As I indicated in the first post back for 2010, I’m going to publish some of the more interesting 13D letters filed with the SEC. These are not situations for which I have considered the underlying value proposition, just interesting situations from the perspective of the activist campaign or the Schedule 13D.
Benihana Inc. (NASDAQ:BNHN and BNHNA), the operator of the Behihana teppanyaki restaurants, is the subject of a campaign by founder Rocky Aoki’s widow and eldest children (who control around 32% of the common stock via a trust called “Benihana of Tokyo”) to thwart a proposal by Benihana Inc. to increase the number of its shares of Class A common stock, which would significantly dilute existing shareholders. The campaign seems to have found some support among other large shareholders, notably Blackwell LLC and Coliseum Capital Management LLC, who filed a joint 13D on Wednesday last week. Here is the text of the letter attached to the 13D filed by Blackwell and Coliseum Capital Management:
BNHN management responded swiftly to the 13D, releasing the following statement on Thursday:February 17, 2010
Richard C. Stockinger, Chief Executive Officer & Director Benihana Inc. 8685 Northwest 53rd Terrace Miami, Florida 33166Re: Benihana Inc. – February 22, 2010 Special Meeting of Stockholders
Dear Mr. Stockinger:
On behalf of Coliseum Capital Management, LLC (“Coliseum”), the holder of 9.9% of the Class A Common Stock of Benihana Inc. (the “Company”), I am writing to express concern over the proposed Agreement and Plan of Merger (the “Proposal”) by and between the Company and its wholly-owned subsidiary BHI Mergersub, Inc.
This Proposal (scheduled for shareholder vote on February 22nd) would give the Company the ability to issue 12,500,000 millions shares of Class A Common Stock under their Form S-3 covering the sale of up to $30,000,000 of securities. Compounded by the anti-dilution provisions contained in the Company’s Convertible Preferred Stock, an equity issuance of this magnitude would be significantly dilutive to existing shareholders.
Thus far, the Company has not provided compelling rationale to affect such a potentially dilutive fundraising; as a result, Coliseum is not supporting the Proposal.
Specific concerns are outlined below:
1. The Company has not provided compelling rationale to affect a potentially dilutive fundraising.
The Company appears to be generating positive cash flow with which to invest in the business and/or amortize debt. Conservatively, the Company appears to produce $25-$35 million of run-rate EBITDA, require approximately $9 million in maintenance capital expenditures and have $4-$8 million of taxes, interest and preferred dividends in total, leaving $12-$18 million of positive free cash flow annually with which to further invest in the business and/or amortize debt.
It would appear that there is sufficient liquidity with which to run the business. The Company disclosed availability of over $11 million for borrowing under the terms of the Wachovia line of credit (“LOC”), as of October 11, 2009. The Company’s positive free cash flow should more than offset the $8 million of scheduled reduction in Availability under the LOC before its March 2011 maturity.
The Company does not appear to be over-levered. In the most recent 10-Q, the Company justified the now-proposed action to authorize the issuance of additional equity by highlighting concerns regarding the March 2011 maturity of the LOC. Before taking into account the positive free cash flow generated between October 2009 and March 2011, the Company is levered through its LOC at less than 1.5x its run-rate EBITDA. In our experience, similar restaurant companies are able to access senior debt in this environment at 1.5x (or more).
2. In combination with the anti-dilution provisions contained in the Convertible Preferred Stock (the “BFC Preferred”), an equity issuance at current levels would be significantly dilutive to existing shareholders (even if completed through a Rights Offering).
Depending upon the issue price of new equity, the BFC Preferred could see a reduction to its conversion price of 15%-25%, and thereby gain an additional 300,000-500,000 shares upon conversion.
3. The process through which the company is evaluating alternatives has been opaque.
We find it troubling that the Company has been unwilling to provide further details relating to Proposal, including rationale, alternatives, process and implications.
4. To date, management has been unwilling to engage in a discussion relating to key questions (below) that any shareholder should have answered before voting in favor of the proposed merger and subsequent fundraising.
What are the Company’s long term plans for each of the concepts?
What assumptions would be reasonable to make over the next several years regarding key revenue and cost drivers, investments in overhead, working capital and capital expenditures, and other sources/uses of cash from operations?
What is the framework for a potential recapitalization?
– What is the rationale for a $30 million capital raise?
– Why raise capital through an equity offering versus other sources?
– What process has been followed (i.e. advisors engaged, alternatives considered, investors/lenders approached)?
– Why change the approach from an amendment of the certificate of incorporation to the current merger proposal?
– What is BFC’s potential role?
– How is the Board dealing with potential conflicts of interest?
It may well be that the Company should undertake a recapitalization, including the issuance of new equity. However, having not been provided information with which to assess the rationale and evaluate the alternatives, Coliseum is not supporting the Proposal.
We look forward to our further discussions.
Very truly yours, Coliseum Capital Management, LLC By: Name: Adam L. Gray Title: Managing Director
[Full Disclosure: No holding. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]Benihana Inc. Responds to Public Statements of Certain Shareholders Concerning Forthcoming Special Meeting of Shareholders
MIAMI, FLORIDA, February 18, 2010 — Benihana Inc. (NASDAQ: BNHNA; BNHN), operator of the nation’s largest chain of Japanese theme and sushi restaurants, today responded to public statements made by certain shareholders concerning the forthcoming special meeting of shareholders to consider and act upon a proposed merger (the “Merger”) the sole purpose of which is to increase the authorized number of shares of the Company’s Class A Common Stock by 12,500,000.
Richard C. Stockinger, President and Chief Executive Officer, said, “The increase in the authorized shares was one step in a series of actions being taken to ensure that the Company had the flexibility and capability to take advantage of opportunities and or to respond to rapidly changing economic conditions and credit markets. Although the Company’s sales and earnings have been softer than management would have hoped over the past year, we are confident that our recently implemented Renewal Program will help to mitigate or reverse these trends. Still, we remain vulnerable to fluctuations in the larger economy and other risks.”
As previously announced, one result of last year’s sales was the Company’s failure to meet required ratios under its credit agreement with Wachovia Bank, N.A. as at the end of the second quarter of the current fiscal year. That in turn led to amendments to the credit line which will materially reduce the funds available to the Company — what began as a maximum availability of $60 million has been reduced to $40.5 million, will be further reduced to $37.5 million effective July 18, 2010, and further reduced to $32.5 million effective January 2, 2011, with the outstanding balance under the line becoming due and payable in full on March 15, 2011. In addition, the Company expects the judge hearing the Company’s long running litigation with the former minority owners of the Company’s Haru segment to issue a decision in the case shortly which will require the Company to make a payment of at least $3.7 million (the amount offered by the Company) and as much as $10 million (the amount sought by the former minority owners). And while the Company has substantially reduced its capital expenditures allocated to new projects, it continues to have significant capital requirements to maintain its extensive property and equipment and to execute upon its renewal plan.
In the face of these developments, the Board does not believe it would be prudent to do nothing and accordingly has taken a series of steps (all of which have been previously publicly announced) to ensure that the Company is in the strongest possible position to meet any unanticipated challenges it may face.
The Company has detailed in its periodic filings the broad range of operational changes that have been and continue to be made to improve efficiency and increase sales. At the same time, and in support of these operational changes, the Company has taken a series of steps in support of the Company’s financial condition. These included forming a special committee of independent directors (which has retained its own investment bankers and attorneys) to undertake an analysis of the Company’s capital requirements and to evaluate the various alternatives (in the form of both debt and equity) for meeting those requirements. That analysis is ongoing. The Committee has made no recommendation, and the Board has made no decision with respect to the Company’s future capital needs or the best manner of satisfying them. The Company also filed a “generic” registration covering a broad range of alternative financing options (again, both debt and equity) so that, if it determined to do so, it would be in a position to quickly effect a capital raise, and it moved to increase the authorized number of shares of Class A Common Stock for the same reason.
The Board is very much aware of concerns with respect to potential dilution raised by various shareholders and those concerns will certainly be seriously considered in the decision making process. But the Board believes it would be foolhardy not to take the actions it has taken which are designed to give management flexibility in responding to changing circumstances, continue to execute against its renewal plan and have the ability to take advantage of selective growth opportunities as they arise. For these reasons, the Board continues to unanimously urge all shareholders to vote in favor of the proposed Merger.
As to the reasons for the proposed merger (as opposed to a simple amendment to the Certificate of Incorporation): Section 242(b) of the Delaware General Corporation law provides that a class vote is ordinarily required to approve an increase in the authorized number of shares of that class. This would mean that an increase in the Class A stock would require a vote of the holders of Class A stock and an increase in Common stock would require a vote of the holders of Common stock. Delaware law permits a company to “opt out” of this class vote requirement by so providing in its Certificate of Incorporation, and the Company has done just that. Thus, to approve an amendment to increase either the authorized Class A or the authorized Common stock, the Company’s Certificate of Incorporation requires the affirmative vote of a majority of the votes cast by all of the holders of the Company’s common equity. The Certificate of Incorporation was adopted at a time when no other voting securities of the Company were outstanding, and although the Series B Preferred Stock generally votes on an as if converted basis together with the Common Stock, the Certificate of Incorporation does not expressly deal with the voting rights of the Series B Preferred Stock in the context of the “opt out” provision relating to amendments to increase authorized stock. Accordingly, and because the Board believed this was an issue as to which the holders of the Series B Preferred Stock had an interest and as to which they should be entitled to vote, it unanimously elected to proceed under the merger provisions of the Delaware statute rather than the amendment provisions in order to avoid any possible ambiguity.
Greenbackd 
Leave a Reply