Smart & Final Investor Comes Out Against Apollo Takeover

(Bloomberg) -- One of Smart & Final Stores Inc.’s largest investors has come out against the food retailer’s plan to sell itself to Apollo Global Management LLC, calling the $497 million deal “untimely and premature.”

Glenhill Capital Advisors, which said it owns about 1% of Smart & Final, argues that the sale -- supported by the company’s majority shareholder, Ares Management Corp. -- disregards the opinions of minority holders that won’t get to vote on it.

“I urge all minority stockholders not to tender into the offer,” Glenhill Capital principal and portfolio manager Glenn Krevlin said Wednesday in a letter to Smart & Final’s board that was reviewed by Bloomberg. “The board’s decision to sell now, when the S&F stock price is near its all-time low, disregards the interests of the minority stockholders.”

A representative for the retailer, based in Commerce, California, declined to comment.

Smart & Final agreed in April to be re-acquired by funds affiliated with Apollo for $6.50 a share in cash, a roughly 20% premium on the shares’ last closing price before the announcement. Including debt, the deal is valued at more than $1 billion, according to data compiled by Bloomberg. Ares acquired the chain from Apollo in a $975 million deal announced in 2012.

A unidentified group was “striving” to prepare a competing bid at $7 a share before the sale was announced, according to a regulatory filing. Smart & Final’s board was concerned about the uncertainty around the group’s offer before pushing ahead with Apollo, the filing showed. The company’s shares closed up 0.3% at $6.55 in New York Wednesday, valuing Smart & Final at $501 million.

Ares Support

Ares Chairman and co-founder David Kaplan said at the time that his firm, which owns about a 58% stake in the company, would “fully support” the transaction. The company only requires a majority of holders to support the deal for it to pass under the tender offer.

“Depriving minority stockholders of their voice is deeply troublesome,” Krevlin said in his letter. “It is precisely because a large stockholder supports this transaction that the board should have considered the interests of, and sought the vote of, the minority stockholders.”

Krevlin argues there are plenty of levers the company could pull to improve value for shareholders rather than a sale. Those include a nationwide expansion of its Smart Foodservice Warehouse business, which has more than $1 billion in revenue after growing to 70 stores last year from 52 in 2014.

“This asset alone could be worth billions as an independent operation,” he said.

Depressed Stock

Kreviln said he believed the stock is trading at a depressed level due to an “unprecedented period of deflation” that has dragged on operating earnings by $50 million. If inflation was to normalize, free cash flow could approach more than $100 million a year. “These results would drive a valuation several times the tender offer price,” Krevlin argues.

If the company were to pay out $50 million of free cash flow, or a 65 cent per share annual dividend, it would result in $8 a share of value, which is 20% above the tender offer price, he noted.

In addition to not tendering their shares, Krevlin encouraged minority holders to also consider alternatives, such as exercising appraisal rights in the Delaware courts.

“Although, given the structure of the transaction, there may be little the minority stockholders can do to prevent the consummation of the merger, stockholders should do whatever they can legally do to hold the board accountable for its actions,” he said.

--With assistance from Joshua Fineman.

To contact the reporter on this story: Scott Deveau in New York at sdeveau2@bloomberg.net

To contact the editors responsible for this story: Elizabeth Fournier at efournier5@bloomberg.net, Michael Hytha

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