/Share
|
$0.66
|
$1.67
|
$1.77
|
|
|
|
|
Leverage and
Coverage Metrics
|
|
|
|
Total
Debt/EBITDA
|
4.41x
|
4.11x
|
3.86x
|
Net
Debt/EBITDA
|
3.89x
|
3.36x
|
2.87x
|
|
|
|
|
Valuation
Metrics
|
|
|
|
EV/EBITDA
|
7.62x
|
6.84x
|
6.13x
|
FCF Yield
|
4.6%
|
11.7%
|
12.4%
|
Implied Share
Price @ 9.5x EBITDA(3)
|
|
$25.32
|
$29.17
|
@ 10.0x EBITDA(3)
|
|
$27.39
|
$31.39
|
@ 10.5x EBITDA(3)
|
|
$29.47
|
$33.60
|
|
|
|
|
Note: Figures
based on FrontFour's internal projections. 2016E FCF figures
include 6 months actuals and 6 months projected.
|
(1) Assumes all book
interest is paid in cash.
|
|
|
|
(2) Cash tax
benefits extend through 2017 as guided by management. For
2018, a statutory cash tax rate of 35% is assumed.
|
(3) Stock closing
price as of 9/12/16.
|
|
|
|
In summary, ClubCorp is a highly valuable enterprise of
irreplaceable assets that generates significant free cash flow but
trades at a significant discount to intrinsic value and to its peer
group. We believe now is the time for aggressive action to be
taken to unlock shareholder value and ensure the discount does not
further persist. Management needs to immediately
commence the process of improving its public messaging and
financial disclosures incorporating the feedback provided in this
letter. To realize ClubCorp's intrinsic value, we also
highly recommend that the Board immediately 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. 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 REIT in order to
unlock significant value.
We have had significant success working productively both
publicly and privately with the management teams and boards of many
companies, including those within the leisure space, to drive
significant value for all shareholders. We look forward to a
continued constructive dialogue with you and the entire Board of
ClubCorp.
/s/ Zachary R.
George
|
/s/ David A.
Lorber
|
/s/ Stephen E.
Loukas
|
Zachary R.
George
Portfolio
Manager
|
David A.
Lorber
Portfolio
Manager
|
Stephen E.
Loukas
Portfolio
Manager
|
About FrontFour Capital:
FrontFour Capital is an investment adviser with offices in
Greenwich, CT and Toronto, ON. FrontFour focuses on
value-oriented investments in North American companies.
Contact:
Stephen Loukas/David Lorber
FrontFour Capital Group LLC
35 Mason Street, 4th Floor
Greenwich, CT 06830
203-274-9050
Photo -
http://photos.prnewswire.com/prnh/20160914/407905-INFO
To view the original version on PR Newswire,
visit:http://www.prnewswire.com/news-releases/frontfour-capital-sends-letter-to-clubcorp-holdings-300328464.html
SOURCE FrontFour Capital Group LLC